Server Market Showdown: Here's Why Smaller Players Are Taking Big-Time Share

In the past year, the Arizona-based Infrastructure-as-a-Service provider said it has doubled the number of its servers, adding about 500 nodes a month, to run its data centers and cloud services.

"We are seeing our business grow exponentially," said Ian McClarty, president of three-year-old Phoenix NAP. "In 2011 we saw a tremendous uptick in business as more companies started making the shift away from internal infrastructure to hosted services," McClarty said. Today, he said, more companies are forgoing big internal server spends and turning to cloud services operations such as Phoenix NAP instead of buying and maintaining their own systems.

Phoenix NAP has been able to grow, and grow quickly, because of its reliance on hyperscale servers—with their lack of bells and whistles and corresponding low price making them ideal for cloud computing.

The hyperscale server market is turning the traditional server space on its head, say experts, with longstanding leaders such as IBM and Hewlett-Packard losing share to a new crop of "other" system makers powering the cloud.

"The trend adds pressure to server makers, squeezing them for sales and profits," said Jed Scaramella, research manager in the enterprise server group at IDC.

In 2012, hyperscale server shipments represented 12.2 percent of the entire server market, according to IDC. The research firm estimates that hyperscale shipments will represent 18.5 percent of the entire server market in 2013 and will account for 21 percent of servers sold in 2017.

These server makers include companies such as Taiwan-based Quanta, China-based Huawei, Taiwan-based Wistron and U.S.-based Super Micro Computers, which ship these systems by the racks to some of the biggest data centers -- including Facebook, Google and Rackspace -- as well as midsize firms such as Phoenix NAP. Quanta, for example, shipped racks of servers that make up about 80 percent of Facebook's servers. Phoenix NAP said all of its 12,000 servers were from Super Micro.

A SERVER BY ANY 'OTHER' NAME

The "other" moniker, given to these system makers, is derived from server market-share data from leading research groups such as IDC and Gartner, which have been charting the aggregate growth of these companies as "other."

In Gartner's second-quarter market-share roundup in mid-August, "others" shipped more servers than HP and Dell, growing a whopping 36 percent compared with the year prior. HP's shipments took a 13.5 percent dive and Dell's leadership inched up only 1.7 percent compared with the previous year. "Others" also came in at an impressive third place after IBM and HP in revenue, growing 8 percent to $2.7 billion in the second quarter. IBM and HP's server revenue each was down considerably.

IBM, HP and Dell each still raked in more revenue than that amassed by the "others" gang. But that's cold comfort, given the commodity server trend is squeezing profits among the server old guard and catching fire with companies such as Google, Facebook and Rackspace, which are busily designing and building their own servers (bought by faceless no-name server makers) to power their football-field-size data centers.

"These companies don't need the server customization and bells and whistles that that they were paying a premium for with HP and IBM," said Andrew Feldman, Advanced Micro Devices' corporate vice president and general manager of AMD's server group. "They just want raw compute for a low price," he said.

Feldman said the hyperscale market has been growing quickly, due to a relatively small number of large-scale customers such as Amazon Web Services, Rackspace and Salesforce selling IaaS products that run the gamut, including running corporate databases, managing websites and hosting email services.

While it's mostly top-tier players muscling their way into the hyperscale market, original design manufacturers and white-box manufacturers such as Super Micro Computers are wising up. They are seizing the hyperscale trend and are working with channel partners to create new opportunities not only selling hardware, but also providing IaaS so that cloud upstarts such as Phoenix NAP can get a piece of the IaaS pie -- estimated to be worth $22.8 billion by 2016, according to market researcher TechNavio.

The idea behind hyperscale systems is that they mesh together applications and storage under a single, dirt-cheap management framework. The kinds of applications run on the servers don't always need the reliability and management features of full-blown enterprise-class servers. The applications run across multiple nodes and have reliability features baked into the software layer. That means hyperscale systems need fewer management controls and redundant power supplies and fans. Machines are stripped down to the bare essentials.

Expert say traditional servers geared toward a specific purpose are quickly losing ground to these "other" commodity x86 servers that don't command a big profit margin and are ideal for cloud computing. Those machines are made by Taiwanese server makers and a handful of U.S. companies with little to zero brand association.

"In order to succeed, it's about scale. Margins are thin and you need to sell a lot to make money," said Jeffrey Hewitt, Gartner server expert.

ENTER THE WHITE BOX

Longtime white-box computer maker Super Micro Computer said the hyperscale server market has boosted nearly all of its business metrics -- from revenue (up 130 percent from $506 million in 2009 to $1.2 billion in 2013), the numbers of servers shipped and its growing employee headcount.

"Two years ago we recognized this trend and made it a priority to position ourselves for the emerging market," said Charles Liang, CEO of Super Micro, San Jose, Calif. Part of that plan has been building a 3-million-square-foot manufacturing plant in Taiwan and buying up the old 36-square-acre campus of the San Jose Mercury News and expanding its California headquarters. Part of Super Micro's success has been ramping up production at overseas manufacturing plants where costs are lower.

Liang said his systems are high-density, easily deployed, and are designed to keep data center costs low. "This is a tough market," Liang said. "It's very competitive with very slim margins."

Super Micro, like many similar players, designed affordable hyperscale machines capable of supporting Hadoop, Ceph and Cassandra -- popular open-source frameworks for running applications on large clusters of commodity hardware, designed to be scalable and offer reliable storage and analysis of both structure and complex data.

