1115RA Data Centers as the New IT Market Bellwether?
What is Happening? Buried in the somewhat disappointing financial reports from Dell and HP this week is something that Saugatuck sees as an indicator of a significant shift in how we see and measure IT markets. Dell, for example, reported that overall sales in the second quarter declined 7.5 percent to $14.5 billion, missing analysts’ $14.6 billion average estimate. It also reported that while consumer revenue dropped 22 percent to $2.6 billion in the quarter (based on slow/declining PC sales growth), sales of enterprise services and solutions, which includes data-center hardware, software, and services, climbed 6 percent to $4.9 billion. That enterprise / data center growth is not only strong, but supports a compelling argument concerning how we see IT markets evolving.
>Despite the changing roles and influences of PCs, many analysts’ estimates of IT market ups and downs still tend to either be based on or linked to PC sales, at least as a significant component of market trends. While Saugatuck has noted in a recent Strategic Perspective how PC sales are actually growing worldwide, we also readily admit that the PC’s influence as a bellwether for IT markets is declining – along with its profitability (1107MKT, PCs Declining Only as Sole “Go To” IT Devices, Not in Numbers, 03Aug2012). Pegging indicative IT market ups and downs to PC sales today is like pegging general business trends on the numbers of #10 business envelopes sold each year.
Instead, we submit that an important “new” bellwether for IT vendors and markets today is and should be the data center, and more specifically, the software, hardware, and services to build and manage large systems environments / data centers.
Why is it Happening? On one hand, practically every CIO and CTO of every large and mid-sized enterprise we talk with proclaims that they “never want to build another data center.” Meanwhile, revenues for data center hardware, software, and services provided by Dell, as well as such vendors as IBM, Oracle, Tata, Wipro and others continue to grow.
Behind every Cloud-based service is a complex data center requiring hardware, software, management, integration, development, security, availability, reliability, and the entire spectrum of traditional IT large systems resources and skills. The reality is that we’re making data centers bigger than ever, more efficient than ever, and moving more of them outside our own premises.
Yes, but what about HP and its $8 billion write-down of old-line data center builder, developer, and management provider EDS? While the write-down is technically related to an “impartment of goodwill,” more broadly it reflects HP’s issues with EDS that stem precisely from the latter’s emphasis on building, developing for, and supporting old-line data centers using earlier-generation technologies. In horse-racing parlance, HP bought an older horse more suited for slow, muddy tracks, while Dell, IBM, and others have bred and bet on faster-moving, much more nimble mounts, adept at flat tracks and steeplechases alike.
Market Impact Paradoxically, in an era when IT executives and planners continue to declare they do not want to build any more data centers, the futures of “full line” vendors Dell, HP, IBM and Oracle are inextricably intertwined with the growth of increasingly powerful and complex large enterprise systems. It’s just that more and more of those data centers will be used to provide Cloud-delivered IT services, rather than being behind traditional firewall.
Like many full-line vendors, Dell has seen the writing on the wall for some time, given declining hardware margins and a rapidly changing demand for PCs (see 1067MKT, The “New” Dell – Reshaping Toward Full-line Positioning, 10May2012). In response, it has been on an M&A rampage for the past few years to help reposition the company. Most recently, Dell acquired Quest, which it plans to establish as the core of Dell’s software group, and which it expects to grow into a $2 billion-a-year business over the next three years (see 1094RA, Dell’s Quest for Enterprise Software Business Should Lead to Cloud, 03July 2012). Other important and more recent acquisitions include Wyse Technologies (desktop virtualization), Kace (systems management), Boomi (integration), Compellent (storage), among the 14 deals done over the past two years, and 26 since 1999.
The net is that Dell is significantly repositioning the brand, and remaking itself into a viable provider of core Cloud technology, infrastructure, and management capabilities for user enterprises and for Cloud-based providers of software and business. Saugatuck would not be surprised to see it make additional forays into on-prem and Cloud Analytics / BI over the next 12-18 months, given the potential for this category of solution to pull additional data center / storage services.