The traditional server original design manufacturer (ODM) model is changing by directly targeting hyperscale data centers and enterprises. Gartner Inc. forecasts that sales of servers by ODMs directly to customers will account for 16 percent of global x86 server shipments by 2018, amounting to $4.6 billion in revenue.
"ODM companies are rapidly changing their business model, as they are directly targeting hyperscale customers. These companies are expanding their business scope to also include enterprises in the near term," said Naveen Mishra, research director at Gartner. "Direct engagement with hyperscale data centers (DCs) is the biggest contributor to ODM growth. These customers are willing to consider innovative DC infrastructure designs that can offer better scalability and can drastically reduce the total cost of ownership of servers (including power and cooling expense) compared with mainstream servers offered by traditional server OEMs."
Growth in Web-based business models is driving hyperscale investment. Gartner estimates that the hyperscale segment will contribute 82 percent of the direct ODM server revenue in 2014. Rather than choosing mainstream OEM servers, these customers prefer ODM-supplied servers due to their lower cost, and innovative and efficient design, along with the ability to customize the systems.
Gartner defines hyperscale as having large DC requirements, and is engaged in serving external customers.
"ODMs have strong credentials of technical knowledge and capabilities in designing customized server solutions for varying customer needs," said Mr. Mishra. "Current ODM success is primarily restricted to server technology; however, OEMs need to recognize that this can eventually impact other technologies, especially storage. ODMs are already shipping storage (primarily internal), along with custom-built servers. Open stack storage solutions are slowly gaining traction with ODMs, which can disrupt the established external controller-based storage vendors."
In the short term, ODMs are focusing on targeting the hyperscale segment; however, they are also contemplating penetrating into the enterprise market. The challenge for ODMs is to transition their custom-built products for these enterprises. Increasing awareness among enterprises regarding Open Compute Project (OCP) can potentially enable enterprise decisions to partner with ODMs, as these engagements will be backed by the OCP community. ODMs should continue their short-term focus on large DCs. North America, Western Europe and the Asia/Pacific are the top three markets, with 82 percent of all DC sites.
With the need to scale to hundreds of thousands of servers, some Web services companies and traditional enterprises have sought more cost-effective procurement through sourcing directly from ODM companies, cutting out traditional OEMs from the supply chain. ODMs have the scalability and business model that allows them to provide lower-cost platforms. ODMs can drive cost-efficiency by virtue of their presence in areas in China and Taiwan, which helps them procure resources at a lower average selling price. With ODMs gaining success and economies of scale, their pricing structure will become more aggressive.
Currently ODM growth is restricted to the hyperscale segment, and OEMs have a clear lead in the overall market. ODM growth can be challenged due to the following factors:
ODMs have limited appeal outside the smaller group of hyperscale companies.
ODMs are under constant pressure from OEM companies due to conflicting business interest, while ODM companies are going directly with customers.
Large enterprise is the stronghold for OEMs that accounts for more than 60 percent of the global server market. ODMs have very little mind share, and they are generally tagged as white-box vendors that can't deliver enterprise-class performance. However, the notion of what constitutes a white-box vendor is changing, and few enterprise customers are willing to explore partnering with ODMs.
ODMs' limited investment in a support service ecosystem, coupled with their lack of knowledge of developing channel, are big disadvantages for them if they aspire to expand their customer base to new geographies and segments, such as large enterprise. Success in an enterprise account will also require an affinity with top-tier independent software vendors (ISVs), which most ODMs don't have today.
More detailed analysis is available in the report "Market Trends: Data Center Infrastructure ODMs Are the Key Threat to DC OEMs Direct Business." The report is available on Gartner's website at http://www.gartner.com/document/2821017.
Trends in data center infrastructure will be discussed further October 5-9 atGartner Symposium/ITxpo 2014 in Orlando. More information on the event is available at www.gartner.com/us/symposium. Members of the media can register for the event by contacting Christy Pettey at firstname.lastname@example.org.
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