Cloud providers fueling server boom
Staff writer, DIGITIMES, Taipei [Thursday 5 June 2014]
Recent IDC cloud research shows that spending on public cloud services will grow by a 30% CAGR to surpass US$14 billion in 2017. By then, more than 80% of new cloud applications will be hosted on the top six platform-as-a-service (PaaS) providers. Given the support from large-scale cloud providers, the prospects of cloud servers look more promising than ever.
Just months ago, the cloud captured a lot of media buzz. The all-star selfie by Oscar host Ellen DeGeneres set the record for the most retweeted tweets of all times and even shut down Twitter temporarily. The social media frenzy earlier prompted Twitter's chief technology officer to visit Taiwan in search for ODM partners as part of the company's plan to boost investments in cloud servers, sparking a competition among local ODMs for this coveted opportunity.
Later, Hewlett-Packard (HP) and Foxconn announced a joint venture agreement to create a new line of cloud servers aimed at cloud service providers, in a deal that highlights how cloud computing has changed the game for the server market. Even HP, a long-time leader in the server market, is being forced to adjust to the shift in corporate computing infrastructure by strengthening its ability to customize designs to respond faster to customer requirements.
No matter how the market evolves, one thing is certain: Taiwan's ODMs, who traditional server vendors have long relied on, are also exposed to the shift. They nevertheless manage to ride the cloud wave by building servers for global cloud service providers, such as Google, Facebook, Amazon and Microsoft, competing against old-time hardware companies, such as HP, Dell and IBM, which recently exited the branded server business.
ODM servers are forecast to represent 30% of global server shipments in 2017
What does the rise of cloud servers mean for Taiwanese ODMs? Industry observers suggest that the gross margin of contract manufacturing for branded server vendors is just 3-4%. Now that many ODMs sell products directly to cloud service providers, skipping the "middlemen" (brand vendors), their gross margin could rise to as high as 20%.
One may ask: wouldn't the fat margin attract more ODMs, such as those in China, to get on the cloud server bandwagon? Industry observers believe that at least for the near term, it is unlikely to happen. The reason is that when cloud service providers plan for new data centers to meet new service requirements and user data demand, they usually look to tweak systems for very specific needs, such as better computing density and more powerful thermal design. Therefore, they prefer servers custom-built by highly experienced ODMs. Such experience cannot be taught overnight. And servers often run for long periods, and an outage or outright failure could have serious repercussions. Consequently, Taiwan's experienced and capable ODMs are perceived as logical choices. Even some Chinese cloud heavyweights, such as Alibaba Group, have sourced servers from them.
As selling servers directly to end customers is becoming the norm, ODM server sales are continuing to grow. According to data published by IDC, ODM servers represented 6.5% of all server shipments in 2013, and their share is forecast to rise to 30% in 2017. It may come as no surprise that Taiwan's ODMs are vying to capture the fast-growing cloud server opportunity.
What will fuel the leap of ODM servers' market share, from 6.5% to 30%? As previously discussed, it will be the large cloud service providers. IDC predicts that data center-based cloud computing will grow exponentially, and the number of global cloud delivery centers will double in the next two years. Last year, Google built its 12th global data center in Taiwan. Amazon has hinted that it may build a new data center in Germany to serve clients in Europe. Meanwhile, Microsoft unveiled plans to invest US$1.1 billion in a massive data center in Iowa, with the facilities occupying 62 hectares of land, about three times as big as Google's data center in Taiwan. IBM is committing US$1.2 billion to expand its cloud footprint, adding 15 new data centers to the existing 13 SoftLayer data centers and the 12 data centers it already operates, giving the company a total of 40 around the globe for cloud services.
The race among cloud service providers to build sprawling data centers is accelerating the growth of the server market and holding promises for Taiwan ODMs. Meanwhile, major customers of traditional servers are increasingly looking to build high-performance infrastructure so as to enhance computing density and the level of application integration in their push into server virtualization and consolidation of data centers. As these customers no longer pursue the latest features and processors for their server architectures, this is leading to a shift in demand from mid-range and high-end servers to low-end servers as well as lower procurement volumes, dampening demand for enterprise servers.
While the rise of cloud servers brings forth opportunities, it also poses challenges on Taiwan ODMs whose strength lies in the design and manufacture of low-cost Intel-based Windows servers. Now that most cloud servers run on open-source, Linux-based systems, there is a growing need for programmers to optimize the clusters for best efficiency and minimum energy consumption. As a result, ODMs have recruited software engineers en masse during the past few years, and the demand for software talent specialized in BIOS, firmware and server management software far exceeds that for hardware engineers.
Simplification of Feature-packed Server Chips
There are many differences between traditional, on-premise servers and cloud servers. For instance, cloud servers are known for fairly standard specifications and orderly organized cables. Cloud servers allow companies to save on floor space, as well as to implement logical partitioning and to apply virtualization more effectively, thus providing increased levels of server scalability. Moreover, cloud servers are much more "sleek" compared to their traditional counterparts as they omit processes or interfaces that are not needed for servers' functions, such as USB and PCI Express, which may incur more cost and consume more power than necessary. Furthermore, cloud servers paint a new landscape of opportunities for server assemblers, and allow Taiwan IC designers further room for growth. That is because for tech giants like Google, Facebook and Amazon, today's feature-rich chips appear to be too complicated and need to be simplified.
In view of this, several Taiwan IC design houses have planned to launch micro server chipsets based on 64-bit, ARM-based processors with 5x the power efficiency, with the aim to appeal to cloud service providers with their high-density, low-power advantages.
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