fan wall microsoft quincy
Fan wall inside Microsoft’s fifth-generation data center in Quincy, Washington (Source: Microsoft video)

Microsoft Said to Cut Purchases of HPE Servers for Cloud Service

New cloud server design forces HPE to compete with commodity hardware suppliers, lower server prices.

By Brian Womack, Dina Bass, Alex Sherman (Bloomberg) -- Hewlett Packard Enterprise Co. is losing business from  Microsoft Corp., one of the world’s largest users of servers, the latest sign of trouble for the pioneering computer maker as it struggles with the rise of cloud services, people familiar with the matter said.

Hewlett Packard Enterprise Chief Executive Officer Meg Whitman said last week her company saw "significantly lower demand" for servers from a tier-1 service provider, but without identifying the customer. Tier-1 service providers are typically major cloud and telecom companies.

The softer demand came from Microsoft, the people said, as the software giant pushes for lower prices from hardware providers to help it efficiently expand its public cloud service and keep up with rivals Amazon.com Inc. and Alphabet Inc.’s Google. Spokeswomen for Microsoft and HPE declined to comment.

Late last year, the Redmond, Washington-based company unveiled a new in-house cloud server design that it will require hardware vendors to follow. This forces HPE and rival Dell Technologies Inc. to compete against lower-cost generic, commodity manufacturers. Already, Microsoft has been using less-expensive gear for its data centers and the new design is set to be fully implemented later this year.

Read more: Microsoft's New Cloud Server Design is Half-Baked, and That's the Point

"We will continue to meet customer demand by expanding data center capacity while driving efficiencies through new technologies," Microsoft Chief Financial Officer Amy Hood said on a call with analysts in January when it announced earnings.

Microsoft’s Azure public cloud business reported a 93 percent revenue surge in the final quarter of 2016 as more businesses opted for the flexibility and ease of accessing computing power and storage over a network instead of building their own data centers.

HPE has been a leading seller of servers that go in these corporate data centers. But the shift to the public cloud means businesses don’t need to buy their own servers anymore. Selling to the big cloud providers is harder, either because they demand more volume discounts, or increasingly they design their own cheaper servers.

"Within Tier 1 we had a much lower demand from a single large customer," Whitman said on the call, noting that these types of deals aren’t as profitable as other parts of the server business. "The Tier 1 business is very competitive, and we’ll see what happens there."

HPE last week cut its adjusted profit forecast for the current fiscal year and reported sales that missed analysts’ projections for the third consecutive quarter.

Want to learn more about the strategy behind Microsoft's cloud hardware decisions? Kushagra Vaid, general manager for Microsoft Azure Cloud Infrastructure, is speaking on the subject at Data Center World, taking place this April in Los Angeles. More details about the conference here.

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