AI boom triggers ‘Wild West’ in channel as hardware economics break down

Christine Horton attended NetApp’s Partner Summit in Amsterdam for CRN UK. She reports on how the vendor is responding to the component shortage turbulence partners are experiencing, including honouring customer quotes

The IT channel is facing a “perfect storm” of supply chain disruption, pricing volatility and demand distortion, with execs warning that unprecedented conditions are reshaping traditional hardware economics.

At NetApp’s Partner Summit in Amsterdam, the company’s leaders described a market under intense strain, driven largely by surging AI demand and constrained supply of key components.

“It’s the Wild West,” Sonya Mathieu, NetApp’s senior director partner UKI, tells CRN.

“That is what it is. And we just have to come together and do the best that we can until things stabilise.”

AI demand fuels unprecedented disruption

At the heart of the disruption is the rapid acceleration of AI infrastructure buildouts, particularly among hyperscalers, which have absorbed vast amounts of global capacity.

“I’ve been a long time in the industry but this I’ve never seen before,” says Willem Hendrickx, SVP EMEA at NetApp.

“Hyperscalers have been buying a huge amount of bulk ahead of time. That led to a certain supply constraint.”

The impact is being felt across storage, memory and broader infrastructure markets, creating a supply-demand imbalance that analysts say exceeds even the disruption seen during the pandemic.

“We saw a bit of that during the Covid crisis but we’re in a different scale of magnitude,” says Alastair Edwards, chief analyst at Omdia.

“This is an unprecedented situation.”

The resulting pricing distortion has been particularly acute, as AI-driven demand pushes up the cost of high-performance Flash storage while disk capacity remains comparatively stable.

Analysts note that while Flash has historically been around four to five times more expensive than HDD, recent supply constraints have widened that gap significantly – into double digits in some cases.

“Two months ago, the pricing of HDD and flash was nearly the same,” contendes Hendrickx.

“Right now, the price of high flash is 25 times higher than HDD.”

Channel caught in the middle

In some cases, the disruption is going further than pricing alone.

Edwards notes that “vendors are cancelling orders up to the point of shipment, even after a PO has been approved.”

This, he warns “has massive implications for a partner’s ability to maintain a credible relationship with the customer.”

At the same time, partners are being squeezed between vendors and customers.

“Partners are stuck in the middle of all of this. It’s been super challenging for them,” says Mathieu.

Meanwhile, Edwards estimates that more than half of channel firms expect profitability to fall in double digits in the near term.

“We found that over 50 per cent of the channel expects their profitability to fall in double digits,” he says.

Short-term demand patterns are also shifting.

Customers are increasingly forward-ordering to avoid anticipated price increases, temporarily boosting revenues.

However, this behaviour may not be viable in the long run.

“At a point where those price rises become unsustainable, they’ll just stop placing orders,” adds Edwards, raising the prospect of shrinking pipelines and declining order books.

Compounding the issue, extended delivery times are delaying revenue recognition, further affecting partner cash flow.

“This is going to be a challenge until at least next year, if not longer,” warns Edwards.

Hendrickx agrees that the situation “won’t change in the next six months for sure – and probably longer.”

NetApp ‘honouring all agreements’

Against this backdrop, NetApp repeatedly falls back on phrases such “transparency” and “empathy” and believes its partner support is a key differentiator.

“When you can support partners and customers in a time like this it opens up an opportunity to have a much deeper, meaningful connection,” explains Mathieu.

To that end, Hendrickx was keen to point out the company’s approach compared to other vendors.

“We have honoured all of the quotes that have been with customers,” he maintains.

“We also have honoured the pricing agreements that we have with our customers, but also with our partners.”

This stance is particularly notable given reports of other vendors revoking quotes or pushing margin pressure onto partners.

“If we’re partner first, we’re not going to say to the partner ‘reduce your margin.’

“That would not be a good partner-first mentality.”

From selling hardware to optimising data

Another key shift emerging from the crisis is a move away from traditional hardware sales toward optimisation and services.

Rather than focusing solely on new infrastructure, NetApp is working with partners to help customers maximise existing resources.

“We’re funding some of our partners to go in and deliver services,” says Mathieu.

This includes strategies such as tiering data to lower-cost storage, moving workloads between on-premises and cloud and freeing up constrained capacity, she says.

Hendrickx, meanwhile, described a surge in customer engagement around these issues.

“We have had more workshops with our customers to define what is the perfect architecture design for them right now,” he says.

The focus is increasingly on workload placement and cost optimisation, he added. “Right workload on the right platform is super crucial.”

NetApp estimates that between nearly 90 per cent of its business is transacted through partners in EMEA, with that proportion continuing to grow.

“We simply must have our partners working with us,” says Gavin Moore, CTO EMEA at NetApp.

“They are the trusted advisors.

“They know the bigger picture; they spend way more hours directly sitting with their end customers than we do.”

Crisis accelerates services transformation

For now, supply constraints are forcing customers to rethink architecture decisions, while creating demand for advisory and consulting services.

They are also accelerating a structural shift in the channel, from hardware resale to services-led engagement.

For vendors, this also changes how value is delivered.

“What we’re doing is going with our partners jointly to our customers in a consultancy kind of way, in an advisory way,” says Moore.

While the immediate outlook remains uncertain, NetApp maintains the direction of travel is towards a more services-driven, datacentric channel model.