How to Thrive as a Hardware Vendor in a Cloud-Centric World

I read a thought-provoking CNET blog post this week that argued storage vendors are better off focusing their sales and marketing efforts on internal clouds rather than on public clouds. Essentially, the argument goes, in the name of large-volume sales, vendors are feeding a growing monster, the cloud, that ultimately hopes to steal their sales. And they’re making these deals at lower margins than selling directly into enterprises. I’d argue this concern applies equally to server vendors, and that as the cloudscale market gets more crowded, the long-term solution is investing in a hybrid strategy or getting into the software racket.

The Competitive Landscape

This week, the troubled Verari Systems rebranded as Cirrascale and announced a “new” focus of selling customized servers to cloudscale data centers. There certainly is promise in this business plan, but realizing that promise won’t be easy; the long list of vendors already selling servers to the same customer base ranges from Dell to SeaMicro. Yes, demand is high — Amazon Web Services, Rackspace and other cloud/hosting providers continue investing in data center capacity — but there is a limited pool of providers. If many enterprise workloads really do move to the cloud, a few server vendors will win, but many will lose.

serverrevenue
Source: IDC

It’s a similar situation in storage, where pretty much every large vendor has arrays optimized for cloud computing environments, and would gladly sell to cloud providers if the opportunity arose. Of the providers actually buying major-vendor storage solutions, there’s only so much business to go around; NetApp appears to have snatched a lot of it early on. Startups are pushing cloudscale storage software that runs on commodity boxes, but that market is shaking out, too. While Mezeo keeps picking up momentum among cloud providers, companies like the once-hot Parascale are struggling to keep the lights on.

So, what’s a hardware vendor to do to remain relevant — and profitable?

Solution No. 1: Hybrid Cloud Computing

Assuming that internal infrastructure will always remain (IDC certainly thinks this is the case), hybrid clouds offer a variety of benefits to users, but they’re arguably more important for vendors. Whether they’re selling servers, storage or both, hybrid cloud computing allows vendors to feed customers’ cloud itches while maintaining those internal sales. If cloud computing isn’t presented as an all or nothing, on-premise or externally hosted option, vendors can sell to anyone who’ll buy without fear of cannibalizing internal sales to feed the provider business.

Depending on the hybrid model, vendors might actually be able to boost their overall sales. Cisco, for example, is seeing a spike in UCS installations within both service providers and individual organizations. Thanks to VMware’s vCloud initiative, both types of buyers have incentive to buy Cisco’s VMware-based, virtualization-optimized systems (although the server technically doesn’t matter to utilize vCloud capabilities). For storage vendors, a comparable arrangement might be federation software enabling customers to manage hybrid storage pools built on that vendor’s gear. The simplest solution is just to incorporate AWS EC2 or S3 compatibility into the management software.

Solution No. 2: Sell Software

As I wrote several months ago, another surefire method to ensure revenues continue in the cloud computing era is to sell software optimized for the cloud. If hardware sales slow, someone has to bring enterprise-grade capabilities to cloud platforms. Server vendors might target virtualization and systems management software; storage vendors are particularly well positioned to target specific workloads. Demand for analytics and BI software is growing by the day, for example, so EMC’s Greenplum acquisition gives it an opportunity to help customers build analytic databases on cloud resources. Likewise, cloud-based storage pools will need to be deduplicated as they grow in volume, so standalone deduplication software or services could sell nicely.

Cloud computing will affect storage and server vendors businesses, but it needn’t be devastating. With a little ingenuity and foresight, vendors can embrace both public and internal clouds and keep on reaping the rewards of our collective appetite for more capacity.

Related Research: Analyzing Cloud Revenues: Look at the Growth, Not the Numbers

Question of the week

How many vendors can the storage and server markets support if cloud adoption goes mainstream?
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