Bekker's Blog

Blog archive

Microsoft's Reported HPE Order Cut a Sign of Tectonic Changes in Server Sales

Intrepid reporters at Bloomberg look like they've solved a big mystery of the last week: Which giant HPE client cut server orders so dramatically that President and CEO Meg Whitman was compelled to bring up the setback in an investor call?

Citing anonymous sources, Bloomberg reported that the client was Microsoft, one of the biggest server buyers on the market as it continues its global buildout of Azure, Office 365, Dynamics 365 and other public cloud infrastructure and services. Microsoft and HPE did not offer on-the-record comments to the report.

The question emerged last Thursday on an HPE earnings call. "We saw a significantly lower demand from one customer and major tier 1 service provider facing a very competitive environment," Whitman said in her opening remarks. Following up with detail in explaining HPE's overall 11 percent drop in server revenue for the quarter, EVP and CFO Tim Stonesifer confirmed that the loss in demand involved "our largest tier 1 customer."

Stock analysts were intrigued enough by that revelation that it came up five times in the Q&A session, according to the Seeking Alpha transcript of the call. During that portion, it emerged from Whitman that the drop in sales was significant enough that it could "throw [HPE] into slightly negative growth for 2017" on revenues and that the tier 1 deals, with their lack of attached services, weren't a particularly profitable area for the company.

The huge shift in compute capacity from business and government datacenters and server closets to public cloud datacenters was guaranteed to impact the way servers were sold.

Early on, it was clear that SMB-focused servers would be the first category to suffer, with major server providers shifting engineering and sales talent toward landing huge contracts with Microsoft, Amazon Web Services, Google, Facebook and larger hosting companies as those megavendors sopped up a greater share of the world's back-end computing. Releases of SMB-focused servers have slowed to a trickle and lack any marketing fanfare as those customers are steered relentlessly to cloud services.

As mid-market and enterprise customers adopt the cloud, the emphasis on even rack-based infrastructure servers is sure to become a compressed part of the market, as well. Yet Whitman's comments suggest that the biggest server players of today may not be nimble enough, or hungry enough, to compete to provide the infrastructure for the growing public cloud server business.

Public cloud vendors like Microsoft have very different priorities from traditional server providers like HPE. For HPE, high-touch, services-attached engagements are the best. For public cloud providers, low-cost designs that plug easily into their established and efficient datacenter management processes are ideal.

Asked specifically on the call whether the client was looking for less capacity or had turned to another provider, Whitman said she didn't know. For what it's worth, IDC this week indicated that the overall server market declined in Q4 in part due to a slowdown in hyperscale datacenter growth.

"Some public cloud datacenter deployments are being delayed and there are indications that overall levels of deployment and refresh may slow down even through the long term as hyperscalers continue to evaluate their hardware provisioning criteria," said Kuba Stolarski of IDC in a statement.

Microsoft isn't confirming that it cut its order with HPE, let alone offering a reason why. Yet it's hard to imagine that hyperscale datacenter growth won't resume, if it's actually slowed, with the rate of revenue growth that those hyperscale vendors are seeing in public cloud infrastructure.

What is clear from Whitman's comments is that current server market leaders may not be completely sold on chasing that business.

Posted by Scott Bekker on March 02, 2017 at 12:17 PM


Featured

  • Microsoft, Salesforce Ink Deal Around Azure Cloud and Teams

    As part of a new partnership, CRM service provider Salesforce will leverage certain Microsoft Azure services, as well as Microsoft Teams, for services to customers.

  • 2019 Microsoft Conference Calendar: For Partners, IT Pros and Developers

    Here's your guide to all the IT training sessions, partner meet-ups and annual Microsoft conferences you won't want to miss this year.

  • The 2019 Microsoft Product Roadmap

    From the next major update to Windows 10 to the next generation of HoloLens, here's what's on tap from Microsoft this year.

  • Version 1909 of Windows 10 and Windows Server Released

    Windows 10 version 1909, also known as the "Windows 10 November 2019 Update," was officially released by Microsoft on Tuesday.

RCP Update

Sign up for our newsletter.

Terms and Privacy Policy consent

I agree to this site's Privacy Policy.