Hewlett-Packard Enterprise is getting out of the cloud server business. That means it will no longer sell low-end “commodity” servers to large cloud computing customers like Microsoft.
It has proven to be an exceedingly tough business for traditional hardware makers because while they may sell huge volumes of cloud servers, profits are slim to none. The target customers are companies like Microsoft (MSFT), Amazon Web Services, or Google, each of which can (and do) negotiate huge discounts. Insult to injury, most of these cloud companies go directly to contract manufacturers in Taiwan or China to have servers built to their specifications at low cost. They don’t need or want to pay for name-brand servers.
On Wednesday, HPE (HPE) president Antonio Neri said the company will stop selling custom-designed commodity servers to such customers, which HPE calls Tier 1 service providers. It will, however, continue to sell higher-end (and more profitable) servers to them. Neri was speaking at HPE’s analyst day in San Francisco.
In a follow-up statement, a spokesperson said HPE defines Tier 1 customers as Amazon(AMZN), Google(GOOG), Microsoft(MSFT), Facebook (FBOP), Apple (AAPL), TenCent, Alibaba (BABA), and Baidu (BIDU) and repeated that the company will keep selling higher margin storage, networking, and “higher value” servers to those customers.
Still, it’s not clear how many Tier 1 providers will buy higher priced servers or even other brand-name gear when they can specify how they want the hardware built and get it manufactured by lower-cost providers.
Patrick Moorhead, president of research firm, Moor Insights & Strategy, thinks of all the top server buyers only Microsoft would be likely to do so.
It’s not all bad news, however. Tier 2 cloud providers and telephone carriers, remain a big target market for branded servers, Moorhead said. “There’s bigger growth in Tier 2 cloud providers than Tier 1,” he said.
Related: HPE Blames One Big Customer for Storage and Server Slump
HPE under CEO Meg Whitman continues to push powerful, high-end servers and storage—as well as “converged hardware” that combines both functions—into large corporate accounts. That can be a very profitable business, but the problem is that many of its targeted Fortune 500 accounts are putting more of their own software and data in AWS, Microsoft, or Google clouds. That means they have less need for servers to use in their own data centers. HPE is not alone in this dilemma; the shift also drove IBM (IBM) to sell its Intel-based server business to Lenovo three years ago.
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HPE’s predecessor company Hewlett-Packard entered the commodity cloud server business three years ago when it signed a deal with Foxconn, the huge Taiwanese contract manufacturer, best known for building Apple (AAPL) iPads and iPods to Apple’s specifications.
Related: HPE Plans More Job Cuts
But Whitman as been signaling since early this year that all was not well with the cloud server business. In February she said that first quarter earnings were dinged because a single large customer (which turned out to be Microsoft) unexpectedly cut back on its expected server order. In June, when server sales continued to swoon, Whitman indicated that HPE had to evaluate if it should stay in that business.
Note: (October 20, 2017) This story was updated at 8:58 a.m. EDT to add analyst comments and again at 11:34 a.m. EDT to add an additional HPE comment.)