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Cloud vendors make the most of their COVID-19 stimulus

Join Allan Krans, Nicki Catchpole, Evan Woollacott and Catie Merrill for a glimpse into the continued acceleration of cloud adoption as the COVID-19 pandemic abates. The discussion will shed light on how the value of cloud was reinforced during the pandemic, leading to accelerated spending as conditions have stabilized and improved in the first half of 2021. 

Don’t miss:

  • How technology and business strategies have changed for cloud customers and vendors
  • How mission-critical workloads are now moving to hybrid and cloud delivery methods
  • The role consumption-based pricing options are playing for customers

Mark your calendars for June 9, 2021 at 1 p.m. EDT,
and REGISTER to reserve your space.

Commoditization economics and emerging workloads disrupt the data center landscape

Commoditization mitigation strategies require business model shifts and an ever-watchful eye on exascale cloud entrants

Volume or value?

Toward the end of 2018 in the data center market, two distinct vendor strategies emerged: Vendors began either increasing sales volume or selling lower-volume but higher-value solutions. TBR believes that in 1H19, now that vendors have determined their camps, they will begin to craft competitive strategies directly targeting specific peers. For example, Dell EMC has publicly stated its intent to increase its market share in both servers and storage, and we believe the vendor will target key competitors to gain this share. Similarly, Lenovo’s large-scale data center investments imply significant competitive goals.

In February Lenovo unveiled TruScale Infrastructure Services. This directly competes with Hewlett Packard Enterprise’s (HPE) GreenLake and Dell EMC’s Cloud Flex. It also addresses customer demand for private cloud infrastructure that is financed like a public cloud offering. TruScale is available for Lenovo’s entire stack of data center infrastructure solutions. In April Lenovo unveiled a server portfolio refresh, which likely reinforces its TruScale solutions and increases its competitive edge against Dell EMC and HPE.

TBR believes that during the next few months, Dell EMC and HPE will fight back against Lenovo’s marketing tactics to preserve market share. HPE has an advantage in that it is pursuing value-centric data center sales, so it is likely willing to concede less-profitable sales to Lenovo or Dell EMC. Dell EMC’s stated objective to increase market share in servers and storage will increase competition between the company and Lenovo as both aim to scoop up HPE’s lower-margin customers.

ODM participation heats up as commoditization drives provisioning simplicity

Because data center hardware becomes increasingly commoditized as software capabilities become more advanced, we believe data center vendors will increasingly find themselves competing against ODMs, especially for larger deals. Smaller customers will still show a preference for OEMs as they need the additional software and services provided with OEM data center solutions. Lenovo’s manufacturing capabilities give the company an advantage in the hyperscale space, where Lenovo’s past financials illustrated some successes, and enable the vendor to differentiate from its OEM peers.

On the hyperscale front, ODMs are rising to dominance, but OEMs such as Lenovo remain a force to be reckoned with in the space. As cloud becomes an increasingly central piece of IT environments, public cloud providers seek ways to expand their environments as cost-effectively as possible to preserve profits. TBR believes very large enterprises are likely to explore leveraging hyperscale vendors as well for their on-premises environments if it is cost-effective.

Consumption-based pricing models tie to the commoditization march

TBR’s Hyperconverged Platforms Customer Research continues to highlight the correlation between private cloud installments and HCI. Most recent findings indicated that 80% of respondents leveraged their HCI purchase for a private or hybrid cloud environment. Since customers are already turning to HCI for cloud, it is a logical next step for vendors to price HCI like a public cloud solution to deepen the competition.

With their channel partners also engaged, Dell EMC, HPE and Lenovo are the three main players in the consumption-based pricing space. Their solutions are not limited to just HCI, but HCI is one of the solutions that can be purchased in this manner. The key value proposition of consumption-based pricing for data center vendors is the ability to bundle software and services into hardware consumption-based deals. This is likely to boost the margin on the solutions. Further, it guarantees larger deals, as in many cases, these consumption-based pricing deals lock customers in for a predetermined duration that has early termination penalties.

Key findings from TBR’s 2H18 Hyperconverged Platforms Customer Research

  • TBR forecasts the HCI market will reach $15 billion by 2023, representing a significant growth opportunity for data center vendors.
  • Survey incidence data indicate that the majority of potential customers have not yet begun their hyperconverged infrastructure (HCI) journey.
  • Emerging solutions, such as Lenovo’s TruScale Infrastructure Services and AWS Outposts have the potential to shake up the HCI market.

Opportunity for successful HCI vendors is great, as the market will rapidly expand through 2023

The HCI market evolves to meet customers’ changing demands. As customers embrace digital transformation, the opportunity in HCI increases, and vendors invest and adapt to become agents of change for customers. TBR estimates the HCI market will increase from $4.6 billion in 2018 to $15 billion by 2023 as customers leverage HCI for a wide array of needs, both traditional and emerging.

