Cloud Computing Is Eating Into Hardware Profits. Can Traditional IT Vendors Survive?

Cloud Computing Is Eating Into Hardware Profits. Can Traditional IT Vendors Survive?

December 2

The cloud is taking the world by storm. Businesses at every level are rushing to sign up for services that allow them to tap into all the computing resources they’ll ever need. While cloud computing is a booming market that offers a ton of benefits, its meteoric rise appears to be coming at the cost of the ailing hardware sector.

Think about how the cloud concepts works. Whether it’s an app or storage you need, you’re typically getting your resources from a server in a remote data center, which is being maintained your service provider. You’re leasing these resources on a pay-as-you-go basis, so there’s no need to buy any hardware or software. And thanks to virtualization, the vendor can run more apps and services utilizing less equipment. This common scenario is leading to fewer pieces of hardware in data centers and office locations across the global IT landscape.

Big Revenue Lost in the Cloud

Recent research from Baird’s technology arm provided some intriguing insight into the cloud’s impact on hardware profits. The firm released a report estimating that for each dollar spent on Amazon Web Services (AWS) AKA the Amazon cloud, $3 to $4 is not spent on traditional IT components like hardware and software. Based on this projected scale, if AWS was to hit $10 billion by 2016, the traditional IT market would lose a whopping $30 to $40 billion in revenue over the same period.

Hardware vendors like IBM are already feeling the pain Baird is projecting. Reports of IBM’s third quarter earnings reavealed that the veteran computer giant’s total revenue is down an estimated $1 billion from 2012 to 2013. The company experienced a 17 percent loss across its Systems and Technology segment, which encompasses core hardware offerings such as Power Systems servers, System X servers, and storage devices. Ironically, IBM has a burgeoning cloud computing portfolio to fall back on. The same can’t be said for other vendors.

Once a dominant force in the hardware arena, Hewlett-Packard is one of those vendors that has most of its chips in traditional IT equipment. According to its performance in the second fiscal quarter, which ended April 30, HP saw a 32 percent dip in total revenue, with sluggish computer hardware sales taking the bulk of the blame. PC sales were down 10 percent while sales from its Business Critical Systems, which include lines of industry-standard servers, declined by 37 percent. You can imagine things being even worse for vendors that lack the notoriety and clientele of these two powerhouses.

How the Strong Survive

With the cloud computing phenomenon growing even bigger, it might appear that the hardware vertical is poised to struggle for the foreseeable future. However, there will always be a market of some shape or form because those cloud companies driving the shift need that very equipment to sell their services to clients. For vendors, the challenge moving forward is delivering quality hardware at volume, performance, and pricing points that accommodate the ever changing IT environment. Those who can adapt and roll with the dynamic punches being dished out by the cloud will most likely survive in an ever shrinking market.

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