Server and storage markets across Europe have seen better days. Significant year-on-year declines in revenues and unit sales over the past two quarters of 2019 have worried some people in the IT channel. Volume and value sales were even lower in Q4 2019 than in Q4 2017. What's going on?
Macroeconomic and political challenges across the region and around the world have forced some businesses to delay investment and so had an impact on the recent performance of the IT infrastructure segment. But that's not the whole story. There are several other factors that are arguably more important.
Rationalisation to the fore
Both 2017 and 2018 saw the server and storage sectors performing well. But many of the businesses that invested in these technologies at that time may have thrown their money at IT infrastructure without first assessing their needs properly. According to Gartner, on average, only 56 per cent of datacentre storage space was being used in 2018 and, as recently as July 2019, nearly a third of servers (30 per cent) were underutilised or sitting idle. As a result of this and continued economic uncertainty, firms are looking more closely at the use and cost of their IT infrastructure with a view to avoiding overprovision.
Many are now satisfying demand by managing existing resources more efficiently rather than by adding more computing power and storage capacity. Companies have learned from their past mistakes and now understand the advantages of having an efficient software architecture on top of an efficient hardware architecture. Innovations in AI, machine learning and virtualisation are helping these organisations optimise existing infrastructure. Increased efficiency also chimes with growing corporate awareness of the environmental impact of datacentres and servers.
No technology leap in 2019
There was no major new technology available in 2019 that would give businesses an incentive to update their IT infrastructure. Compared with the processors available five years ago, those of today are not much different in terms of power even though they're more energy efficient and have more cores. This lack of a fundamental leap forward also hit 2019 sales.
The components conundrum
Another factor is the global shortage of Intel CPUs that has affected many market segments over recent months. Until the last quarter of 2019, the server space more or less escaped the effects of this because Intel prioritised the production of high-end chips. However, even with these extra efforts, several server vendors are concerned that the shortage is now starting to affect their business as the poor availability of some SKUs is forcing them to offer certain customers more expensive processor models.
Although the shortage has pushed up CPU prices and revenues, it has not had the same effect on other components. In 2019, SSD, HDD and RAM revenues fell by as much as -30 per cent, with SSD price per GB slumping by -50 per cent in the space of a year. This had an inevitable impact on the price of - and revenues associated with - infrastructure systems.
Many businesses on the digital transformation journey are migrating to cloud. This is great news for them, but it is having an impact on the datacentre market and more traditional vendors. The migration of customers to a small number of cloud providers that manage their IT assets more efficiently tends to benefit the hyperscale vendors as these are more likely to deal with the cloud providers and absorb the lower margins, and therefore revenues, in this segment.
The impact of datacentre-as-a-service (DaaS)
Distributors appear to be increasingly frustrated with new consumption models for IT infrastructure such as HPE GreenLake, Dell Flex on Demand and Lenovo TruScale. This stems from the vendors themselves appearing to be unconcerned by below-average sales through distributors, fuelling the suspicion that direct sales are growing without much involvement from the channel.
For now, revenues from DaaS are still relatively low, but it is vital that vendors clarify pricing and resolve contractual obstacles associated with these models as soon as possible if they want to soothe tensions with their partners.
So what's the picture for 2020? Well, while Intel CPU problems will continue into 2020, it's not all doom and gloom.
To start with, distributors are continuing to sell increasing amounts of storage capacity in terms of gigabytes; the volume of data that companies need to manage is continuing to grow exponentially. Prices for components cannot decline forever, and any move towards stabilisation should have a positive impact on revenues over the coming year.
In addition, software optimisation is creating a lot of new opportunities and these are helping to offset hardware sales losses. That vendors such as IBM and Red Hat performed well in 2019 is testament to this approach to managing datacentre infrastructure. We are now in a software-defined era, and vendors need to adapt to this reality. The acquisition of software companies by Dell EMC and HPE shows that diversification is key to the survival of traditional hardware vendors.
What's more, Brexit clarity and a US presidential election mean business confidence could return later in the year and such confidence is important if the right conditions for growth are to be created in the IT infrastructure sector. And if they do invest, after their recent experience, they will do so more wisely in the capacity, computing power and software which they need.
To put it simply, after such a poor end to 2019, the channel has a good chance of seeing at least some improvements in performance over the coming 12 months.
Gurvan Meyer is a business enterprise analyst at Context
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