GOOGLE AND FACEBOOK PLANTED THE SEEDS

The "others" got a toehold in the server space almost by accident when Web companies started experiencing extreme growth. "Standardized boxes available from the tier-one server makers did not meet the needs of companies such as Google and Facebook," AMD's Feldman said.

In 2006 the industry experienced exponential growth in server sales to search and then social networks. Huge, inefficient and hulking server farms sprung up overnight next to dams or rivers where power was cheap.

"Facebook and Google got sick of paying $300 million a pop to open data farms and millions a year to cool," Feldman said.

Google and Facebook, said Feldman, saw traditional server makers and the long lead time to deploy systems as an impediment to growth. "Google did an end run around HP and IBM and decided to go straight to Taiwan and work with contract manufacturers directly to design its own servers," Feldman said.

White-box server makers cut the lead time to deliver servers from months to weeks and shrink-wrapped 40 server racks at a time. Better yet, servers met specs for power efficiency and were designed small so more servers could be crammed into data farms, in turn reducing energy costs related to cooling.

Faced with the same growth challenges as Google, Facebook went a slightly different route, pioneering an industrywide program called the Open Compute Project. The program designs its own networking switches, creating a cheaper and more effective way of moving information across massive data centers. It then publishes the detailed specifications for anyone configuring servers with components from no-name "other" manufacturers.

Facebook's open-source server designs are available from several manufacturers, including Quanta and Winstron. Google's in-house customization is only for Google.

DOES HYPERSCALE EQUAL FEWER SERVER SALES?

It comes as little surprise that this nascent and growing market is being met with skepticism from the server old guard. HP and IBM have both been critical of the hyperscale shift in the market. HP CEO Meg Whitman told CRN in August, "It is only the top six or seven [Web companies] that are big enough to actually do this [hyperscale] on their own. The rest of the tier two and the tier three need HP, and they actually need partners. It is a much more customized selling process."

David Cantu, CEO of Redapt, a data center solution provider and hardware reseller, disagrees with the assertion that smaller companies can't hitch a ride on the hyperscale juggernaut. Cantu said the hyperscale market has opened doors for Redapt in targeting midmarket companies that want to take advantage of the cost savings of hyperscale but aren't as large as Google and Facebook.

Redapt, which lists Zynga, Citigroup and Red Hat as customers, offers soup-to-nuts cloud infrastructure and support offering for companies moving data centers and services to the cloud.

Cantu said hyperscale servers have saved his hide. "As companies move to the cloud, they spend less on our hardware business," he said. Cloud services gives Radapt a chance to recoup lost hardware sales with hosted public and private cloud solutions revenue.

That drop in hardware sales Cantu describes has kicked off an industrywide debate: Has the move to cloud computing taken a toll on server sales?

Cantu said the shift to cloud services isn't reducing the number of servers sold, it'S just changing who's buying them. He said the slack in server sales to SMB companies is being shored up by IaaS companies.

THE BIG GUYS

For companies such as IBM and HP that have for a long time been comfortable selling $12,000 big iron servers to companies a handful at a time, retooling itself to compete selling high-volume commodity servers at low prices has been hard.

"A lot of these big traditional server companies were caught flatfooted," AMD's Feldman said. "As soon as Web companies did an end run around the HPs and IBMs and went straight to the Taiwanese contract manufacturers, it was game over," he said. There was just no competing with labor costs and shortening manufacturing times, he said.

But HP, IBM and Dell have been competing, and with some success.

Earlier this year HP, Palo Alto, Calif., unveiled a class of hyperscale servers, running on Intel's low-power Avoton processors, as part of Project Moonshot, the company's attempt to build highly scalable, densely packed and low-power servers. HP said Project Moonshot is part of HP's research in low-power server designs for hyperscale environments.

IBM, Armonk, N.Y., also tackled the hyperscale market with the newest addition to its x86 portfolio, the NeXtScale Server Line introduced in September. IBM's NeXtScale System combine high-density and power, running Intel's Xeon processor, with efficiency specifically designed to compete with low-cost and stripped-down alternatives from the "others."

Dell, Round Rock, Texas, has fought hard to keep itself in the hyperscale game and has reaped the rewards. In Gartner's latest server market-share roundup, Dell placed No. 2 behind HP in server shipments due to a booming market for hyperscale servers, said Jeffrey Hewitt, research vice president at Gartner.

"Going back a few years we spotted a sea change in the server market," said Drew Schulke, global marketing director for Dell's data center solutions business. "We saw a strong focus on cost. Customers wanted us to strip anything out of our servers that were not adding value. And they wanted to buy 40 to 80 servers at a time."

In July Forrest Norrord, Dell's vice president of servers, said, "Hyperscale and density-optimized server sales are growing like gangbusters."

Dell has battled aggressively, said IDC's Scaramella. But, he points out, low margins have hurt Dell's profits. According to Dell's own financials, operating income for the company's Enterprise Solutions Group declined 9 percent in the most recent reporting quarter, despite revenue growth.

Scaramella said as hard as the established players fight, for the foreseeable future all eyes are on the undistinguished "other" guys as they scramble to feed the cloud's insatiable appetite for growth.

PUBLISHED OCT. 7, 2013