Servers: off-brand demand

Last year was difficult for hardware. Big enterprise hardware stocks (such as IBM, Western Digital and Seagate) underperformed the Nasdaq and the S&P 500. Revenues have fallen and margins are under pressure. But in the server market — worth $50bn annually — things may be improving.

Server sales are expected to increase significantly in 2015. There is growing demand from so-called “hyperscale” data centres used in cloud computing. In July a 2003 Windows operating system expires, boosting demand as these servers are replaced (60 per cent of the world’s servers are run on Windows). And new server chips such as Intel’s Grantley Xeon are driving upgrades. Data from IDC show that these trends are already having an impact: server vendor revenues in the third quarter rose 6 per cent from the previous year. Morgan Stanley recently raised its forecast for server demand unit growth next year to 10 per cent, from 8 per cent previously.

The world’s biggest server vendors — HP, IBM, Dell, Cisco and Oracle, in that order — will all welcome some relief. But the biggest winners may not be big brands at all. Many “hyperscale” data centres buy servers and components from unbranded suppliers known as ODMs (original design manufacturers). ODM direct sales are growing more than 40 per cent annually, according to IDC, much faster than the big vendors. Price is one reason: Morgan Stanley says ODM servers tend to be less than half the price of branded competitors.

The other challenge for HP, Dell, et al is that the biggest customers can do it themselves. Google designs and builds its own serv” programme. This is good news for ODMs such as Quanta, Wistron and Compal. But traditional server vendors could lose market share in the long run. Whatever happens to volumes, prices only go in one direction. Even if 2015 is better than 2014, hardware will remain a hard business.

Email the Lex team at lex@ft.com