As word spreads about open-source hardware, data centers are more willing to consider buying a server from an ODM...
rather than a traditional server vendor.
We've seen this direction change in electronic equipment before, with laptops and PCs. The vast majority -- 94% -- of notebook sales come from original design manufacturers (ODMs), according to Reportlinker.com. Though lacking a precise definition, ODMs manufacture hardware in a generic fashion, producing base systems that third parties or enterprises tailor to their own needs.
ODM's roots began in computer internals, like motherboards, but sprouted to various system sales. They typically concentrate on commodity items and do not heavily market or support their systems.
Now ODM suppliers are looking to increase their presence in the server market. While these manufacturers thrived in the laptop and notebook markets, these sectors are losing ground to mobile devices such as smartphones and tablets. ODM PC and laptop suppliers have seen lower sales, shrinking profit margins and limited growth.
Server sales, on the other hand, continue to rise; ODM server sales rose 34.5% to $434 million in the first quarter of 2013, noted analyst firm Gartner Inc. And there's money to be had in the server business. Server buyers are also accustomed to paying double-digit gross margins, unlike laptop and PC buyers that are more cost-restricted.
It took decades for the architecture of notebooks and PCs to become established enough for ODMs to design such systems. ODM vendors need standardized and modularized devices so they can easily produce generic systems that customers then customize. A similar pattern is starting to take shape in the server space, thanks in large part to the Open Compute Project.
Companies like Facebook, Apple and other technology giants that own mega data centers have helped fuel the ODM market momentum. Facebook began the Open Compute Project to promote a new server design that relies less on proprietary extensions from server vendors and more on open interfaces. Starting in 2011, Facebook put money behind its initiative, using ODM hardware in its new data centers.
"Cloud service providers and forward-thinking enterprises that want a level of efficiency you cannot get from traditional general-purpose hardware are leading the trend toward buying servers from ODMs," said Mike Yang, general manager of QCT, a subsidiary of ODM Quanta Computer Inc.
Buying a server from an ODM
The names of the ODM suppliers may not be as familiar to many enterprises. Delta Group, Inventec Corp., Quanta, Computer Inc., and Wistron Corp. are some of the leading ODMs. These companies are based in Asia (mostly in China), are large and well established, and generate tens of billions of dollars in revenue every year.
These vendors are making a push into the U.S. market. In May 2012, for example, Quanta launched QCT as a Fremont, Calif.-based subsidiary, distributing Quanta-branded server, storage and networking products stateside.
Price cutting has been one way that these firms have built up market share in other segments. ODM servers are often cheaper than traditional systems, so expect more price volatility for servers as the ODMs swarm the industry. Without providing differentiating services, they may simply push margins lower for all server makers.
Commoditized hardware means customers have more say over server design. Businesses are able to take ODM systems and customize them to meet their own computing requirements.
"If a financial services company needed a lot of processing power for its system, it could configure its own system to meet those requirements," said Christian Perry, senior analyst at Technology Business Research, Inc.
But there are some downsides to buying ODM servers, with support often being a key hurdle. Servers are hardware systems that link computers in an enterprise, are major components in data centers and are essential elements for business continuity. Not surprisingly, users demand a high level of support. Top server vendors, such as Hewlett-Packard Co. and IBM, have built their businesses around making advanced support technicians available 24 hours a day, every day.
"To embrace the ODM model, customers generally need a higher degree of hardware sophistication in-house than they might be used to when buying traditional enterprise solutions," Quanta QCT's Yang said. In most cases, the ODMs have not established any distribution channels that interface directly with businesses. ODMs are reaching out to computer distributors such as ASI Corp. and Synnex Corp. to take on some of the support responsibilities.
About the author:
Paul Korzeniowski is a freelance writer who specializes in data center issues. He has been writing about technology for two decades, is based in Sudbury, Mass. and can be reached at firstname.lastname@example.org.