In the first quarter of 2016 Amazon reported that revenue for its Web Services division grew 64% from the same period a year earlier. Salesforce.com reported a 33% increase in revenues compared to a year earlier.
Meanwhile, global storage revenues declined 32% between 2007 and 2015 and server revenues dropped 13%, according to research firm Forrester. The trend is clear: Cloud revenues are up, on-premises hardware revenues are down.
A new report from Forrester titled “Evolve or Crumble: Prepare for the fate of the hardware incumbents” details what these seismic shifts in the IT marketplace mean for enterprise end users and legacy vendors. The likes of EMC, Dell, HPE, Oracle and IBM are being disrupted by the cloud-focused vendors Amazon, Microsoft, Salesforce and Google.
Cloud computing is an undeniable mega-trend sweeping the IT landscape. Last year 26% of respondents to Forrester’s survey of enterprise infrastructure decision markers said they were already using public IaaS cloud services, up from 15% in 2014. Fifty-five percent reported plans to increase spending on public cloud services this year. “The public cloud market is growing faster than we predicted,” Forrester analysts wrote in their latest market prediction report, which now pegs public cloud to be a $236 billion market by 2020 (Forrester estimates cloud will be a $114 billion market this year).
“Enterprises are moving spend away from traditional hardware and new companies are attracted to the zero-upfront infrastructure investments and rapid speed-to-market that cloud enables,” Forrester analysts Dave Bartoletti and John Rymer write in the report.
It gets worse for the legacy tech vendors: As more workloads move to the public cloud, the largest vendors in that market are not relying on the traditional hardware suppliers to power their clouds. Amazon and Google for example buy directly from the hardware supply chain bypassing hardware vendors that sell to enterprises. To make matters worse, companies like Facebook are open sourcing their server designs as part of the Open Compute Project, allowing traditional enterprise customers to take a similar approach. Forrester says even large, risk-averse enterprises like Fidelity and Goldman Sachs are embracing the OCP.
The sky is not all falling
Cloud will not kill legacy enterprise hardware sales though. “While hardware vendors are undoubtedly in the early stages of serious challenges, reports of their death are greatly exaggerated,” Rymer and Bartoletti contend. “Hardware still matters.”
There are some bright spots for enterprise infrastructure vendors. Converged and hyper-converged systems, along with software-defined storage platforms are becoming “transition platforms” for modernizing IT equipment into a private cloud or being a bridge to hybrid cloud computing, they say.
Smaller cloud service providers will continue to buy up enterprise infrastructure that they will host for customers. These vendors favor time-to-market and are therefore willing to pay for potentially high-margin capital expenditures.
In an era of cloud, pundits can lose track of the reality of infrastructure spending. “Despite cloud uptake, owned infrastructure is and will remain the largest portion of enterprise infrastructure through the end of this decade,” Forrester says; managed, outsourced and cloud environments will make up a minority of infrastructure spending. While enterprises are growing their spend on cloud, half of infrastructure decision makers plan to increase spending on non-cloud hardware through 2016 too.
Legacy hardware vendors are taking varying approaches to dealing with the issues. Some, like Hewlett Packard Enterprise, Fujitsu and Hitachi Data Systems, are entrenching in their legacy positions. Hewlett Packard’s decision to split up the company amounted to a doubling-down on its enterprise hardware strategy; its exiting of the public IaaS cloud market was further evidence.
Other vendors are expanding to adjacent markets. Dell buying EMC in the largest technology acquisition in history is a prime example of a server company expanding into the storage market. Cisco has expanded from its networking core to selling servers with its UCS brand.
Other companies are going all in on transformation. IBM and Oracle have repositioned themselves to be cloud-first companies, re-aligning their products to be offered via the cloud.
What you need to do
For enterprise end users, Forrester has some advice: Embrace technology innovation and make future buying decisions based on the best vendor for your need.
Buyers beware though: Many new technologies come with tradeoffs. Tightly integrated out of the box capabilities of hyperconerged systems remove the complexity of integrating systems during setup but can be hard to standardize on for all workloads. The more services you deploy to a public cloud vendor like Amazon, the more difficult it will be to get them out, increasing your lock in with the vendor.
A key consideration is that applications should be built technology-agnostic, Bartoletti and Rymer contend. Enterprise architects should have a vision for how infrastructure works, regardless of who the vendor is supplying it. “In a truly technology-agnostic architecture, you should be able to rip and replace any component without breaking the functionality of the whole system,” they write. “Such an approach can be frightening after decades with a particular strategic vendor, but you must develop your future based on capabilities, not vendors.”