Semi's Triple Play for the Next Growth Wave: Cloud migration and hardware


v5n3-cloudBased on current tracking, data volume is increasing at a 32% CAGR for large organizations, resulting in a need for data management. Data management solutions are being found in the cloud ecosystem and its necessary hardware infrastructure. Analysts see the cloud's integrated ecosystem as the catalyst for a third penetration growth cycle in the semiconductor and electronics industry. 

There are headwinds presently, without question.  Inventories are being closely monitored and demand in the traditional, mature economy markets is in question, resulting in lowered 2011 forecasts for many along the semiconductor and electronics value chain.  But if we peel back the sovereign debt problems of the mature economies and their consumers' lackluster purchasing confidence, is there more going on?  Are there opportunities on the horizon that might be building steam now?  The industry drilldowns from the major financial analysts all point to a resounding yes. 

One demand driver for new semi and electronics industry opportunities is data management. The wave that is mounting is directly tied to the exponential rise in data volume and demand for access to those data.  Regardless of what is going on in the economy, the continued and consistent data growth is undeniable.  Based on current tracking, data volume is increasing at a 32% CAGR for large organizations, according to research by Aberdeen Group, as cited by Credit Suisse in their sector report, "The Need for Speed," p. 71.  Consumers and enterprises alike, by virtue of their compute behaviors, are rapidly producing immense data sets and then are demanding faster access to these data with more powerful analytics to manipulate and leverage them. 

The fortuitous byproducts of these data, storage and management needs (for analytics and searches) are the relevant hardware and software solutions.  IT is already well into its latest growth cycle fueled by these data management needs.  As a result, both semiconductor and sector analysts increasingly see IT's present (software) architectural wave as the catalyst that will also move the semiconductor and electronics industry into its third penetration growth cycle.  Behind this change and driving data management solutions is the cloud ecosystem.

Semi's triple play: is there a new penetration growth cycle?
It is challenging to talk about growth cycles and exciting growth opportunities while the current global macro-economic situation is pushing industries into demand-weak positions, we hawk inventories, and our hopes for a 2H11 rebound dim.  However, there are important currents and hard data showing undeniable increases in penetration rates across semiconductor and electronics sectors (e.g., tablets, smartphones, wider PC devices, embedded computing, servers, data centers), as tracked by Credit Suisse in their latest report, "Semiconductors: 2Q11 Earnings Preview: Head-fake, Mid-Cycle Pause or Downturn?" from 7/18/2011.  Credit Suisse's analysis, based on multi-year historical data comparisons, is that the semiconductor industry is in a mid-cycle pause, "which [they] define as decelerating [year-over-year] y/y unit growth without substantial absolute negative growth – hence a pause and not a downturn." (ibid., p. 7) 

With IT being roughly six years into the present growth phase of the cloud ecosystem, there has already been a roughly 20% shift from on- to off-premises workloads for enterprises.  This shift is what analysts are citing as having reached "a key inflection point for accelerated adoption," based on past technology cycles, as detailed by Morgan Stanley in their Blue Paper, "Cloud Computing Takes Off" (p. 12ff) available here.  The shift to off-premises workloads (cloud) is forecasted to accelerate over the next three years.  This shift does entail a decline, however:

[…] on-premise server shipments will decline at a 1% CAGR while shipments into managed hosting environments grow at a 12% CAGR and shipments into public cloud environments at a 60% CAGR. […] Over the next three years we expect overall server shipments to grow at a 3.4% CAGR as headwinds from the shift to the cloud continue to mount. (ibid., p. 12)

One important driver behind the shift of workloads to cloud environments is the roughly 8% savings in IT spend for enterprises.  This shift to the cloud, however, will disrupt traditional hardware spending patterns and "the traditional drivers of server growth (application growth and refresh) [will] become more disaggregated from actual server shipments." (ibid., p. 12) 

Another aspect of the server purchasing forecast is a shift of purchases by enterprises from the major OEMs to ODMs and white box server manufacturers by the new cloud services providers.  This purchasing trend opens up the server supply chain to new competitive opportunities.  As enterprises and major data centers shift away from name-brands (leading OEMs), the focus is now on cost-competitiveness and (hardware configuration) solution scalability with new alternatives favoring tiered, in-memory columnar databases, as cited by Morgan Stanley (ibid., pp. 12-13) and Credit Suisse's sector report, "The Need for Speed" from 3/30/11 (pp. 1, 71ff). 

