When Facebook Inc. set out to build two new data centers, engineers couldn’t find the server computers they wanted from Dell Inc. or Hewlett-Packard Co. They decided to build their own.
“We weren’t able to get exactly what we wanted,” Frank Frankovsky, Facebook’s director of hardware design, said at a conference on data-center technology last month.
Hewlett-Packard, Dell and companies that sell the computers off the shelf are losing sales in a key market because Facebook and larger rival Google Inc. are leading a switch among Internet companies to do-it-yourself servers. These customized machines now account for 20 percent of the U.S. market for servers, which generated $31.9 billion globally in last year, said Jeffrey Hewitt, an analyst at Stamford, Connecticut-based Gartner Inc.
As sales of personal computers slump and consumers shift to tablets such as Apple Inc.’s iPad, computer makers are becoming more dependent on servers. Dell and Hewlett-Packard lose out when they’re shunned by large customers such as Facebook, which are outfitting data centers with thousands of servers.
“It’s definitely a threat to the traditional business model,” said Jim McGregor, chief technology strategist for researcher In-Stat in Scottsdale, Arizona. “Customers are finding solutions that the industry wasn’t ready to provide.”
Buyers say custom servers provide a cheaper, more efficient way of meeting the boom in demand for personal data shared via the Web. A lot of that demand can be met by less expensive machines shorn of the components, upgrades and backup services that server makers traditionally offer to large corporations.
Hold the ‘Pickles’
“People want to be able to build it their way,” Frankovsky said at the Dell-Samsung Chief Information Officer Forum in Half Moon Bay, California. “They kind of want a Burger King: ‘I don’t like pickles -- why do I have to have pickles?’”
The market for servers, which increased almost 20 percent in the second quarter, is outpacing growth in desktop PCs as companies upgrade their corporate networks and snap up the thousands of servers needed to run data centers.
That traditionally has spurred demand for machines made by Hewlett-Packard, Dell and International Business Machines Corp. Yet surging costs for running and maintaining data centers is causing Facebook and other companies to seek cheaper options.
Hewlett-Packard, which last month cut its profit forecast for the third time since November, can’t afford to lose momentum in one of its better-performing units. Hewlett-Packard’s revenue from the servers that are typically deployed in so-called cloud-computing data centers rose slower than the industry average in the second quarter, according to Gartner.
Dell, where sales have barely budged for two quarters, needs to keep server customers happy too. Dell’s sales of servers based on PC chips -- the type most often used in cloud-computing data centers -- grew 4.4 percent in the June period, according to Gartner. Cloud-computing networks store and deliver software and services via the Internet.
In one indication of the growing demand for servers that are being built from the ground up, Intel Corp. said its revenue from chips used to craft servers for data centers surged 50 percent in the second quarter.
Intel’s understanding that cloud data centers had different needs was key to a turnaround in market share. The company share of the cloud server-chip market is above 90 percent from a low of 35 percent in 2007.
“It’s a completely different animal” than corporate servers, said Rejeanne Skillern, head of marketing at Intel’s cloud computing division.
Google, Facebook and Microsoft Corp. have designed servers that contain the minimum amount of components required for their specific task. Facebook’s servers, for example, have custom power supplies and circuit boards in sheet-metal enclosures designed to maximize airflow with the minimum number of fans.
Those and other tweaks -- combined with a specially designed facility -- boosted efficiency by 38 percent and reduced the cost of building a data center in Oregon by 24 percent, according to the company.
Google’s servers are also built to the company’s specifications, with hardware limited to what is needed for applications to run. The machines run a stripped-down version of the Linux operating system that leaves out unnecessary code.
Microsoft is hedging its bets. The software maker designs its own servers. Yet it also has big computer makers build them, sticking with suppliers that can provide worldwide support to quickly fix any server that breaks down, said Dileep Bhandarkar, chief architect of Microsoft’s Global Foundation Services.
For the data centers that underpin its cloud services and Bing search engine, Microsoft uses machines similar to the scaled-down, low-power ones Google uses. Though instead of making the hardware itself or through contractors, the company has a team of engineers who create server designs. Microsoft then commissions companies like Dell and Hewlett-Packard to build the machines.
Computers makers must come up with products that fit the new needs of data-center builders.
“Many of them are realizing they’re going to have to address that,” said Gartner’s Hewitt, who is based in San Jose, California. “Most of this is being driven at the moment by Google, but there are others who will look at it.”
Microsoft and other companies’ demands for tailor-made machines leave server makers with a dilemma: go after build-to-order market and accept lower profits, or lose customers and relevance.
Hewlett-Packard sees the market as an avenue for growth, said Jim Ganthier, vice president for marketing in the company’s server unit.
“We’ve gotten entire design teams, we’ve got an entire execution team that wakes up every morning thinking about this,” he said. “If you think you’re going to go in there with a generic off-the-shelf product, you’re going to lose.”
Dell, meanwhile, supplies customized servers to Microsoft and Facebook, as well as Chinese Internet companies Tencent Holdings Ltd. and Baidu Inc., said Tim Mattox, vice president of worldwide enterprise product management.
“There’s quite a lot of opportunity, but there’s not a lot of margin in it,” said Matthew Eastwood, an analyst at Framingham, Massachusetts-based IDC.
The computer industry has little choice but to adapt. The shift to using cheaper servers for cloud computing may spread beyond Internet search and social media and find its way into other areas, such as mobile-phone service providers.