Global IaaS Industry 2011& Forecast 2014-2016 – Slow adoption by large Enterprises

Infrastructure as a Service is a cloud computing model in which the service provider owns the equipment (Hardware like Storage, Servers, Networking Equipment, etc.  & Software) and is responsible for housing, running and maintaining it and the client typically pays on a per-use basis.  Major players in the IaaS market include Leaders like Amazon Wen Services, Savvis, CSC, Terremark, Bluelock; Challengers like Navisite, Opsource, IBM, GoGrid; Visionaries like Rackspace, Joyent and Niche players like Hosting.com, Tier3, AT&T, Tata Communications, SoftLayer, iland, Carpathia Hosting, Datapipe and Virtacore Systems, according to Gartner Magic Quadrant December 2011. Gartner predicts IaaS is a fast growing market as players like Google & Microsoft entered this market and in future this market will be 1/3^rd of the hosting market. Gartner also forecasts the IaaS market will generate $24.4B in revenue in 2016 from $5.6B in revenue in 2011 and IaaS is expected to grow by over $20B with a CAGR of 41.7% in the forecast period globally. The Compute sub segment is expected to see the greatest revenue growth globally, growing from $3.3B in 2011 to $20.2B in 2016, generating a 43.2% CAGR and other two sub segments CAGR growth - Storage (36.6%) and Print (16%).

Forrester predicts that IaaS market will initially grow for next few years but the market is expected to decline in the long term. Forrester’s report, “Sizing the Cloud”, highlights that IaaS is the second largest public cloud category with a $2.9 billion market size and “IaaS will reach a peak of $5.9 billion in global revenues in 2014 and will then enter a period of significant commoditization, price deterioration and margin pressure and between 2014 and 2020, as a result, the IaaS market will first stagnate and then decline, with total market revenues of $4.8 billion in 2020,” according to Forrester analysts Stefan Ried and Holger Kisker. Yankee Group analysts suggest IaaS might represent $2 billion to $3 billion, globally. IDC also estimates IaaS will decline to $15 billion in 2014 and most of the analysts believe the IaaS market will be larger than the PaaS market and IaaS is one of the most talked about in the cloud space, which saw several important improvements, such as changes in pricing strategies, the appearance of new smaller players, and the entrance of some technology heavyweights.

Enterprise Strategy Group survey published in January 2012 highlights that of more than 600 enterprise and mid-market companies globally; only 27% said they were using public cloud IaaS services. That's up 10% from a similar survey published in early 2011. But 28% of respondents said they have no immediate plans to jump into the cloud, and another 24% said they haven't pulled the trigger on a cloud deployment yet, but plan to at some point in 2012. SMBs are at the forefront of IaaS adoption totally for IT infrastructure needs but large enterprises are selective in adoption and using public IaaS primarily for these specific use cases: R&D projects, load testing, move non critical legacy applications from expensive on premise to off premise, build & deploy new apps and as part of SaaS or PaaS usage. With some of the large enterprises that selectively adopted IaaS couple of years back and who effectively utilized it are becoming test cases for more large enterprises to adopt IaaS within their organizations. There are also concerns that the pricing has not fallen for some time till now but with the entry of more players particularly Large IT players, businesses can expect more choice of offerings and reduction in prices.

Impact of Thai flooding on the Hard Disk Drives, PCs and Storage Devices Supply

Thailand’s worst flood in 50 years has swamped more than two-thirds of the country, shutting down many factories, businesses have been impacted and hundreds of lives have been tragically lost. Thailand is the world's second-largest producer of HDDs and accounts for 45 % of worldwide hard-drive production, after China and is a major supplier of hard drive parts too. The major hit has been to 2.5in drives produced in Thailand and typically targeted at the notebook, rather than the larger 3.5in drives more commonly produced in Malaysia or mainland China facilities. Seagate, Western Digital and Toshiba have extensive production facilities in Thailand that are affected. Seagate facilities are not submerged but the component suppliers and Western Digital factories are submerged in water still. Nidec supplies more than 70 percent of all global HDD motors, to major manufacturers like Western Digital, Seagate, Hitachi Global Storage Technologies, Toshiba and Samsung.

Technology Research View:

According to research firm IHS iSuppli, HDD shipments in the fourth quarter will decline to 125 million units, down 27.7% from 173 million in the third quarter, resulting in a significant shortage of HDDs, and an increase in price of about 10 percent compared to third quarter prices. Disruption to notebook shipments is not expected in 2011, as the PC industry appears to have sufficient stockpiles to last through the fourth quarter. With HDD production disruptions expected to last at least six months, the shortage could impact notebook PC production in the first quarter of 2012.

Digitimes Research reported that the flood will create a 12% HDD supply gap in the 4^th quarter of 2011 and the gap may increase into 2012. Digitimes estimates the 4Q11 hard disk drive shortage to reach 19 million units. 

Noble Financial Equity Research estimates 120M drives will be shipped in Q4 versus the TAM (total addressable market) of 175M to 180M units. Charts below highlight Digitimes and Noble Financial Equity Research respectively. 

