While challenges persist for security vendors due to COVID-19, opportunities abound as customers adapt to the new world

Acquisition sprees continue despite economic woes

As noted in TBR’s 1H20 Security Benchmark, consolidation continues in the enterprise security market as customers continue to seek to work with fewer vendors to secure their IT portfolios. This encourages larger firms to make tuck-in acquisitions to meet customer demands. COVID-19 rapidly increased the need for enterprise security in remote and edge environments to enable employees to securely work remotely.

Logistical challenges with hardware shipping threaten multiline vendors’ ability to deliver solutions

Many multiline vendors in the enterprise security market also sell data center infrastructure and attach security sales to hardware sales to provide customers with solutions. The logistical and supply chain challenges that data center hardware vendors encountered due to COVID-19 hampered their ability to fulfill orders, resulting in a hardware sales backlog in 1H20. However, this backlog will be cleared out in 2H20, which will enable these vendors to realize the revenue. This should, in turn, enable multiline enterprise security vendors to realize the revenue of attached security solutions in 2H20 as well.

New use cases created at the edge amid pandemic

COVID-19 has fundamentally changed how society works, rapidly increasing the demand for new use cases for IT infrastructure as companies swiftly seek new ways to continue to do business. A key example is the emergence of new edge use cases to help slow and monitor the spread of COVID-19, including leveraging surveillance equipment to monitor social distancing and mask wearing as well as assist to assist with contact tracing if a person tests positive. These new uses will result in the need for more technology at the edge and heightened security to protect individuals’ privacy.

TBR’s Security Benchmark provides clients a deep dive into the enterprise security market, highlighting the financial performance of public and private, multiline, and pure play vendors within the industry.

NVIDIA acquires ARM: Creating a next-generation AI platform

NVIDIA announced Sept. 14 an agreement to acquire ARM holdings from SoftBank for $40 billion, subject to regulatory approval in the U.S., the U.K., the European Union and China. The acquisition has been rumored for several weeks, but the announcement generated negative comments from ARM customers. The two companies’ IP portfolios complement each other, especially in the context of rapidly growing AI workloads. TBR believes the combined company can successfully create new integrated AI hardware platforms, while growing profitable in each former company’s primary business, graphics processors for NVIDIA and mobile CPUs for ARM.

Complementary IP and different business models

ARM is in the CPU business. NVIDIA is in the graphics processing unit (GPU) business, and NVIDIA GPUs are increasingly used in non-graphics AI processing applications. Both companies rely on microprocessor design to deliver value and grow their businesses, but the way each company monetizes its IP is very different. NVIDIA is a traditional product-based business; it makes processors and boards that it sells to equipment manufacturers and to cloud service providers. ARM follows a licensing model; it sells the rights to use its designs and instruction sets to equipment manufacturers that often modify the ARM designs to meet their needs.

One concern of current ARM customers is that NVIDIA will eventually move ARM to a product model; only NVIDIA will make hardware that incorporates ARM designs, shutting off customers’ ability to customize ARM-based chips. This would be a disaster for the major mobile OEMS, including industry behemoths Apple and Samsung. ARM chips power virtually all smartphones and tablets, and mobile vendors rely on derivative ARM designs for differentiated products. Apple makes its own modifications and recently announced that its PCs will be migrated from Intel to ARM processors, allowing the company to have a uniform hardware platform for all its major products. Samsung designs its own ARM processors but relies on third-party ARM designer Qualcomm for many of its products. To make matters more confusing, Samsung manufactures both Qualcomm and Apple processors.

NVIDIA announced that it would continue the current ARM licensing business model and, in fact, would license some of its GPU IP in the same manner. Nevertheless, ARM customers are concerned because strategically vital licensed IP would now be owned by a hardware vendor. TBR believes the ARM licensing model will continue for ARM designs and the same model will greatly benefit NVIDIA’s GPU business as well.

NVIDIA is transitioning from graphics to AI

NVIDIA is the dominant vendor in GPUs, and for that reason, if its processors were used only for graphics, its growth would be limited to the growth of graphics applications. GPUs, however, are also well-suited for AI deep learning applications because both graphics and deep learning rely on massively parallel processing.

2Q20 is a crossover quarter. For the first time, NVIDIA data center revenue, which is almost all AI, was greater than revenue from graphics applications in PCs. NVIDIA data center revenue grew 167% year-to-year; NVIDIA will soon be dominated by AI applications in data centers. There is competition in AI processors from Google’s tensor processing unit (TPU) and from field-programmable gate arrays (FPGAs), as well as several new AI processing entrants, including two from Intel. Nevertheless, NVIDIA enjoys an enormous lead in a very rapidly growing business.

