Server shipments fall ... just as AI drives demand for costlier kit

Changing priorities among enterprise and cloud providers are driving apparently conflicting trends, according to research outfit Omdia, with demand for compute resources remaining high, especially as ChatGPT has spurred interest in AI training, yet at the same time server shipments are declining.

Omdia’s Cloud and Data Center Market Update predicts a contraction in server shipments for the first time since the global financial crisis of 2007-2008. However, it warns that conflicting feedback and data points are making 2023 a particularly difficult year to predict.

A change in priorities for both enterprise buyers and large cloud service providers is at the root of this, it believes. One trend appears to be that more costly servers that are configured for AI model training are being prioritized over the usual server refresh cycle, driven by the recent surge of interest in Generative AI models caused by ChatGPT.

Omdia said that 2.8 million servers were sold during the first quarter of 2023, and that this was significantly below its expectations, not to mention those of the server OEMs themselves. The decline in shipments from 4Q22 to 1Q23 is the largest on record, it claims.

Those OEMs have apparently told Omdia that many enterprises are now reluctant to commit to large projects, with IT spend pull back seen particularly among financial services and manufacturing companies in North America.

Meanwhile, server shipments to cloud operators were said to be healthy during the first quarter, but a sharp decline seen during the second quarter has now forced Omdia to revise its full year forecast so that it now expects to see server shipments going to the big cloud providers to decline by 2 percent for this year.

Microsoft, Google and Meta were all investing in new servers in Q1, while AWS pulled back somewhat on new server installations, but by Q2 both AWS and Meta are holding back on spending, Omdia said.

Sweating the assets

Another contributing factor in the mix is lengthening server lifecycles. The normal lifespan for server kit at all the big cloud providers is now 6 years, while a step down a level to the tier 2 providers shows that some are reporting life spans of nine or 10 years, according to Omdia.

It foresees that a two-tier system for cloud services could soon become the norm, with cloud providers offering a premium tier using the latest server hardware alongside a value tier based on servers older that are more than five years old. This is not new, Omdia concedes, but the model appears to be spreading.

Euro cloud operator OVHcloud told The Register recently that it operates just such a scheme, because many customers do not require high performance and are “very happy” with servers that are 6, 7, 8 or even 10 years old, for a discounted price.

Omdia indicated that such deployments of refurbished second hand servers have surged since the pandemic, where they were chiefly used to offset the long lead times caused by semiconductor shortages.

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OVH also operates a “reverse supply chain”, where old servers are returned to the factory (it builds its own servers), and disassembled and components individually tested to see if they can be repurposed or sold on to the grey market via brokers.

This also chimes with what Omdia is seeing; it notes that the useful life of some components will be longer than that of the servers they are part of, and a movement to recycle and reuse components is gaining traction at cloud operators. It cites reuse of memory modules leading the way, followed by power supplies and Ethernet adapters.

Looking to the future, Omdia said it expects the growth in the server installed base to slow down while shipments of new servers will accelerate, driven by a new server refresh cycle.

However, the datacenter industry in general is in good health, according to Omdia, with capex levels at the hyperscale companies still at high levels and datacenter buildout, as measured in square feet/meters, continuing to grow by about 10 percent each year on average. ®