A majority of potential customers have not yet purchased HCI, creating opportunities for all HCI vendors to gain customers. Incidence data from TBR’s research show that only 27% of companies surveyed purchased HCI. This demonstrates the massive opportunity that remains for vendors to gain net-new customers in the space. Converged infrastructure (CI) leaders Dell EMC and Cisco have a distinct advantage over other HCI peers, as their CI legacies have afforded them incumbent status with existing CI customers. Despite the incumbent advantage, there is opportunity for any vendor to capitalize on emerging buyer preferences. For example, software is an increasingly central piece of the HCI story, and with 79% of respondents indicating that they would consider consumption-based HCI purchases, strategic marketing and investments can enable any HCI vendor to rise through the ranks.

While Lenovo is not a leading vendor at this time, 30% of respondents indicated they considered Lenovo for their HCI purchase. Lenovo’s restructured portfolio, its recent unveiling of TruScale Infrastructure Services, and the rapid positive changes in its overall data center business are likely to bolster gains for the vendor in HCI as well. Although Dell EMC’s and Cisco’s leadership in the HCI space has been established, the opportunity in HCI remains vast, even for fast followers in the space. Digital transformation only stands to reinforce this trend as HCI becomes more widely adopted.

Customers leverage HCI for private and hybrid cloud installments as security remains a top concern with public cloud adoption

It is clear the private and hybrid cloud value proposition is a benefit HCI buyers are looking to achieve, with 80% of respondents indicating they leverage HCI for private or hybrid cloud installments. A majority of customers (60%) leverage their HCI for database management, and many of these customers indicated their database management use was for mission-critical purposes. This underscores the need to protect critical and sensitive data. TBR’s research showed that buyers are making additional investments in security in conjunction with HCI, particularly network security.

Graph depicting 2H18 security software purchased with hyperconverged

Going forward, the emergence of AWS Outposts in the market will challenge current HCI deployment trends as Amazon Web Services (AWS) messages its Outposts offering as being able to seamlessly integrate with AWS public cloud, addressing a key driver behind HCI adoption for private cloud installments. AWS Outposts are expected to hit the market in 2H19, so it will take some time before the impact of Outposts is known. However, that AWS is making its Outposts offering available as a managed service will improve ease of use, and will likely increase demand, especially among existing AWS customers as the underlying hardware of Outposts will resemble that of AWS’ public cloud environment.

Lenovo unveils TruScale Infrastructure Services, consumption-based data center pricing

In February Lenovo’s Data Center Group (DCG) unveiled TruScale Infrastructure Services. A Hardware as a Service (HaaS) solution with subscription-based pricing, TruScale makes DCG’s entire ThinkSystem and ThinkAgile portfolio available to customers “as a Service” through both Lenovo sales associates and channel partners. For a monthly fee, customers will gain access to data center infrastructure, which can be installed at the customer’s location of choice. Cost will be based on power consumption, as power consumption is a relatively accurate way to measure usage without compromising infrastructure security. The hardware remains Lenovo-owned, -maintained and -supported, and with no minimum usage requirement, customers gain the financial flexibility available through public cloud offerings without the risks associated with taking data off premises. Further, the monthly pricing structure includes installation, deployment, management, maintenance, remote monitoring, system health checks and removal of the hardware once the subscription expires. Pricing details of the solution have not yet been disclosed and are likely to be determined case-by-case. The solution is currently available only in English and priced in USD and Euros.

DCG’s late-to-market status will be advantageous in the consumption-based pricing realm

DCG is a fast-follower in consumption-based pricing, as Hewlett Packard Enterprise (HPE) and Dell Technologies have offered consumption-based pricing for over a year. While these offerings have greater market longevity, as they are typically multiyear agreements, customer adoption remains relatively nascent for consumption-based pricing models. These deals are more complex than traditional hardware sales, and therefore require a mindset shift in some ways to promote adoption, just as cloud did initially. DCG’s entrance into the market times well with customer interest, and the vendor’s later arrival to the space will not prove to be a major inhibitor to growth.

The total inclusion of DCG’s channel partners, in addition to its direct sales force, in providing TruScale, is an asset and distinction for the group. Because Lenovo’s services portfolio is not as mature as that of vendors such as Dell EMC, providing channel partners with this opportunity will prove to be a win-win as it enables channel partners to sell attached services while affording Lenovo a more passive revenue stream. Involving the channel has been an initial challenge for some vendors offering consumption-based pricing as the partners need to be incentivized to pursue it over a traditional hardware sale, in which they would get a lump sum payout versus a subscription-like payout. TBR believes that because Lenovo has arrived to market later than peers with its consumption-based pricing offerings, it was able to work out channel partner challenges before going live with the solution.