GPUs and CPUs working together

GPUs and CPUs coexist. Every device that uses GPUs for AI needs CPUs for all the other required processing. In data centers, the CPU is now almost always an Intel product. While ARM designs are increasingly powerful, as illustrated by Apple’s decision to use them for PCs, they are not yet used widely for data center devices. Where the GPU is doing most of the work, however, ARM-NVIDIA designs could be quite viable. ARM-NVIDIA designs would also work well in edge devices. This synergy positions NVIDIA well in a world where deep learning is becoming increasingly important.

Applications for deep learning are becoming more diverse, creating a variety of settings and requirements for CPU-GPU platforms. This proliferation of design requirements is a challenge for a product-based company like NVIDIA. The ARM licensing business model fits this diversifying market very well. TBR believes NVIDIA will first experiment with the licensing of older GPU designs, but then move rapidly to licensing GPU IP for all AI applications, greatly accelerating adoption of NVIDIA designs for AI and inhibiting growth of competing AI chip designs.

The ARM acquisition will accelerate AI

While NVIDIA and ARM are not competitors, therefore reducing anti-trust concerns, many parties have expressed concerns about this acquisition. Both companies are very important, with NVIDIA dominating AI processors and ARM monopolizing mobile CPUs. There are also concerns about a U.S. company controlling these two critical components. In the U.K., there is concern about the loss of jobs. TBR, however, believes this union will prove beneficial, certainly to the combined company, but also to other companies basing their business on the growth of AI.

Amid a consolidating market, vendors adopt creative initiatives to fight for mission-critical cloud workloads

Public cloud growth leaders

While Amazon Web Services (AWS) continues to dominate the public cloud IaaS market, its rivals continue to expand in the space and even collaborate to take market share. Microsoft and Oracle added a new data center interconnection in Amsterdam, deepening the ties between the vendors as they enable customers to run Oracle workloads on Azure and integrate workloads between the vendors’ clouds. TBR believes Microsoft and Oracle will continue to improve their competitive position against AWS as more data center interconnections are added. In addition, TBR expects Alibaba will become a growing threat to AWS and other U.S.-based vendors as it builds out data centers in APAC and EMEA.

1Q20 Public Cloud: Percentage of Revenue Growth vs. Absolute Dollar Growth

Public cloud remains the largest and fastest growing segment of the cloud market. Changes in customer acceptance, data integrations and innovation have combined to sustain the rapid growth of public cloud adoption. The Public Cloud Benchmark details how hybrid deployments, new use cases for enterprise apps, and trends in emerging technology will make public cloud even more relevant in the future.

Total benchmarked revenue growth slowed in 4Q19, but TBR expects the colocation market to remain strong amid COVID-19

Market summary

Colocation market

While slowing to single-digit growth, down from 10.6% in 2Q19, the colocation market continues to expand as colocation vendors address the shifting needs of enterprise and hyperscale vendors. According to TBR estimates, benchmarked vendors’ average data center services and colocation revenue increased 8.1% year-to-year in 4Q19 to an aggregate of $3.4 billion. Moving forward, TBR expects incumbents and smaller players alike to continue driving expansion initiatives, particularly in the U.S. Even Japan-based NTT Communications is moving its overseas subsidiaries to become part of NTT Ltd. to better capitalize on market opportunity abroad.

4Q19 Colocation and Data Center Services Revenue Growth_Percentage and Absolute Dollar Growth

Colocation has long been an option for the data center space, but the market is taking on greater importance amid recent IT trends. Rising demand for cloud environments, specifically hybrid models, pushes leading hyperscalers and the modern enterprise to seek out co-located facilities and the managed services vendors have to offer. TBR’s Colocation Benchmark covers the financial performance of leading providers in this space and tracks their business strategies across core colocation markets and for complementary data center services.

COVID-19 survey update: Cloud reliance grows

This piece is an update to our blog post in late March that looked at how IT organizations are being impacted by COVID-19, including insights from TBR’s survey of enterprise IT leaders. The blog discussed how we are experiencing the second wave of impacts from the outbreak, in which widespread business disruption is affecting demand for IT products and services.

In typical IT research, we tend to track trending on a quarterly, semiannual or annual basis. Given that nothing we are experiencing during this pandemic aligns with the typical way of doing business, we have decided to compare how sentiment has shifted among IT leaders over a roughly two-week span. During the first half of April, we refielded our March pulse survey questions, which yielded the following trends in sentiment.

Overarching IT projects remain in wait-and-see mode

A delay in IT initiatives is one of the clear emerging trends as companies ride out disruptions to employees’ workflows and gauge the financial impact of the pandemic. Compared to the second half of March, there has been no change in the status of existing projects in the first half of April, with 42% of respondents indicating they are delayed. Trends have also remained constant in regard to IT budgets, with about 32% of respondents indicating budgets are frozen and new spending is on hold.

