Infrastructure Spending By Cloud Giants Soared In Q1 As Hyperscalers Race To Build Bespoke Data Centers

As public cloud leaders race to attract big customers to their clouds, they're shelling out more than they have in years to build data centers faster, with much of that spend funding custom components.

The prime beneficiaries of record infrastructure spending in the first quarter of this year were ODM vendors that built hardware the hyperscale cloud operators designed themselves, according to a report released Monday by Synergy Research.

"Hyperscale operators are working at a scale that makes this approach feasible so they are sourcing more and more of their hardware through that process," the report's lead author, Synergy Research Director John Dinsdale, told CRN.

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Capital expenditures on public cloud infrastructure surged 32 percent year-over-year in Q1, amounting to more than $11 billion overall spent on hardware and software. And while the start of the year usually sees a sharp decline in such spending, the falloff from Q4 of 2017 was an atypically low 2 percent.

It was the highest level of growth recorded over the last nine quarters, which typically saw 10 to 20 percent year-over-year increases.

That spend purchased servers, operating systems, storage, networking and virtualization software. Security and management software also accounted for roughly five percent of the $11 billion, Synergy said.

Dell EMC, Cisco, and HPE each saw between 5 and 10 percent of revenue generated from public cloud operators in the quarter. Microsoft, Hauwei and VMware trailed them in share.

But the ODM providers "continue to run away with the market," Dinsdale said.

Manufacturers like Quanta, Wistron, Inventec, Sanmina, and Flextronics that build bespoke hardware at large volumes claimed almost 30 percent of the billions spent on infrastructure as hyperscalers increasingly look to design their own components rather than source from traditional vendors.

The ODM approach allows large providers to save on costs while increasing control and flexibility over hardware implementation and the supply chain, Dinsdale told CRN.

By designing components in-house, they can "strip the hardware design down" to meet their precise requirements, he said.

While spending for the hardware and software components continues to ramp, since 2016 more money has gone to procuring services from those cloud providers.

The gulf between those two segments dramatically widened in 2017 due to three times faster growth in subscriptions for aggregated services than capital expenditures on infrastructure products.

In the first quarter, infrastructure services offered by those cloud providers—IaaS, PaaS, Hosted Private Cloud—generated more than $14 billion in revenue.

More than $11 billion was also spent on building private clouds—roughly equivalent to the public cloud infrastructure market.

"Our forecasts show that IaaS, PaaS, SaaS and public cloud workloads generally are all going to continue to grow rapidly over the next five years, which will continue to drive ever-increasing levels of spending on data center infrastructure," Synergy's report concluded.