Software eats hardware's lunch in data centres

Hardware commoditisation among servers, storage and networking is set to increase further in 2015 says research. “Functionality and value in the data centre hardware market are increasingly shifting to software, which is shrinking the hardware market’s profit pool,” said TBR Data centre Senior Analyst Scott Dennehy. “The vendor landscape is beginning to shift as vendors adjust their strategies for future longevity. Furthermore, we anticipate that OEMs will be increasingly forced to choose between market share and profitability, demonstrated by IBM’s gross margin surge after it exited the x86 server market.”

Server, storage and networking hardware revenue for the vendors tracked in TBR's Data centre Benchmark increased 1% year-to-year in 4Q14. TBR attributes average data centre hardware revenue growth to recent portfolio refreshes in the industry-standard server market based on Intel’s “Grantley” platform. However, opportunities for OEMs to differentiate on hardware will be increasingly limited in 2015. TBR’s report discusses how OEMs are adapting their go-to-market and portfolio approaches to capture evolving revenue opportunities that centre increasingly on software-centric cloud, analytics and mobile solutions.

Migration to industry-standard servers and the growing adoption of software-centric solutions drove average proprietary server revenue for vendors tracked in TBR’s benchmark down 25.2% percent year-to-year in 4Q14. IBM and Oracle remain committed to the proprietary server market and continue to invest in their portfolios and compete for market share. Conversely, Unisys and HP are in the process of exiting the proprietary server segment and continue to focus on their industry-standard server portfolios. TBR estimates industry-standard server revenue for the vendors tracked in TBR’s Data centre Benchmark increased 8.9% year-to-year in 4Q14. TBR attributes growth in the industry-standard server market to recently launched Intel Grantley-based servers, which drove spending in the US.

Average storage revenue declines moderated from a loss of 1.2% year-to-year in 3Q14 to a decline of 0.6% year-to-year in 4Q14. Vendors are investing in better-performing storage hardware technology areas such as flash and convergence to solidify the value propositions of their hardware portfolios and offset the continued impact of commoditisation. However, TBR anticipates growing demand for open, industry-standard hardware will continue to pressure the storage market in 2015.

“Storage hardware OEMs are repositioning their portfolios and sales approaches to adapt to changes in customer demand,” said TBR Data centre Analyst Stephen Belanger. “However, the adoption of cloud, software-defined storage and hyperconverged solutions will contribute to hardware commoditisation and shift the value proposition in the storage market to software.”

Commoditisation has had less of an impact on the enterprise networking hardware market than on the server and storage markets, but cloud and SDN trends will increasingly force vendors to adapt their business models. Average networking hardware revenue increased 4.3% year-to-year, largely driven by market leader Cisco’s 8.6% year-to-year revenue growth. TBR believes hardware commoditisation will increase during 2015, and vendors will adapt by aligning resources, partnering and acquiring companies to enhance their SDN and cloud capabilities.