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Thursday, October 23, 2014

Next-Gen Data Center Fuels Open Platform Demand

The ongoing shift to next-generation data center architectures continues to impact the legacy vendor community. The advent of cloud and mobile computing -- as well as exponential growth in data variety and velocity -- is upending the traditional data center innovation model.

This shift drove average gross margin down 60 basis points year-to-year to 41.9 percent in the second quarter of 2014 for server, storage and networking original equipment manufacturers (OEMs) tracked by Technology Business Research (TBR).

"OEMs willing to share intellectual property -- and profits -- with ecosystem partners are setting themselves up to reap the benefits of tapping niche innovation, driving partner loyalty and remaining in-tune with customer's evolving application requirements, all while reducing up-front investment risk," said Krista Macomber, data center analyst at TBR.

These benefits will include more stable bottom-line hardware performance, as well as higher-margin, higher-profile software and services opportunities.

While previously the partner ecosystem served the primary purpose of reselling point products for server, storage and networking OEMs, TBR research indicates it is through the ecosystem that OEMs are able to tap niche, value-add innovation and facilitate workload-optimized solutions increasingly.

Some OEMs embraced the trend toward collaborative, open-source software- and services-led innovation delivered on top of low-cost, customized bare-metal hardware. Others continue investing in the channel and bringing reference solutions to the market, but have been slower to shed their proprietary hardware-led business models.

The shift from proprietary to industry-standard hardware is evident in the financial performances of the data center vendors. TBR estimates x86 server revenue for these vendors rose a cumulative 8 percent year-to-year in 2Q14, with aggregate ASP rising 9.7 percent as customers deploy mission-critical workloads increasingly on these platforms.

In contrast, proprietary server revenue for legacy vendors tracked in TBR fell by 16.7 percent year-to-year during the quarter. "The competitive landscape is in flux across the server landscape, and it’s no longer just about sheer processing performance and efficiencies," Macomber said.

With a server refresh spurred by Intel’s recent “Grantley” chip launch underway, OEMs are jockeying to regain market share lost in recent quarters to original design manufacturers (ODMs) including Quanta and Wistron that have grown exponentially on the back of their ability to deliver high-volume orders of customized hardware at near-zero margins.

TBR believes that value-add software capabilities -- such as automation and unified management -- will prove just as critical to competitive displacements and customer loyalty, as customers seek to reduce the IT administrative burden and increase flexibility and optimization in their infrastructures.

Cloud, Big Data and Mobile industry disruptors also continue to impact financial performance within the storage segment. Overall revenue for vendors tracked in TBR dipped 1.8 percent year-to-year during the quarter.

As the lines between servers and external storage arrays blur due to the industry trending toward converged and open-source software-defined infrastructures, storage vendors are pushing portfolio boundaries through a blend of alliances, acquisitions and organic innovation to capitalize on exponential data growth.

From a networking standpoint, legacy vendors continue to experience year-to-year revenue declines as a result of its struggles in emerging markets, demonstrating the negative impact of a proprietary, closed hardware business model when competing for infrastructure build-out and modernization contracts.

Average networking revenue for the segment, however, increased 0.4 percent year-to-year in 2Q14 for vendors covered within TBR's Data Center Benchmark.