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Sep 14, 2020

Data Center Evolution

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Over the last several years the migration of operations to digital platforms has been underway for businesses large and small. However, the COVID pandemic accelerated the timeline for these migrations to near real-time for many, causing data center infrastructure to be put to the test as demand for web-enabled services skyrocketed. Now more than ever, data center infrastructure is core to our world; providing the technology foundation that the internet and digital platforms reside upon. 

While the broader data center ecosystem was suitable to support work from home and educate from home migrations, we saw sales of associated hardware and software slow in 2020, specifically in Q2. As reflected in NPD’s Data Center Ecosystem Report*, which provides insight into key technology infrastructure segments within data centers, Q2 2020 generated $6.7B in combined data center hardware and software revenue; a decline of 7%, despite a nearly 5% unit increase. With general declines in both data center hardware and software, the Security segment emerged as the lone positive. Security as defined by NPD includes hardware devices and software applications that protect the information systems within the data center. In Q2, the Security segment generated $1.5B in revenue, an increase of 11% year over year and the fifth consecutive quarter of positive growth. Within the broader Security segment, Gateway / Firewall and SIEM drove the majority of the increase. Much of the Q2 decline can be attributed to general uncertainty and tighter cash management coupled with key component shortages leading to delays in both existing and planned new projects. Complicating efforts further were challenges related to insufficient staffing due to difficulty in finding and retaining qualified personnel during the pandemic. Long-term staffing shortages could lead to insufficient maintenance and risk of increased downtime. 

Despite challenges for categories in the data center ecosystem during the first half, general expectations are that web-enabled demand will continue to grow exponentially due to the accelerated migration to digital platforms and increased support for remote based workforces. While existing data centers were able to meet near-term demand, capacity will likely tighten as broader digital transformation efforts accelerate. The need for increased capacity should translate into higher sales revenue across the broader hardware and software data center ecosystem in the second half of the year.  Below are trends we expect to see in the next several months:

Hyperscale Data Center

Post COVID, as demand for cloud based solutions continue to accelerate, Hyperscale data centers will need to keep pace through driving increased capacity. Major players including Amazon, Google, Microsoft, Facebook and Apple will continue to expand their efforts as the need for cloud and social media will drive exponential growth. Due to their size and higher power consumption, Hyperscale data centers of the future will look to generate their own power through renewable energy sources as the likely power capacity point will begin at 100MW.

Enterprise Data Center

While enterprise data centers have been in decline in favor of lower, more cost-effective Hyperscale or Colocation based solutions, the real value of Enterprise data centers remains the same, Security.  The expansion of the remote workforce and the increase in sensitive data within high security sector verticals such as finance, insurance, and healthcare will likely drive the need for updated hardware and software within existing legacy enterprise data centers, as well as potentially driving select new construction. While the migration to colocation solutions will continue, there will always be a need for enterprise data centers within select sectors where security cannot be compromised.

Colocation Data Center

Colocation data centers have become an attractive option to traditional enterprise data centers mainly due to lower cost, financial flexibility (OpEx versus CapEx) and versatility. With colocation typically providing the physical building, cooling, power, bandwidth and physical security, clients are required to provide the server and storage resources. Post COVID, companies will continue to expand their digital transformation efforts and the need for colocation solutions, services, and capacity.

The data center ecosystem is the collective structure now core to how we work, learn, entertain, shop and care for ourselves. Data centers must now be viewed and supported as essential infrastructure and this shift, accelerated by pandemic needs, will be critical to meeting the needs of today as well as tomorrow.

*Source: The NPD Group/U.S. B2B Distributor and Reseller Tracking service/Categories include: compute, storage and data protection, networking, power, and security.

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