One of the key trends moving the server market — and likely one of the reasons IBM was so eager to sell its x86 server business, as it did to Lenovo last week — is the threat from the growth of off-brand servers that are custom built by Taiwanese manufacturers for big customers such as Google, Facebook and Amazon.
In short, it’s a big business that’s turning into a big headache for the leading server vendors. In the third quarter of 2013, the research firm IDC estimated that worldwide server shipments declined slightly and sales declined by four percent, even as sales of these ODM servers grew 45 percent and shipments rose by almost a third.
The latest look at this trend comes in a study by the research firm Moor Insights and Strategy, and it focuses primarily on the Taiwan-based Quanta Computer. It is one of the “original design manufacturers” that are better known for building notebooks and other gear under contract for the mainstream computer companies like Apple, Dell and Hewlett-Packard.
In recent years, Quanta has been among those tapped by the cloud giants — Amazon, Google, Facebook, Rackspace — to build no-frills servers by the thousands that are used in their data centers. The direct relationship with the companies doing the manufacturing allows them to cut out the middleman and save money on each machine.
Today’s white paper from Moor Insights drills down on Quanta and how it attacks the market. For one thing, it has a tight relationship with chipmaker Intel. “Quanta is generally first to market with new Intel technologies and often Intel’s lead partner at industry events, indicating ‘preferred’ status,” the paper says.
When Facebook started to build its first data center in Prineville, Ore., it was Quanta that won the deal to supply the servers, supplanting Dell, which had previously been Facebook’s preferred supplier. And as Facebook started to work up the details of its Open Compute Project — its open-source recipe book for how it does things in its data centers — Quanta was working right alongside it.
And then there’s the matter of price. Quanta can sell servers with slimmer profit margins than the HPs and Dells of the world, Moor Insights says. That has helped it become a strong player in the big data centers — known in industry lingo as the hyperscale segment of the business.
But where it’s not as strong is in the traditional enterprise data centers — the smaller installations run by large companies and government agencies. This is where the established players like HP, Dell, and IBM/Lenovo hold sway. They’re often collectively referred to as OEMs, or original equipment manufacturers.
Here, the companies that buy the servers are more risk averse and less willing to design their own stripped-down specialized boxes. They also want more ongoing service and support than a typical ODM is willing or able to provide. “Many IT buyers have come to rely on the long-term support contracts, local service and sales channels, and ease of use they experience with the products and services from their global vendors of choice,” Moor Insights says.
There’s also a few looming threats for Quanta. Hyperscale customers aren’t exactly loyal to their vendors. They tend to go where the best deal is. Also, its tight relationship with Intel could prove to be a hinderance later if servers running ARM chips get a serious toehold in the marketplace. By sticking so close to Intel, Quanta could miss the boat on other new server technologies that Intel doesn’t support. “With a lack of internal architecture research and development,” says Moor Insights, “it will be difficult for Quanta to differentiate.”
Then there’s Lenovo. After it spent $2.3 billion last week to buy IBM’s x86 server business unit, Lenovo instantly transformed itself into the third-largest vendor of servers in the world. Lenovo also has a reputation for pricing its products aggressively. Last year it supplanted HP as the top PC vendor in the world, and its primary weapon in winning that fight was price cuts. Quanta may find Lenovo to be a tough competitor.