Data center revenue dips 4.3% as customers opt for virtualization

Data Foundry data center in Texas
Data center profits have decreased 5.4 percent, while revenue fell 4.3 percent year on year during the second quarter of 2016 as customers accelerate transformation initiatives towards virtualization.

The virtualization across customers’ data centers compounds public cloud attrition, shrinking server, storage and networking hardware profit pools.

Revenue for incumbent data center hardware vendors fell 4.3 percent in Q2 2016 as gross profit decreased 5.4 percent, according to TBR’s latest Data Center Benchmark.

“Increasing pressure from lines of business to move with greater agility and productivity, coupled with the maturity of new architectures such as hyperconverged platforms, is significantly disrupting the data center market,” said TBR Data Center Senior Analyst Krista Macomber.

“At a quickening pace, customers are embracing software‐defined functionality and service‐based delivery for business‐critical workloads and data center consolidation initiatives. For mainstream hardware vendors , this shift necessitates business model evolutions that are equally as radical to remain relevant,” said Krista Macomber.

The report said that data center revenue pools continued moving toward industry‐standard servers (ISS) during Q2 2016, with the segment’s contribution rising 180 basis points year‐to‐year to 39.8 percent of benchmarked revenue.
sdn-market-size-by-2018Customers are turning to the more cost‐effective and flexible nature of ISS technology compared to more traditional, siloed deployments of proprietary servers and high‐end storage arrays as the foundation upon which they build out their digital front offices.

Meanwhile, the aggressive advent of hyper-converged platforms and the need for more centralized and programmable IT administration are sparking investment in software‐defined networking functionality, resulting in early commoditization of data center switches and routers.

The report said gross margin for benchmarked vendors shrank 50 basis points to 41.5 percent in the second quarter.

“Dell’s acquisition of EMC, Hewlett Packard Enterprise’s plans to reduce emphasis on noncore capabilities, and Brocade’s purchase of Ruckus Wireless all point to a shifting data center environment that requires vendors to compete not only comprehensively but also with a stronger focus on customers’ evolving, infrastructure‐level pain points,” said TBR Data Center Research Analyst Stephanie Long.

The report said that shrinking opportunities to differentiate on hardware and consolidation of the vendor landscape will result in a highly competitive market for the foreseeable future.

Customers’ data center modernization initiatives are influencing vendors’ financial performance globally, with APAC being the only major region to experience year‐to‐year revenue growth in 2Q16 for benchmarked vendors, TBR estimates.

Short‐term geopolitical challenges exacerbated revenue declines in EMEA, while the volume of traditional revenue streams in the Americas led to a more significant impact from commoditization on financial performance.

In this environment, vendors will focus on faster‐growing revenue opportunities in emerging countries such as India, where customers are investing in maturing technologies such as hybrid cloud computing for greenfield data center build‐outs.

Key companies in the Software Defined Data Center market include Microsoft, IBM, HP Enterprise Company, Hitachi, Cisco Systems, Fujitsu, Google, and Oracle Corporation.

Rapid growth of big data and cost-effectiveness of Software Defined Data Centers has influenced the adoption of Software Defined Data Center across industries such as BFSI, retail, telecom & IT, and healthcare.

The data center equipment market report from Transparency Market Research says the data center equipment market will expand at a 12.90 percent CAGR during the forecast period from 2014 to 2020. The global data center equipment market will be worth $72 billion by 2020 against more than $32.1 billion in 2013.

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