Attention is increasingly shifting toward enabling remote work

While long-term projects may be slowing or paused, there is growth in IT teams’ spending on and delivering of remote work capabilities for end users. In the latter half of March, 34% of respondents reported increasing spending on remote productivity; by mid-April, nearly half of respondents indicated this was the case. TBR believes this trend is driven not only by extensions of stay-at-home orders but also by general acknowledgement that a reintroduction to “normal” life will likely be a slow process.

Reliance on cloud is increasing

SaaS and IaaS are among some of the few IT segments that may see increased demand in the first half of this year. Responses from IT experts reflect this trend, with a considerable increase in respondents indicating usage of cloud resources has grown compared to our survey fielded in March. Currently 30% of respondents are increasing cloud usage due to data center shortages while 19% are increasing cloud consumption to offset labor shortages related to social distancing.

The impacts of the pandemic will be lasting

Respondents have not wavered from their belief that the use of cloud technology at their company will increase in the long term due to the COVID-19 pandemic, as indicated by 48% of those surveyed. Further, a decrease in respondents indicating their use of cloud technology will diminish in the long term suggests that companies expect this wave of cloud adoption will be maintained in the future, rather than serving as a temporary fix for employees needing to conduct business remotely.

On the other hand, there are also simultaneous increases in optimism and uncertainty compared to responses from two weeks ago, as more respondents indicated that they intend to return to typical IT strategies post-pandemic or that they do not know how the pandemic will shape their IT strategy.

While the pandemic has a variety of implications across different types of businesses as well as the IT vendors that serve them, our survey data suggests that IT strategies and ways of working will change for many. Contact TBR to learn more from our analyst team.

COVID-19: Life between trapezes

Economic activity currently appears more in cessation than recession. It is as if the world is suspended, untethered between two trapezes. As activity resumes, we know inquisitive humans will turn to easy-to-assemble technology to meet the emerging business demands and consumer pain points materializing daily. We will see a flurry of IoT-enabled endpoint applications that will spur new demand. Increased interconnection will pressure networks, with businesses and service providers looking for easy-to-deploy provisioning using traditional compute as the underpinning infrastructure. In short, whatever Horizon 2 and Horizon 3 concepts are being dissected by the strategists will be fast-tracked for trials if they can address the near-term business, social and policy pain points being magnified for us in this once-in-a-century crisis.

In the current climate, strategy really nets down to agile thinking: the ability to make tactical shifts necessary in the heat of the moment to keep operations sage, secure and adaptable. Compute is far more ubiquitous today than in prior economic downturns, and, as such, the problems that can be solved from the practical applications are equally as ubiquitous. Multi-enterprise collaborations built on top of open platforms will create opportunities.

Pervasive compute represents a fundamental difference today compared to the recent economic jolts of the 1987 stock market crash, the dot-com bubble, or Sept. 11. For example, Sept. 11 gave rise to business web conferencing as business travel stalled. Today, with consumerized IT, we are seeing the rise in social conferencing keeping families and friends connected on inexpensive compute devices. We have likewise certainly seen broad shifts in where compute cycles reside since the banking crisis of 2008-2009 when cloud was just beginning to gain market traction. As such, when looking at the implications of COVID-19 on compute, we really have to evaluate an entire suite of compute instances including, but not limited to:

  • Traditional data centers
  • Cloud computing data centers
  • Edge computing or micro data centers
  • Colocation data centers

Traditional centers: Delayed refresh cycles with pockets of modernization opportunities

The short-term outlook for those focused on selling silicon into enterprise data centers is to expect a steep stall out on the refresh cycle rhythm of business. Executives across virtually all industries will put the hammer down on discretionary spend, and a server refresh will be hard-pressed to move forward until the business fundamentals improve to the point where leadership will not want to conserve cash.

However, pockets of opportunity should persist.

  • COVID-19 pressures the traditional “fortress” data center given the need for remote monitoring and management of the data center. Those needing to make the pivot over to greater remote monitoring will be looking for the equipment required to augment that existing infrastructure, whether it is to turn this remote monitoring over to existing staff in work-from-home mode or to take advantage of remote managed services in the event staff illness depletes existing capacity.
  • Networking capacity expansion to accommodate the surge in remote work has been well documented.
  • Colocation (COLO) center compute could well be repatriated back to the data center due primarily to worker safety issues pertaining to entering and exiting COLO centers to perform whatever smart hands work is required.

Cloud computing: The RPMs on the flywheel should spin faster, requiring capacity build-outs

Cloud computing, especially for the exascale cloud providers — Amazon, Azure and Google, or “Amazurgle” — has been well documented for having seen demand surge due to COVID-19. These surges have come from the rapid move to remote work and the uptick in collaboration and video conferencing application usage as well as increases in consumer use of various streaming video platforms these exascalers underpin. This all points to data center expansions and build-outs by the exascalers. This will increase chip demand, but more chips will flow to the ODM market than to the OEM market based on exascaler preference for these lower-cost, built-to-spec systems.

