Why Web Giants Buy Dell Infrastructure

By Patrick Moorhead - December 12, 2013

There is no Santa Claus. It’s crushing as a 7 year old to come to that realization after years of believing in the narrative. But the jolly man in a red suit isn't the only myth being exposed these days. Also, the supply chain for some of the world’s largest cloud data centers isn't necessarily what everyone believes it to be either. Some believe that all large cloud data center customers are actually bypassing the OEMs like Dell, Hewlett-Packard, and IBM Corp, going straight to the ODMs in Taiwan and specifying their own custom hardware to save money. While there are a few companies doing this, companies like Google, it is far from the norm, and instead is as much of an oddity as a flying reindeer.

OEMs like Dell are innovating to address the market in a more unique way as we discuss in our detailed paper. Dell’s division called Data Center Solutions(DCS) that has customized solutions for these cloud data centers, and can address the full supply chain for the largest web-scale customers.

There is a certain glamour in the idea of cutting out the middleman, going straight to the source for those “factory direct” prices and more control over logistics. Recently IDC reported that over 325,000 direct servers were sold into this market; despite that small number, it is the fastest growing part of the market. But in reality, that model works for only a few of the largest companies like Google who are willing to step up and take on the challenges involved in the decision. Furthermore, the commoditization that has occurred over the last 10 years in the server market has shrunk margins to the point that there are not too many places in the hardware to find huge savings any longer.

ODMs like Foxconn, Quanta and Wistron primarily do the development work for OEMs, developing the hardware platforms. Then the OEM (like Dell, HP, and IBM) add in their secret sauce – hardware IP, software, services, management tools, low level software, logistics, financing, support, integration, distribution, etc.- to deliver a complete package to the end customer. While it seems appealing to go directly to the source, ODMs are not necessarily the largest source for much of servers that are running today’s cloud data centers. In fact, the bigger surprise to many is that OEMs are still delivering more of these servers than ODMs. OEMs still account for more than 85% of all of the server shipments and over 90% of the revenue. The reasons make all the business sense in the world.

The implied savings of going ODM direct comes with a cost. Ownership of the services that OEMs were providing that ODMs are not providing will now fall on the company buying the servers, something that most businesses are not equipped to handle. If you are an auto manufacturer you probably have thousands of people designing the next sedan, but nobody that has the skills to design a server – it’s not your core competence. Companies instead rely on those with server expertise to deliver their platforms, just like they choose payroll professionals to provide their payroll services versus trying to do it themselves.

It is easy to see those pieces of the supply chain where the OEM is providing value like integration, testing, logistics and support. Sure you could reduce cost by taking those pieces in-house, but that is like trying to cut down on the cost of the vending machine contract by having the vendor drop off the soda and then filling the machines yourself. It makes more business sense to work with your vendor to try to find a better solution than to step over your vendor to try to cobble together a solution.

Cloud companies are relying on products from the same companies that you are probably buying your servers from, but from different divisions that approach the market differently; they still have the leverage of the rest of the business and processes to help ensure things run smoothly. Between their purchasing power, their ability to react quickly and creatively to bids and the global reach of their server business, Dell DCS is in a great position to deliver what these cloud data centers need without having to compromise.

But it’s not just the server or the supply chain that puts DCS in the lead. Dell’s innovations in power and cooling efficiency help data center environmentals; their innovations in modulatory are driving better density and serviceability; innovations in standardization help drive lower overall costs and increase agility; innovations in workload modeling help drive better application efficiency. But the best benefit of all of is that these innovations eventually work their way from the cloud data centers into your data center because Dell’s business can span both domains. What makes Dell DCS great eventually filters over into the servers that you are buying for your data centers; just like high end Formula One race technology eventually trickles into the more mainstream automotive market.

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Patrick founded the firm based on his real-world world technology experiences with the understanding of what he wasn’t getting from analysts and consultants. Ten years later, Patrick is ranked #1 among technology industry analysts in terms of “power” (ARInsights)  in “press citations” (Apollo Research). Moorhead is a contributor at Forbes and frequently appears on CNBC. He is a broad-based analyst covering a wide variety of topics including the cloud, enterprise SaaS, collaboration, client computing, and semiconductors. He has 30 years of experience including 15 years of executive experience at high tech companies (NCR, AT&T, Compaq, now HP, and AMD) leading strategy, product management, product marketing, and corporate marketing, including three industry board appointments.