Bad news for HPE. Microsoft is reportedly choosing lower-cost commodity manufacturers for its cloud servers
The challenges facing Hewlett Packard Enterprise on the hardware side has been demonstrated by a report that it is losing business from one of its key customers, namely Microsoft.
Microsoft is one of the world’s largest users of servers thanks to its cloud services that see it challenge the likes of Amazon and Google.
The Big Squeeze
According to Bloomberg, which quoted people familiar with the matter, Microsoft is scaling back its server purchases from HPE.
It comes after HPE CEO Meg Whitman warned last week that her company was seeing “significantly lower demand” for servers from a tier-1 service provider.
Whitman made the comments as HPE lowered its projected annual profit. It did not identify the customer, but tier-1 service providers are typically major cloud and telecom companies.
Bloomberg’s sources however identified the customer as Microsoft, and they said that the software giant is hunting down lower prices from hardware makers to help it keep up with rivals Amazon and Google.
Spokeswomen for Microsoft and HPE reportedly declined to comment.
The falling demand from Microsoft for data centre servers should however come as no surprise to HPE. The writing was on the wall last year when Redmond announced ‘Project Olympus’ -its next generation hyperscale cloud hardware design.
Microsoft’s design for its in-house cloud servers focus on modularity, cost and power efficiency, and global data centre interoperability.
But using its own designs forces the likes of HPE and Dell to compete against lower-cost generic, commodity manufacturers.
Another factor that is hurting hardware sales for HPE and Dell at the moment is that many customers are shifting away from in-house corporate data centres, in favour of renting capacity from public cloud providers such as Microsoft.
This means that these corporate clients don’t require as many servers, and it also means that public cloud players such as Microsoft, Amazon, and Google, are able to demand tough volume discounts, or else use their internal and cheaper hardware designs.
HPE reported its first quarter fiscal results late last month. Its results revealed a 10 percent decline in revenues compared to the same quarter last year.
The Enterprise Group, a strategically important division for HPE, recorded a 12 percent decline in revenues, while its server revenues dropped by 12 percent, its storage sales slumped by 13 percent and its networking services saw a steep fall in revenue of 33 percent.
Whitman tried to put a positive spin despite the declining divisional revenues: “I believe HPE remains on the right track,” she said at the time.
“The steps we’re taking to strengthen our portfolio, streamline our organisation, and build the right leadership team, are setting us up to win long into the future,” she said.