Facebook's custom-designed servers
The first article is a Bloomberg piece titled "Dell Loses Orders as Facebook Do-It-Yourself Servers Gain." Bloomberg notes that large cloud providers are designing their own servers and having them manufactured to order. The traditional server suppliers like HP and Dell (while the headline read "Dell," it was clear from the article that this phenomenon applies to all of the major server vendors) are faced with an unpleasant dilemma: Manufacture these custom designs, but accept lower margins, or proffer higher-margin standard designs and lose orders.
The implication of the article was clear. The large cloud market is cost-focused and applies pressure on vendors to accept less profit in return for volume. Astonishingly, according to Gartner analyst Jeffrey Hewitt, quoted in the article, this type of server accounts for 20 percent of the server market (the article wasn't clear if this is 20 percent of shipments or revenue). From this stat, it's clear that this is a significant part of the market; one can expect that it will come to represent an even higher proportion of the overall market, increasing the margin compression for server vendors.
Brocade: Why not rent instead of buy?
Brocade, a network equipment manufacturer, has launched a new program aimed at cloud computing environments. Customers can acquire network equipment on a subscription basis: "Customers can subscribe for additional capacity to meet peaks and then step down capacity as those peaks diminish."
The model for how this works was not made clear in the article. Does Brocade install a large number of boxes and dynamically configure them to be on or off based on network load? Or does Brocade physically install and de-install boxes according to a customer calling up and asking for more or less equipment? One presumes it is the former. This has the effect of shifting network equipment -- from the cloud provider's perspective -- from a capex to an opex financial commitment. Put another way, it shifts utilization risk from the provider to Brocade. Or, put yet another way, it has the effect of Brocade financing its customers network equipment.
No matter how it's put, though, the implication is clear: Brocade will carry the asset-owning capital investment and let its customers pay for capacity as needed.
This is a really big deal. If you've seen people from AWS like Werner Vogels (Amazon CTO) or James Hamilton (AWS data center guru), they note that network equipment is one of the high cost items in their data centers. Vogels, in particular, is quite vocal about how AWS views network equipment as too expensive for what it provides and speaks longingly about network equipment moving toward the commodity approach of server designs.
Taking these two stories together, it's clear that the entire cost structure of data centers is changing under the pressure of cloud computing and its move toward massive scale and efficiency. Every supplier, whether a server manufacturer or a network equipment provider, will need to respond to a high-volume, low-margin market.
The obvious question is, how will users with smaller data centers do? Will they be able to ride the same economics (e.g., "you know those servers you just sent over to Facebook, well, we'd like 50 of the same type"), or will their lower volumes and more heterogeneous environments force them to use higher cost equipment?