Cloud Giants Spent Unusually Big on Data Center Tech in the First Quarter

Operators of the world’s largest cloud platforms spent an unusually large amount of money on hardware and software those platforms are made of in the first three months of 2018.

That’s according to Synergy Research Group, whose new report estimates that these companies – including Amazon, Microsoft, Facebook, and Alphabet's Google, among others – spent north of $11 billion on servers, storage, networking, operating system licenses, and virtualization software during the first quarter.

That’s 32 percent more than they spent in the same period last year – “the highest growth figure seen in nine quarters.”

Typically, first-quarter revenue drops sharply from the “seasonally strong fourth quarter,” Synergy explained, but this time revenue was down only 2 percent from the previous quarter.

Other market players and watchers have reported similar growth rates. Chipmakers Intel and Broadcom both reported high data center revenue growth in the first quarter, and market research firm IDC said total revenue from server sales worldwide grew 39 percent, marking a third consecutive quarter of double-digit growth.

IDC attributed “historic demand for servers” to companies refreshing hardware market-wide, strong demand from cloud service providers, companies building out software-defined infrastructure, demand for newer CPUs, and the rise of next-generation workloads.

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But IDC identified hyperscale companies as the ones driving server volume demand in the first quarter.

Synergy has developed its own set of criteria for calling a company hyperscale based on scale of business. It’s identified 24 hyperscalers using that criteria, each company’s data center infrastructure measured in tens of thousands of servers.

Besides the four hyperscalers mentioned above, the list includes Chinese giants Alibaba, Baidu, and Tencent, as well as US-based Apple, IBM, Twitter, LinkedIn, eBay, and others. 

But, as the market for cloud infrastructure technology expands, incumbent data center hardware vendors continue to see their share of it shrink, most of the big hyperscale hardware deals going to Asian design manufacturers, who are selling gear at low prices and high volumes.

“In terms of vendor market share, ODMs in aggregate continue to run away with the market and now account for almost 30% of total revenues,” Synergy said.

The ODMs had more than 25 percent market share in the first quarter, according to Synergy. Dell EMC, Cisco, and Hewlett Packard Enterprise each had between 5 and 10 percent market share; while Microsoft, Huawei, and VMware each had between 3 and 5 percent.

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There are many ODMs included in the 25-percent market share estimate, but the leading ones are Quanta, Wistron, Inventec, Sanmina, and Flextronix, among others, John Dinsdale, chief analyst and research director at Synergy, explained in an email to Data Center Knowledge.

The market-share estimates here include hardware and software. ODMs’ revenue comes primarily from hardware, while much of the cloud infrastructure software is sold by Microsoft and VMware – OS licenses by the former and virtualization software by the latter. “Windows Server is the big-ticket item in the Microsoft numbers,” Dinsdale said.

The estimate doesn’t include the use of Windows Server by Microsoft’s own Azure cloud, he said. “The analysis and data is being driven by external sales and not internal sales,” he explained.