Four Disruptive Factors Will Challenge the Survival of Incumbent Data Center Market Vendors
Four disruptive factors will force dramatic changes in the data center (DC) market by year-end 2016, according to Gartner, Inc. Gartner said that highly disruptive competition, big cloud provider dominance, economic warfare and nationalism will occur with different intensities over different time frames. However, at least two of these factors will drive significant disruption within the next three years, and elements of all four will drive the opportunities and risks in the DC market during the next three to four years.
"There are four market disruptions in play in the DC infrastructure market," said Joe Skorupa, vice president and distinguished analyst at Gartner. "Elements of them are already in play, and will become visible no later than early 2016; however, radical action by just one significant player could accelerate the market disruption of any of the factors."
Although, on the surface, the DC market is poised for growth, existing assumptions regarding the ongoing growth of the DC market are unlikely to be realized. They rely heavily on the current base of traditional enterprise IT end users, and a vendor community that is more likely to support the status quo, rather than introduce risk and break the enterprise IT mold.
"Underneath this calm surface, increasing market pressures are driving a change in vendor behaviors, which, along with the four disruptive factors, make the market ripe for a period of major disruption," said Mr. Skorupa. "These behaviors will become more obvious as the pace of change increases."
Gartner believes that vendor behaviors will fall into one of three categories: Protectors who aggressively defend their market share, revenue, profit margins and large installed base during periods of transition; Evolutionary Disrupters who strike a balance between disrupting the existing business model of protectors, while protecting their own business from other disrupters; and Revolutionary Disrupters who challenge the status quo, with more-nimble business models and less-complex go-to-market strategies adopting radical new approaches to selling.
Gartner has outlined the likely impacts of each disruptive factor.
Throw the First Punch — An Incumbent Disrupts the Margin/Business Model of Its Onetime Partners in Adjacent Markets
An uneasy peace exists among the incumbents (Protectors and Evolutionary Disrupters). While there is some heightened tension as former partners now compete, no one wants an all-out slugfest because everyone is addicted to the high 50 percent or more gross margins in storage and networking hardware and DC infrastructure software. New workloads may be going to external IT providers, and these buyers are not interested in high-price/high-margin commercial off-the-shelf (COTS) products as they shift toward open-source software (OSS) and embedded manageability; however, vendors are focused on maintaining the status quo for as long as possible.
Should a powerful Protector aggressively enter an adjacent market with its new offering, it would trigger severe shockwaves throughout the industry. A Protector might decide it has more to gain by forcing a major disruption. It might be one that sees no way to win, and triggers a massive price war in the hope that first-mover advantage will give it the upper hand. Or an Evolutionary Disrupter recognizes an all-out battle is inevitable, and that it is as strong as it ever will be, so it throws the first punch to maximize its advantage and quickly cripples its competition.
In today's DC infrastructure market, there are numerous potentially disruptive technologies, including software-defined networking (SDN) and software-defined storage, network function virtualization; extreme low-energy processors and webscale-integrated infrastructure. With buyers needing step-function improvements in the efficiencies of their DC infrastructures to cope with ever-increasing demands and the threat of outsourcing, there is potentially enormous latent demand for the improvements these disruptive technologies could bring. A Protector turned Revolutionary Disrupter could leverage these disruptive technologies to upset adjacent markets. If the Throw the First Punch factor occurs, though, the current state of market is instantly changed to outright competitive warfare.
Dominance of the Big Cloud Providers — The End of Growth for Traditional DC Vendors
The center of gravity for new application development and deployment is shifting from in-house to cloud-first as consumer/mobile needs dominate. This is also starting to influence the expectations around new internal applications, which require more-flexible, distributed and hybrid IT.
The SaaS/cloud-first approach to new, high-growth workloads means that growth in infrastructure hardware is generally aligned to webscale architectures. While workloads may not run more efficiently in the cloud, providers ensure that excess capacity is used, in some cases, at lower prices to ensure highest utilization, and, therefore, highest monetary return for the provider. This result is top-level improvement in efficiency, which, as cloud provider dominance increases, has the immediate effect on the DC market of reducing the demand of total amount of compute to total workload.
