How the Data Center Technology Market Is Faring in the Pandemic

As workloads shift to the cloud faster, spending on data center gear shifts too.

Yevgeniy Sverdlik

May 27, 2020

8 Min Read
IT racks in a data center

Late last week Hewlett Packard Enterprise, Dell Technologies, and IBM all announced cost-cutting measures of varying degrees meant to stabilize their respective businesses hurt by the pandemic-induced slump in demand. Dell halted 401(k) contribution matching and froze raises; HPE said it would cut jobs and change its product, support, marketing, and real estate strategies; IBM implemented what appear to be wide-reaching job cuts, possibly in the thousands.

Meanwhile, the largest publicly traded data center service providers earlier this month all reported solid results for the first quarter and, importantly, expectations of continued, steady growth for the rest of the year (albeit not without much hedging in the executives’ canned statements).

Why the disconnect? Why do data center providers expect to be basically fine in the face of the crisis, while the largest companies that sell the technology that populates those data centers struggle?

Vendors like HPE, Dell, and IBM serve much more than just data centers of course, and their troubles likely stem from more than just their data center businesses. But the data center market has been a key source of growth for these companies, and the current dynamics in the space explain at least some of the disparity.

Related:US Data Center Operators Have Financing Advantages Over EU Counterparts

Over the recent years, the largest commercial data center operators oriented much of their business around serving cloud platforms, both hyperscale and the so-called “tier-two” and “tier-three” cloud providers. The latter two are categories for smaller cloud companies that compete with the public cloud giants by specializing in serving specific industry verticals or by building out rich sets of services to make cloud easier to consume for traditional enterprises that don’t have great technical capabilities inhouse.

The pandemic-induced acceleration of cloud adoption is expected to only drive more growth for cloud providers across the board. The big American “traditional” IT vendors lost much of the hyperscale hardware market to Asian contract manufacturers years ago. And while they still own the lower-tier cloud-provider market, traditional enterprises are responsible for the bulk of their data center revenue. And enterprises are either shifting spend from on-prem data centers to the cloud or planning to shift it – while holding tight to their cash for the time being.

Data Center Spend Shifts Along with the Workloads

The COVID-19 crisis will drive up demand for everything from IT hardware and software to power and cooling infrastructure gear for cloud service provider data centers, according to the market research firm Omdia, which recently put out its assessment of the headwinds and the tailwinds the data center industry should expect from the crisis. Telco data centers will see a lot of the same. Meanwhile, demand by enterprise data centers will be down substantially for the next six months to two years, Omdia projected.

Related:Resilience in a Pandemic: Smaller Data Center Providers Hang On, Hold Fast

(Disclaimer: Omdia and DCK are sister brands under the Informa Tech umbrella. Be sure to visit Omdia’s dedicated page for free resources the analysts are offering to help practitioners and vendors deal with the challenges presented by the pandemic.)

“The tailwinds are probably strongest felt by the cloud providers,” Cliff Grossner, senior director with Omdia’s Cloud and Data Center Research Practice, told DCK. They are and will continue to be beneficiaries of the accelerated shift to the cloud by enterprises.

After a few years of record infrastructure investment, hyperscalers, the largest cloud providers, pulled back their spend in the first half of last year, before slightly picking up pace in the second half. “2019 didn’t have humongous growth,” Grossner said. Now that enterprise demand for cloud services is expected to accelerate, so is the hyperscalers’ investment in capacity to meet that demand.

“What we’re expecting is an acceleration of server buying by the hyperscalers to take up the increased demand, as the enterprise slacks off in terms of its spend,” he said.

Tier-two and tier-three cloud providers are also expected to accelerate infrastructure spend. Using hyperscale cloud services requires a level of technical skill many enterprises don’t have inhouse. The lower-tier providers that specialize in making cloud easier to use are expected to feel a business headwind from an influx of less skilled enterprise users.

Enterprises may have delayed planned IT deployments, but they still need to provide IT services to their employees. And, they now have new, lockdown-related needs for things like disaster recovery and unattended operations – in other words, “all the things cloud providers are notoriously good at doing,” Grossner said. “Digitization as a whole has all of a sudden leaped ahead two years. That’s partially moving those workloads into cloud provider-operated data centers.”