HCI vendors capitalize on digital transformation with private cloud adoption

HAMPTON, N.H. — In many ways, digital transformation equates to rising cloud adoption. Enterprises need the increased agility and flexibility that a cloud environment provides but also want the cost structure associated with cloud. However, new regulations on data sovereignty continue to emerge and security concerns are mounting as data becomes an increasingly valuable asset, creating challenges for enterprises seeking cloud environments. Hardware vendors that initially lost business to cloud providers revel in this shift, as clear markets for both public and private cloud enable infrastructure and services vendors to co-exist.

Despite the need for greater control and security of data, enterprises still demand the agility and flexibility afforded by cloud environments and are increasingly demanding opex-based consumption models. Insights from TBR’s recently published 1H18 Hyperconverged Platforms Customer Research report further detail these trends and the impact they will likely have on the data center infrastructure and cloud markets.

Many customers purchasing HCI are doing so for cloud environments

More than 90% of hyperconverged infrastructure (HCI) customers surveyed in TBR’s 1H18 Hyperconverged Platforms Customer Research are leveraging or will leverage HCI for cloud installments: 54% are leveraging HCI for hybrid cloud, 30% are leveraging HCI for private cloud, and 8% are not currently leveraging HCI for cloud but intend to do so in the future. HCI is well-suited for the cloud as it is highly software-enabled, making spinning it into a private cloud relatively seamless compared to traditional infrastructure environments. Further, HCI sales tend to be more supported with services than legacy infrastructure sales, enabling customers to experience a more collaborative sale. Findings from 1H18 Hyperconverged Platforms Customer Research indicate 59% of respondents purchased their HCI solution direct from the vendor, while 62% of respondents received or requested additional hardware services, such as firmware and break-fix, with their HCI purchase.

HCI is a lucrative opportunity for vendors as it combines hardware, software and services into a single sale, increasing margins for hardware vendors and enabling vendors to leverage strategic marketing to sell across their entire portfolio stack rather than one-off piecemeal hardware sales. Further, many HCI vendors successfully bundle additional non-HCI sales on top of HCI purchases, as a customer already strongly considering a given vendor’s HCI architecture is likely to consider other solutions in the portfolio. Respondents in the 1H18 Hyperconverged Platforms Customer Research indicated they frequently make additional hardware purchases with HCI sales. However, these additional hardware sales were not necessarily associated with the HCI appliance, with customers purchasing additional hardware for their data centers in many cases. This suggests a broad portfolio is paramount to enterprise success as IT shops look to reduce the number of suppliers they manage while seeking hardware components to maintain existing infrastructure requirements of legacy workloads and building out new environments for native cloud workloads. This will prove advantageous for multiline vendors in the space such as Lenovo, Dell EMC and Hewlett Packard Enterprise (HPE) but will challenge niche vendors such as NetApp and Pivot3.

The rise in consumption-based pricing makes HCI more desirable for cloud installments

Of 1H18 Hyperconverged Platforms Customer Research respondents, 81% are considering consumption-based pricing models for future HCI purchases. The reasons for considering consumption-based pricing vary, with less than one-third of respondents doing so for the shift to an opex model alone, indicating that purchasing decisions are more complex than simply to shift expense structures. However, customers are still intrigued by these new pricing options.

The more interest increases for consumption-based HCI purchases, the greater challenges public cloud vendors will face from infrastructure vendors. Dell EMC and HPE both have a strong presence in the consumption-based pricing space, and there are other infrastructure vendors playing in this space less vocally. Competing will be a challenge for public cloud providers as infrastructure vendors message increased security and control without cost increases to battle public cloud options.

There will always be a place for both public and private cloud in the data center market

Although competition will continue to heat up between public cloud and private cloud vendors as evolving market dynamics alter messaging, the need for both installments in the digitizing world will remain. However, as economics become more favorable on the private cloud side, partly due to HCI and consumption-based pricing, customers may consider private cloud options for workloads they previously would have considered a public cloud environment.

For additional information about this research or to arrange a one-on-one analyst briefing, please contact Dan Demers at +1 603.929.1166 or [email protected].

ABOUT TBR

Technology Business Research, Inc. is a leading independent technology market research and consulting firm specializing in the business and financial analyses of hardware, software, professional services, and telecom vendors and operators. Serving a global clientele, TBR provides timely and actionable market research and business intelligence in a format that is uniquely tailored to clients’ needs. Our analysts are available to address client-specific issues further or information needs on an inquiry or proprietary consulting basis.

TBR has been empowering corporate decision makers since 1996. For more information please visit www.tbri.com.