Gartner currently estimates that 50 million HDDs will be taken out of the planned 180 million-unit 4Q11 production runs, and there may be an additional 50 million HDDs taken out of the projected 175 million-unit build plans in 1Q12. More impact for the Regional OEMs and White box system integrators compared to the PC, Server and Storage OEMs.

According to IDC, major part of PC production for the fourth quarter had already been shipped and it expects the negative effect of the flood on PC shipments to be limited to 10% lower than earlier expectations. For the first quarter of 2012, the firm expects total PC shipments to be slashed by more than 20% from previous forecasts. IDC had previously projected 8.2% PC unit growth in the first quarter. HDD industry will begin to recover in the first quarter of 2012, and HDD pricing will stabilize by June, with the industry running close to normal in the second half of 2012.

HDD Manufacturer’s View:

Seagate's hard drive and component assembly factories in Thailand were not submerged, but manufacturing at those facilities has been curtailed due to external component constraints. Seagate now expects to report a total production of 41 million to 45 million hard drives for its December 2011 quarter, compared to the 48.9 million drives it shipped in the fourth calendar quarter of 2010. Seagate had been expecting a relatively flat total hard drive market of about 180 million to 200 million units per quarter through 2012, but that will no longer be possible and significant shortfalls in the 50 (million) to 70 million (units per quarter) range by end of year.

All Western Digital's hard drive and component manufacturing facilities in Thailand have been shut down since the week of October 10. Company expects its hard drive shipments during the December quarter will be 22-26 million units in contrast to the 58 million units shipped in the September quarter and overall hard drive industry unit shipments in the December quarter will also be supply constrained. Company expects the suspension of its operations in Thailand and that of some of its suppliers will continue into the March quarter and possibly beyond and is exploring alternatives to maximize existing capacity in other locations, including its Malaysian hard drive assembly facility and a third-party slider fabrication facility in the Philippines.

Samsung, Hitachi Global Storage Technologies and Toshiba are also affected by Thai floods. Samsung is more affected in PC business and a reduced demand for dynamic random access memory (DRAM). Toshiba Corp suspended the planned sale of a unit in Malaysia to Amkor Technology Inc due to the impact of flooding in Thailand and is shifting production to Malaysia unit from Thailand. WD believes the flooding in Thailand puts greater impetus on the European Competition Commission to green-light its proposed acquisition of Hitachi Global Storage Technologies.

Original Equipment Manufacturer View

Dell has warned its revenues could be hit by a worldwide shortage of hard drives caused by the flooding in Thailand. Company has to give priority to "higher-end customers and products" and also warned that the company may have to raise computer prices after the flooding forced the closure of factories and pushed up the global cost of hard drives.

Lenovo aims to maintain its profit margin in coming quarters despite floods in Thailand disrupting hard disk drive supplies. Lenovo believes it can source enough hard drives to meet customer demand and try to manage the cost situation with minimal impact on profitability.

Samsung and Acer have said that PC supplies will be lowered due to shortage of HDDs and subsequently prices will rise. Drive prices have increased 20% since the flooding started and Acer have to increase PC prices to cover the higher costs for disk drives.

NetApp says severe flooding in Thailand, which is hurting hard-disk drive production, and revenue growth is slowing as the data-storage company deals with the fallout from the devastating flooding in Thailand and choppy spending patterns by customers. Difficulty in forecasting revenues and big impact will be felt in second half of 2012.

Goldman Sachs lowered its expectations of Microsoft Windows revenue for both 2011 and 2012, citing ongoing damage to the PC market from Thailand flooding. Goldman Sachs report put fiscal 2011 Windows revenue at $5 billion, down from $5.1 billion, and 2012 revenue at $19 billion, down from 19.4 billion.

How to best manage the scenario

There is no doubt that there will be shortage of HDDs in 2012 which will impact the PC business. Since there is more demand than supply prices of HDDs are bound to go up. Since the manufacturers and OEMs have accepted these facts, they have to plan for the scenario. Manufacturers are trying to move production capacity to their plants in other countries. But the fact remain the supply shortage cannot be completely filled. Taiwan and China manufacturers can also increase production and cover supply to some extent.

Pricing is another issue as the prices have already rose by 20% since flooding and HDD cost is around 7-10% of total cost. OEMs will try to pass on the cost on to the customers but the question rises to what extent. Already the PC business is running with very tight margins as the OEMs are trying to keep the prices at the affordability levels to the customers in the coming holiday season. To what extent OEMs manage and absorb the costs is a major issue?

Another suggestion is adoption of Solid State Drives in place of HDD. But SSD are very costly right now and there is still couple of year’s time further for its adoption. SSD may pick up in high end corporate market and data centers market but not in the PC market. But Thai floods have definitely signaled a move towards SSD adoption and with DRAM prices fall overall SSD prices are expected to fall in future.

Sourcing of HDDs from Taiwan, China and other countries like Malaysia is another strategy adopted by OEMs. OEMs have started to pick up HDDs from these markets and trying to keep up the inventory and stockpile for next year. They already have four – six weeks of supply and are confident that they will source HDDs they require but at a higher cost.Overall HDD manufacturers expect their shipments in the first quarter of 2012 to decrease 40-50% and factories impacted by flooding in Thailand will resume normal production in February-March at the earliest. They will normalize their operations by second half of 2012.