Cloud, Enterprise, and Telco

Omdia has adjusted its forecast for the amount of servers vendors will have shipped this year and, more importantly, for the types of customers they will have shipped them to. If pre-pandemic the analysts expected the enterprise share of the shipments to be 37 percent, the new forecasted enterprise share is 33 percent. Meanwhile, cloud providers’ expected share has been bumped up from 50 percent to 55 percent. The projection for telcos’ share of the year’s server shipments has been adjusted from 13 percent to 12 percent.

Notably, Omdia had forecasted earlier that workload migration from on-prem enterprise data centers will at one point reach an “equilibrium,” where 25 percent of enterprise computing capacity will remain on premises, in companies’ own data centers, with cloud providers serving the remainder of their computing needs. The pandemic has not changed Omdia’s prediction for the year that equilibrium will be reached – it’s still 2024.

Investment in storage capacity by cloud providers is also expected to accelerate this and next year, driven by greater demand from video and gaming services and by enterprises increasingly relying on remote collaboration tools enabled by file sharing. Omdia has similar expectations for investment in multi-tenant server software, application delivery, and SD-WAN by cloud providers.

Facilities infrastructure investment by cloud providers will be up in the near term as well. Omdia expects providers to accelerate spending on UPS, racks, and rack PDUs this year and next.

The analysts expect revenue from switch sales to cloud providers to remain unchanged. Cloud growth typically drives demand for data center switches, but component supply chain delays in hard-hit regions will constrain switch supply, they said.

Omdia has nearly opposite projections for on-prem IT and physical data center infrastructure spend by enterprises. These companies are expected to slow down spending on servers, network switches, storage, multi-tenant server software, UPS, racks, and PDUs. Their spend on application delivery and SD-WAN solutions is expected to remain flat, explained by the need to equip more remote workers, shift to the cloud, delays in campus and branch office expansion projects, and supply chain disruptions.

Data center spend by telecommunications companies is expected to go up. Increased demand for CDN and mobile-network capacity, surveillance, remote operations, remote workforce, edge infrastructure, and automated operations will drive accelerated telco spend on servers, storage, multi-tenant server software, and SD-WAN, according to Omdia.

Supply Chains Hold Up – For Now

Data center equipment supply chains managed to overcome challenges in the first quarter, Omdia said. But the analysts didn’t rule out further disruptions this year, recommending that vendors “build additional supply chain redundancy.”

They particularly expect short-term supply chain constraints affecting data center UPS and PDU products and network switch components sourced in Asia.

Supply chains have been “a rolling issue,” Grossner said. First, early shutdowns in Asia strained much of the component supply. “That’s eased off somewhat.” But even when components can be sourced, the devices they comprise have to be shipped, and shipping has been constrained by border closures and slowdowns in logistics operations, such as warehousing. “I don’t think we sold and delivered too many servers in Italy in March,” he said.

Even as things begin to slowly open back up around the world, there’s still the possibility of a second wave, and it’s important that companies secure multiple sources for the equipment they need.

How Deep Will the Hole Be?

There are now two sets of market trends that should be weighed, Grossner said: one set for the short term (this year), and the other for “the longer-term envelope of a global recession” and its impact on demand. The short-term shifts will probably keep the market steady overall, because the needs for compute infrastructure are there, he said. “That’s not going to change.” But the long-term effects of a shrunken global economy are less clear. “Nobody knows how long and how deep that is.”

By the UN agency International Labour Organization’s latest estimate, the equivalent of 305 million full-time jobs will be lost around the world in the second quarter. The estimate followed an earlier one, when the agency projected an equivalent of 195 million full-time job losses for the same quarter.

There’s no telling when the carnage in hard-hit industries like travel, hospitality, tourism, retail, and entertainment will end. “It’s not a six-month shift,” Grossner said. “It’s a long-term change in how we do things.”

We have a clear picture of this year’s first-quarter results for the IT sector, and from talking to semiconductor suppliers, Omdia has a good idea of the second-quarter results as well. From the first half, it’s possible to extrapolate a fairly accurate assessment of the second half. Assessments for 2021 are possible but “riskier,” Grossner said, and “post-2021, it’s still anyone’s guess.”

Be sure to visit Omdia’s dedicated page for free resources the analysts are offering to help practitioners and vendors deal with the challenges presented by the pandemic.

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