Furthermore, enterprises reluctant to migrate to the cloud will be forced to as part of their business’s continuity planning around the need to keep their IT staffs at home or to shut down data centers where employees exposed to COVID-19 have been working. In this way, COVID-19 will accelerate the prevailing trend of more application migration to cloud. Not all activity moving to cloud under these unique conditions will revert back once the crisis abates. The current economic environment merely accelerates a trend that has been largely anticipated as hybrid multicloud integrations have become more automated and secure.

An offset to this demand surge will be lower transaction volumes in some industries. E-tailers will certainly spin the meter faster, but online travel, hotel bookings and their adjacencies will slow. Ultimately, TBR expects the exascalers’ revenue will grow as a variety of factors, though societally disruptive, positively impact the need to move more compute to the cloud.

The edge will likewise accelerate

Edge compute has more issues influencing demand and activity. There will be the near-term surges to accommodate the need for added remote compute and networking cycles within enterprise. Additionally, we expect to see the rapid assembly of new use reference architectures for a host of point-of-sale configurations as customer and worker safety concerns begin to be addressed with technology-enabled solutions. This demand will not be a one-for-one contribution. Edge deployments need the “killer app” to have enterprises commit to the infrastructure purchase in much the same way that mobile voice put smartphones in people’s hands. As such, some of these rapidly assembled solutions will only be layering an additional app onto an existing edge configuration with new end-point devices being tied into the compute instance.

But in the midterm, TBR expects to see a rapid increase in the reference architecture designs for additional edge services that will pull more software and specialty devices and have a minor, cascading impact on the edge above and beyond the prevailing activities that have been taking place.

The downdraft will be seen in the verticals most seriously impeded by reduced human movement such as the retail and hospitality sectors. Healthcare, on the other hand, will certainly see spikes in new configurations for patient screening within the existing medical infrastructure.

Colocation centers: A still maturing space addressing foot traffic

Few anticipated a human virus as a threat to COLO operations, but recent articles indicate the novel coronavirus can challenge current operating practices. The comings and goings of enterprise employees who may have the virus can lock down COLO centers until sanitation teams can decontaminate the space. Workarounds consist mainly of additional screening of the customer technicians entering the facilities. We anticipate there could be additional remote monitoring done by customers of their COLO instance, potential construction retrofits for better isolation and portioning, and additional services COLO providers can offer to minimize human traffic within the centers.

The need for dedicated cloud interconnections will not abate as more business and streaming activity demands distributed compute across cloud data centers for geographic density. Micro data centers under cellular towers are edge applications that will increase in popularity and potentially take some share of wallet from COLO centers. But, like the cloud and the edge, we expect the COLO segment to weather the current economic climate better than others.

As the COVID-19 tsunami crests, will new opportunities be in the offing?

No one still gainfully employed has navigated a business through a pandemic. No employee with less than 12 years of experience has even worked in an economic downturn let alone a cessation of business activity. Senior leaders will be well served by staying close to their middle management executives to help them stay measured and calm. Companies with sufficient cash to take the long view can use this slowdown to invest in employee training and education on digitally transformative business applications and devices to upskill staff to handle the pent-up business demand when the economy re-engages.

The world as we knew it on New Year’s Day 2020 will not return, but the world that will emerge will be better in the long term. The companies that have been at the forefront of digitally transforming their operations will have better operating methods for the near-term impact; services firms with templated frameworks will have near-term opportunities to help late majority businesses make the leap to the digital world; and from the current tactical firefights will come scalable solutions benefiting society as a whole. As a world, we are suspended between trapeze bars, reaching for the Fourth Industrial Revolution on the horizon.  

The bar is sturdy and well within the grasp of those businesses stewarded by steady hands in these unsteady times.

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Hardware commoditization pushes vendors into new ventures

Insights from TBR’s 2020 Data Center Predictions

Join Stephanie Long and Geoff Woollacott for a detailed analysis of where the data center market is headed in 2020. With many emerging technologies coming to market, data center vendors are investing in various emerging technologies to augment their existing portfolio and maintain relevance as legacy portfolios become commoditized.

Don’t miss:

  • How cloud versus on-premises dynamics will impact data center vendors
  • The rise of quantum services vendors
  • The emerging dynamics of ODMs and OEMs in the data center landscape

TBR webinars are held typically on Wednesdays at 1 p.m. ET and include a 15-minute Q&A session following the main presentation. Previous webinars can be viewed anytime on TBR’s Webinar Portal.

For additional information or to arrange a briefing with our analysts, please contact TBR at [email protected].