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Commoditization of Hardware

So, what were the long-term effects of the "New Economy?" This is the subject of heated debate; however, economists J. Bradford DeLong and Lawrence Summers provide us with an insight into one aspect of the "New Economy:" competition. In an address at Kansas City's Federal Reserve Bank Symposium in August, 2001, DeLong and Summers argued that the long-term effects of the technological advances of the "New Economy" would not be the creation of "scale-related cost advantages," but the creation instead of a more level playing field, making competition itself "more effective."12

Obviously DeLong and Summers refer primarily to the supply side of the economic equation. Accordingly, they state, "Competitive edges based on past reputations, or brand loyalty, or advertising footprints will fade away. As they do so, profit margins will fall: Competition will become swifter, stronger, more pervasive, and more nearly perfect. Consumers will gain and shareholders will lose."13

The commoditization of disk and server hardware is therefore a visible symptom of stronger and more perfect competition, and certainly the consumer in most circumstances benefits from increased purchasing power. The question, however, remains: Do the consumers gain a true advantage? Not if the commoditized assets are poorly utilized, which, when dealing with storage, is more often than not, the unfortunate case.

The Disk as Commodity

As noted, IT spending on the whole declined dramatically between the years 2000 and 2003, and the effect on the disk storage industry has been punishing. IT spending began to suffer in some cases as early as 1999, but the disk storage industry shows itself to be a lagging indicator of decreased corporate spending. The delayed decline of storage revenues were due in part to poor utilization efficiencies, which buffeted disk spending by forcing companies to purchase more storage.

The increased revenues for disk storage systems between the years of 1999 and 2000 (as shown in Table 1-2) were primarily due to three factors:

  • Spending on Y2K-related infrastructure

  • Continued demand for web and electronic commerce applications

  • Increases in the number of complex enterprise resource planning and supply-chain management installations

As a major manufacturer of disk storage systems and a provider of disk-related software and services, the annual revenues for the Hopkinton, Massachusetts-based firm, EMC Corporation, provide an excellent snapshot of disk spending for the two years on either side of Y2K (shown in Figure 1-3).

Figure 3Figure 1-3 EMC Annual Revenues from 1998–200214

What is more germane to the premise of this discussion, however, is the breakdown of revenue by line of business at EMC Corporation from 2000 to 2003 (see Figure 1-4). These figures show at a glance the growing shift in focus from disk sales to revenue generation through software and services. This shift indicates further commoditization of disk storage.

Figure 4Figure 1-4 Percentage of EMC Revenue by Line of Business15


Note that the software figures exclude revenues from Legato and Documentum because the acquisition of these two firms occurred midway through the 2003 financial year (in October and December, 2003, respectively).

It is important for the purposes of this discussion not only to note the contraction in revenues and units sold for disk storage systems, as previously shown, but also to note the steady increase in sales of Fibre Channel infrastructure components as outlined in Table 1-3.

Table 1-3 Worldwide Fibre Channel Switches and HBAs Factory Revenue ($M), 2000–2003 (Source IDC, 2004).16

Worldwide Fibre Channel Switches and HBAs Factory Revenue ($M), 2000-2003






WW FC Switches and HBAs





Three consecutive years of growth in the Fibre Channel switch market point to a shift from DAS to SAN infrastructure and, as intelligence moves onto the storage network, the commoditization of disk storage continues.

The Server as Commodity

Server sales decreased dramatically between 2000 and 2002. The number of server units sold during this same time frame indicates the increased commoditization of the host.

Table 1-4 shows the decrease in worldwide server revenues between 2000 and 2002, echoing the trend evidenced previously in the storage numbers. These figures also show the relative plateau in the number of units shipped during this same period. The 2003 spike in revenues and units sold highlights decreased margins and the move to lower-priced, rack-mountable server platforms, further illustrating the trend toward commoditization.

Table 1-4 Worldwide Server Factory Revenue ($M) and Units Shipped from 1999–2003 (Sources: IDC 2004 Release)17

Worldwide Server Factory Revenue ($M) and Units Shipped













WW Total













The increased popularity of rack-mountable servers stems from the capability to provide enterprise-class service for a fraction of the cost and the footprint. More rack-mountable server deployments, however, translate into increased datacenter costs in terms of management efficiencies.

Blade servers have the potential to alleviate the pain points associated with implementing significant numbers of rack-mountable servers. Rack-mountable servers tend to overwhelm the datacenter with network, power, cooling, and storage demands, whereas blade servers can utilize shared datacenter resources to cut back on the capacity consumed per deployment.

Additional discussion of blade servers and virtualization of disk and CPU resources follows in Chapter 5, "Maximizing Storage Investments."

It is reasonable to assume that the adoption of the Linux operating system has also contributed to the commoditization of the server.

An application infrastructure based on the Linux operating system has a significantly lower TCO than one based on a proprietary operating system. The increased customer adoption rate of Linux will continue to apply pressure on companies whose revenues are derived from sales of proprietary operating systems and enterprise-class servers.

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