The steady creep of virtualisation across customer data centres continues to compound public cloud attrition, shrinking server, storage and networking hardware profit pools.
During the second quarter of 2016, Technology Business Research findings show that revenue for incumbent data centre hardware vendors shrank 4.3 per cent year‐to‐year, as gross profit dollars declined 5.4 per cent.
“Increasing pressure from lines of business to move with greater agility and productivity, coupled with the maturity of new architectures such as hyper-converged platforms, is significantly disrupting the data centre market,” TBR data centre senior analyst, Krista Macomber, said.
“At a quickening pace, customers are embracing software‐defined functionality and service‐based delivery for business‐critical workloads and data centre consolidation initiatives.
“For mainstream hardware vendors, this shift necessitates business model evolutions that are equally as radical to remain relevant.”
Macomber said data centre revenue pools continued moving toward industry‐standard servers (ISS) during 2Q16, with the segment’s contribution rising 180 basis points year‐to‐year to 39.8 per cent of benchmarked revenue.
“Customers are turning to the more cost‐effective and flexible nature of ISS technology compared to more traditional, siloed deployments of proprietary servers and high‐end storage arrays as the foundation upon which they build out their digital front offices,” Macomber explained.
Meanwhile, Macomber said the “aggressive advent” of hyper-converged platforms and the need for more centralised and programmable IT administration are sparking investment in software‐defined networking functionality, resulting in early commoditisation of data centre switches and routers.
Consequently, gross margin for benchmarked vendors shrank 50 basis points year‐to‐year to 41.5 per cent.
“Dell’s acquisition of EMC, Hewlett Packard Enterprise’s plans to reduce emphasis on noncore capabilities, and Brocade’s purchase of Ruckus Wireless all point to a shifting data centre environment,” TBR data centre research analyst, Stephanie Long, added.
“This requires vendors to compete not only comprehensively but also with a stronger focus on customers’ evolving, infrastructure‐level pain points.
“Shrinking opportunities to differentiate on hardware and consolidation of the vendor landscape will result in a highly competitive market for the foreseeable future.”
Looking ahead, Long said customers’ data centre modernisation initiatives are influencing vendors’ financial performance globally, with Asia Pacific being the only major region to experience year‐to‐year revenue growth in 2Q16 for benchmarked vendors, per TBR estimates.
Consequently, TBR believes short‐term geopolitical challenges exacerbated revenue declines in EMEA, while the volume of traditional revenue streams in the Americas led to a more significant impact from commoditisation on financial performance.
In this environment, vendors will focus on faster‐growing revenue opportunities in emerging countries such as India, where TBR customers are investing in maturing technologies such as hybrid cloud computing for greenfield data centre build‐outs.