Big-Money Technology Battle Is Over Backbone, Not Ears Thinkstock

Big-Money Technology Battle Is Over Backbone, Not Ears

About $1 trillion will be spent in 2017 on this and other gear typically purchased by corporations and governments. (Yes, you read that stunning figure correctly.)

The technology industry is captivated by titans fighting over voice-activated home speakers. The war among Amazon, Google and Apple is technology's newest frontier, but it's also pretty small potatoes. People might spend a few billion dollars this year on computer-assisted speakers such as the Amazon Echo, based on forecasts from research firm Parks Associates.

The big-ticket fight on the tech frontier is happening not in happy homes bathed in WiFi but in the cold, warehouse-sized buildings that house rows upon rows of computer equipment that function as the invisible locomotive of the internet. About $1 trillion will be spent in 2017 on this and other gear typically purchased by corporations and governments. (Yes, you read that stunning figure correctly.)

The world couldn't function without this hardware, including refrigerator-sized racks of computer servers that are the matched set for each interaction of a digital device. Every time someone asks Amazon Echo to play music or Walmart crunches numbers on its inventory, computer servers somewhere are firing on for those tasks. 

Most people wouldn't know a computer server if they saw one. But with the notable exception of transportation, few corners of technology are undergoing more disruptive change with so much money at stake. Sales of servers and other equipment for the world's digital backbone was a stodgy affair for decades, controlled by stodgy companies such as IBM, Dell and the company now called Hewlett Packard Enterprise. It's not stodgy anymore. 

Amazon, Google and Facebook have helped lead a revolution in how the world's digital backbone operates. The tech titans still buy equipment by the truckload to stuff into their chilly warehouse-sized computer centers, but they're shunning the expensive and specialized gear sold by the likes of IBM. Instead, they buy lower cost, made-to-order computer servers from anonymous factories in Asia.

Many conventional companies are following their lead. They are reluctant to spent a lot of money on equipment that may become obsolete. Or they are giving up on owning computer gear at all and instead paying to use the digital backbones built by Amazon, Microsoft or Google.

All of this is having a profound effect on that $1 trillion yearly market for computer hardware. In the first three months of this year, the anonymous Asian server makers favored by Google and Amazon accounted for 20 percent of the servers sold worldwide, which barely trailed the market share of industry leader Dell, research firm IDC estimates. That's the equivalent of the store-brand cereal nearly outselling Cheerios.

Total revenue from server sales fell in the first quarter and in 2016, and those declines don't capture all the pain. Sales of pricey and specialized computer equipment are faring even worse. At Hewlett Packard Enterprise, server sales have dropped 13 percent in the last six months. The company pinned most of the blame on a pullback in server purchases by a single large customer -- most likely Microsoft. That shows the software giant that was once a reliable buyer of Hewlett Packard Enterprise equipment is now more than likely shopping for computer servers in the store-brand aisle. 

It's clear the market for computer equipment has changed profoundly. Purchases are becoming concentrated in the hands of a handful of massive companies such as Google and China's e-commerce king Alibaba. And they are remaking the invisible locomotives of the internet to suit their needs. 

The $1 trillion market for computing gear will never be the same, and the digital world as we know it would look very different if the once-stodgy state of computer affairs had remained. One example: An early investor in Facebook has said without the transformation of the computer hardware market Mark Zuckerberg's company might never have existed. 

We all like to imagine the tech world changes rapidly. But as in most markets with lots of money at stake, change happens slowly and predictions of what's next take a long time to pan out. (Where are those flying cars, anyway?) But like the collapse in spending on newspaper advertisements or the twilight for photos on film, the destruction in corporate computing hardware is panning out. The only question is how long the purge takes, and which victims will fare the worst.

 

 

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