Traditional managed service providers (MSPs) and infrastructure providers are failing to deliver compelling alternatives to platform as a service (PaaS) from Amazon, Google, IBM, Microsoft and Baidu. MSPs are relegated to providing basic transport, or, at best, become managed service brokers. Amid this churn, traditional vendors find it increasingly hard to compete. Their growth gradually slows as large cloud providers acquire greater market share. In a very short time, these providers will come to dominate the infrastructure as a service (IaaS) and PaaS markets, and strongly influence the price of DC infrastructure.
Economic Warfare — East vs. West for Market Control
The two camps of DC infrastructure providers, East and West, cannot peacefully coexist in any market, given the need to protect and/or increase their influence. The impact is that the market is in constant flux, as both sides try to achieve some sort of dominant constant state over the majority of the markets.
In a major step toward reshaping the Western-dominated international financial system, the countries of Brazil, Russia, India, China and South Africa (BRICS) announced a $100 billion development bank and an emergency reserve fund. On the technological front, China has invested in its national high-tech R&D program (also known as the 863 Program) since 1986, as a response to the growing technological and innovation gap between China and the West. Additionally, China has various subsidized programs that are targeted to help high-tech Chinese enterprises to reduce R&D costs in core electronic components, high-tech application-specific integrated circuits (ASICs) and fundamental software development.
Gartner predicts that China, buoyed by deep resources, increasingly respected brands and strong original design manufacturer (ODM) suppliers with headquarters in Taiwan and electronics manufacturing service in China, and increasing anti-U.S. sentiment, will increase its share of the DC infrastructure market by two percentage points by the end of 2017, at the expense of Western companies.
Nationalism vs. Rationalism — The Snowden Effect Drives Severe Market Fragmentation
As buyers come to believe that none of the large multinational providers are trustworthy, emphasis shifts to in-country-developed technologies, and OSS and hardware. The software shift happens first to commercially supported OSS, since it is perceived as more transparent.
There is a resurgence of small, local assemblers, substantially increasing the proportion of sales by white-box suppliers. These small assemblers would be unable to fully replace the economies of scale that the traditional large suppliers have benefited from in areas such as R&D, but the increasing use of open-source hardware ecosystems will help mitigate the problem. This hardware base is complemented with locally verified embedded OSS, which generates suffering among Protectors. In extreme cases, motherboard manufacturing becomes regional, rather than concentrated in Greater China.
Intel, AMD, Western Digital and Seagate should maintain their positions for the next several years, but Intel and AMD should see erosion as mobile and light-medium workload processors shift to ARM and other architectures. As high-performance rotating media becomes less important, the storage component market shifts steadily to flash. Software vendors will have to invest more to ensure their applications are compatible with a wider range of hardware, or pick and choose which hardware vendors to work with. The infrastructure tool market will become more fragmented, but won't have a big impact on the overall DC infrastructure market.
Additional information is available in the report "Four Highly Disruptive Factors Will Challenge the Survival of Incumbent Data Center Market Vendors." The report can be found at http://www.gartner.com/document/2831717.
Gartner analysts will present their analysis on the likely impacts of these forces in the webinar "4 Disruptions Threatening The Data Center Infrastructure Market." The complimentary webinar will be hosted by Gartner on October 14 at 11 a.m. EDT. To register for the webinar, please visit http://my.gartner.com/portal/server.pt?open=512&objID=202&mode=2&PageID=5553&resId=2839117&ref=Webinar-Calendar.
Gartner analysts will take a deeper look at the outlook of the data center market at the Gartner Data Center, Infrastructure & Operations Management Summit, November 24-25 in London and the Gartner Data Center, Infrastructure & Operations Management Conference taking place December 2-5 in Las Vegas. More information on the London event can be found at http://www.gartner.com/technology/summits/emea/data-center/?ref=g_homelink. More information on the Las Vegas event is at http://www.gartner.com/technology/summits/na/data-center/. Members of the media can register for press passes to the events by contacting email@example.com (London) or firstname.lastname@example.org (Las Vegas).
Information from the Gartner Data Center events will be shared on Twitter at http://twitter.com/Gartner_inc using #GartnerDC.
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