Original Design Manufacturing: Trouble for the Top Platform Providers?

Arthur Cole

Sometimes, you can predict the future by analyzing the trend lines of the present. If that is the case, then there are some ominous clouds on the horizon for the leading IT platform providers of today.

I touched on it last week with a look at the increasing customization of IT hardware. To be sure, many of the top vendors are starting to provide customized systems to their customers to help them differentiate their services and capabilities from their competitors'. But this is also leading to some of the extremely large IT consumers, the Googles and Facebooks of the world, to design and build their own hardware. This means that a good chunk of the IT infrastructure out there is not provided by IBM, HP or Cisco, but is coming directly from original design manufacturers (ODMs) in Asia. Not only does this give the enterprise in question broad control over the make-up and direction of their infrastructure development, but it comes at a lower unit cost as well.

The extent of this shift in buying patterns has been kept largely out of sight so far. However, there are some tell-tale signs that the top vendors are losing share. For one, there is a growing cottage industry of go-betweens that specialize in hooking up top consumers with ODMs in the Far East. Companies like Cumulus Networks and Pica8 are often populated with former Google et. al. engineers involved in the design and specification of these proprietary systems.

There is also the changing distribution pattern of silicon to consider. Intel stated earlier this month that as recently as 2008, HP, Dell and IBM brought in 75 percent of company sales. This year, that figure is shared by no less than eight manufacturers, with Google coming in as the fifth largest buyer. That can only mean with the former big three buying fewer processors, they are delivering fewer finished products to their customers.

And it might not be long before these proprietary systems hit the open market. Facebook is knee-deep into the Open Compute Project, which aims to present its low-power internal infrastructure as a design spec to the data center industry at large. The company is said to be close to releasing an Open Compute motherboard, with the help of both AMD and Intel, and has already drawn interest from major hardware buyers like Rackspace and Goldman Sachs.

Big deal, you say? The traditional platform vendors still move massive amounts of hardware throughout the IT market, so even the loss of a few marquee buyers won't be fatal. Besides, isn't there still an extremely healthy installed base of large and medium clients who don't have the means to buy ODM gear in bulk and will have to stick with current channel sources for the foreseeable future?

Perhaps, but it's also true that the cloud is making it tougher and tougher for small firms, and even some not-so-small, to maintain independent IT infrastructure. The latest to go virtually all-cloud is Netflix, which recently announced that it is shifting 95 percent of its IT capability to Amazon. The company says it should be able to reduce its IT environment from about 2,500 virtual servers today to maybe 50, occupying about two racks of equipment. The company has already shifted its video-streaming service to Amazon.

If we follow this trend to its conclusion, which is by no means foregone, mind you, what we'll end up with is massive service companies like Google, Facebook and Microsoft, maintaining huge data infrastructures and buying ODM equipment at a fraction of the cost of today's branded hardware. All the rest will purchase IT services directly from these behemoths, leaving traditional platforms out in the cold.

It probably won't come to that extreme, but it nonetheless means that traditional IT markets are being squeezed from both the top and the bottom, and that can't be a comfortable position for a systems vendor.



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