How to survive (and thrive) despite sinking server sales

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How to survive (and thrive) despite sinking server sales

The metrics aren’t good. Market research data suggests people are buying fewer servers, both in the number shipped and by revenue. In the third quarter of 2016, worldwide server shipments were down 5.8 percent in US dollar terms, from $13.5 billion to $12.7 billion. Units shipped were down 2.6 percent, from 2.76 million to 2.69 million.

“The server market was impacted during the third quarter of 2016 by generally conservative spending plans globally,” says Jeffrey Hewitt, research vice president at Gartner. “This was compounded by the ability of end users to leverage additional virtual machines on existing x86 servers – without new hardware – to meet their server application needs.”

Chris Kelly, executive director and general manager Dell EMC’s infrastructure solutions group, says the modern server is a very different beast to what it was a few years ago. 

“There’s been a significant increase in the density of the server configuration,” he says. “In one rack today, you can almost get what would have taken a whole data centre before.”

Rajnish Arora, lead analyst for servers and enterprise infrastructure at IDC, agrees with this analysis. 

“The on-site infrastructure being built by businesses today is a lot more efficient, a lot more optimised and has far greater utilisation compared to what’s been built over the past ten or 15 years,” he says. 

“That’s leading to new computing paradigms – like convergence or hyperconvergence – that are taking optimisation to the next level.” 

The growth in these newer, denser and easier-to-operate methods have led to impressive growth for hyperconverged companies like Nutanix, which did its IPO last year with a billion-dollar valuation, and SimpliVity, which was recently snapped up by Hewlett Packard Enterprise. Dell EMC has been enjoying its own hyperconverged success story with VSAN, as part of its VMware portfolio, now boasting more than 7000 customers.

Prodigal cloud workloads

Certain workloads are definitely moving away from on-premises hardware; particularly cloud-native workloads, which are being built within AWS, Azure and Google, and low value-added workloads such as email. Yet, IDC’s Arora says it would be incorrect to declare the server dead or to call public cloud the victor.

“It’s not that the cloud guys have taken over the world,” he says, “In fact, even in highly virtualised Australia, over 80 percent of infrastructure spending is still on-site.” IDC’s overall market numbers show that cloud makes up about 13-15 percent of overall server revenue, so there is still an awful lot of money being spent on servers that live in on-site data centres.

“We’re seeing good growth in large enterprises, particularly for hyperconverged systems and engineered appliances,” says Rob Makin, group director of the enterprise business group at Lenovo. “We’re seeing our resellers embrace these new technologies, particularly hyperconverged infrastructure.”

These newer formats, which bundle dense compute and storage into a single, higher-priced unit, create very efficient platforms for running workloads in the data centre. Hyperconverged players, such as Nutanix, SimpliVity and industry stalwart VMware, have been working hard in recent years to make administering these systems easy. The combination means the pain of running your own server fleet isn’t what it once was, which has blunted the appeal of the cloud for some customers.

Some customers are noticing that they’re paying a lot to run workloads in the cloud that don’t really change much, and therefore, the much-debated benefits of the flexibility of the cloud aren’t as compelling.

“We call it ‘workload repatriation’ internally,” says Dell EMC’s Chris Kelly. “Some customers are finding that they can save 30 to 50 percent by bringing predictable, stable workloads back on-site from the public cloud, usually into some sort of private cloud.”

Next: New approach needed

New approach needed

Software may be eating the world, but it still needs to run somewhere, and for most people, that somewhere is a server. But as we’ve seen, there are now more options than ever for running that software, be it in public cloud, private cloud, on-site servers, converged or hyperconverged.

“The need of the customer has changed,” says Paul Vinton, CEO of South Australian reseller Vintek. “There’s been a radical shift in the way customers engage with technology.”

Customers are far better informed of the options available to them and IT departments are now far more business oriented than they were even five years ago. They are more likely to concentrate on the overall use-case and workload than the detailed specifications of individual servers. The consumerisation of IT has encouraged people to give up on
knowing the minutiae of everything themselves, and to rely on partners to deal with those aspects for them.

Vinton is enthusiastic about the prospects for resellers in this environment. “That’s the wonderful thing about technology: it changes all the time,” he says. “I think there’s never been a better time or more opportunity than there is today.”

Vinton also has some advice for resellers with existing businesses who are worried about the future. 

“Be prepared to engage with vendors and get their ideas,” he says. 

“Most partners are lazy and they go to market with what they already do because it’s too much work to change it.”

As servers become a commodity, there isn’t a lot of value in being a simple reseller unless you achieve a certain amount of scale. Lower margins will drive sellers to aim for higher volumes to maintain absolute profits, which leads to consolidation to achieve economies of scale. We’re already seeing that with the Dell-EMC merger, and with HPE acquiring SimpliVity and Nimble Storage. Nutanix is cosied up with Dell EMC, and Lenovo is partnered with Nutanix as well as DataCore.

Unless you’re in a position to go after substantial market share as a dedicated server slinger, the only other choice is to diversify and add other hardware and services to your playbook. Services are by far the most profitable, but selling them requires very different skills to simple hardware order-taking.

There is plenty of opportunity for partners who understand the options available beyond simple server specifications and hardware compatibility lists. 

Resellers who can understand their customers’ business and work with vendors to find the right combination of hardware, software, and commercial terms that best suit customer needs are the ones that will thrive.

The vendors and distributors understand that this is what the future looks like, and that their own future depends on their channel partners’ ability to make the necessary changes. They are only too happy to help willing partners make the transition, so if you’re not already talking to them about what’s available, now would be a great time to start.  


HOW THE SERVER SLINGERS ARE RESPONDING

Dell EMC

Dell, of course, famously merged with EMC in one of the largest ever tech deals. The US$60 billion deal closed in September 2016, and the combined Dell Technologies entity now controls the complex EMC Federation, which includes Dell EMC, VMware, RSA and Pivotal.

Dell has been a strong partner of Nutanix since 2014, though Nutanix has since diversified its server partnerships, cosying up to Lenovo in late 2015.

HPE

In an almost mirror image, HP split itself in half in 2015, creating HP Inc for the consumer products part of the business, – PCs and printers, essentially – and Hewlett Packard Enterprise (HPE) for the enterprise parts – servers, storage, networking and services. Just last year, HPE split out the services part of the business to concentrate on infrastructure.

Lenovo

Lenovo acquired IBM’s PC business in 2005 and bought IBM’s Intel-based server business in 2014. In late 2015, Lenovo announced a ‘strategic partnership’ with Nutanix to develop a new line of Lenovo branded appliances running Nutanix software.

Lenovo also partners with DataCore to produce
x86 based storage systems using DataCore’s software-
defined storage software.

Cisco

Cisco has already more-or-less committed to using Springpath as its HCI offering, but hasn’t actually acquired the company, despite it being essentially dedicated to UCS. 

Nutanix also claims to run on UCS, but it’s not officially supported by Cisco, so the HCI vision from Cisco is anything but clear at this stage.

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