Further underscoring the competitive opportunity is this recent discussion from Bloomberg that details the latest travails (and losses) for a couple of major server OEMs in the face of hardware demands for server and data storage/management solutions from Facebook and Google.  As a result of not being able to customize their respective server solutions through the OEMs, these major corporations decided to build their own server solutions for their data centers where thousands of servers are housed.  This problem underscores the requirement of new thinking on the part of server OEMs but also the competitive opportunity now for new solution providers.  As the Bloomberg article offers, " These customized machines now account for 20 percent of the U.S. market for servers, which generated [US] $31.9 billion globally in last year, said Jeffrey Hewitt, an analyst at Stamford, Connecticut-based Gartner Inc."

While for the software and IT sector the migration to cloud computing is well underway, it’s important to recognize that such a shift necessarily entails the hardware and networking equipment to provide these services and handle the new requirements for data management.  The semiconductor and electronics industries are really only on the earliest cusp of the cloud shift. New database architectures will dramatically alter the semiconductor value chain and present new market opportunities for competitors as well as new technological challenges, just when Moore's Law is becoming so costly to execute.  The shift facing the semiconductor industry from the actual hardware implications of the cloud ecosystem and ensuing data management is just as positively disruptive and healthy as smartphones and tablet PCs have been for the consumer electronics (CE) sector.  In fact, it is precisely these devices and their reliance on the cloud ecosystem that has helped push the shift at the backend, that is, at the data centers and their hosts in new public and enterprise clouds.  For example, the new, customized, tiered, in-memory, columnar databases are designed to leverage the availability of lower average selling price (ASP) DRAM and NAND Flash memory options, as well as 64-bit x86 server architecture.

Consumerization of IT
There is more to these exciting opportunities arising from migrations to cloud ecosystems than data management architectures alone.  Importantly, among the opportunities for the semiconductor value chain is the well-known and still high demand adoption of smart wireless devices (SWDs) by consumers.  These consumers are also employees who are vociferous about their likes and dislikes in SWDs, particularly their brand preferences for smartphones and tablet PCs.  Furthermore, these employees have significant interest in reducing the number of devices they carry.  As a result of their demands, there has been an increase in demand for support of heterogeneous SWDs in enterprises.  The demand has come from the employees to push IT and management to adopt, or at least support, their smartphone and/or tablet PC choices to realize the employees' desire of having SWD dual-functionality: work and personal use.  This shift to a bottom-up demand is actually quite radical and unprecedented.

This new enterprise demand situation, whereby employees are pushing technology up the corporate ladder, has been dubbed the "consumerization of IT"  by analysts such as Barclays Capital in their 2H11 "Global Technology Outlook" 6/20/11 (pp. 5, 52ff).  The importance of this phenomenon of "consumerization of IT' is that the software support for the now more heterogeneous set of SWDs is being moved to cloud services.  No longer is the enterprise the issuer of devices, employees are deciding which ones to adopt and employers are tasking IT departments with finding secure means to support employees' activities and devices.  The most nimble and cost-effective means for doing this, while being able to provide and control access to the software necessary to support the work of employees, is through cloud service providers who can update and secure connections and specialized software more quickly and cost-effectively than large enterprises with heavy IT departments. 

Employees are already used to accessing and storing their personal data (movies, pictures, emails, etc.) through cloud services with only subsets of their data housed on their devices.  This familiarity with these consumer-based cloud services is translating into not just the rapid adoption of cloud services within the enterprise, but also a push from the bottom-up to move the enterprise further into the cloud.

Data Management
Increased migration to cloud computing offers the possibility of some growth opportunities for the memory sector in particular. What analysts are seeing is that the semiconductor and industry is interwoven with the present "IT revolution" based on cloud migrations.  This "IT revolution" is so wide-reaching that it has been called a "tectonic shift" because it is rooted in new data management and business intelligence (BI) architectures, as detailed by Credit Suisse in their sector report, "The Need for Speed," 3/30/11.  The enabling driver behind this radical new era in IT?  The increased availability of DRAM and NAND Flash driven data management solutions along with new types of in-memory columnar database (software) solutions leveraging the benefits of 64-bit architectures. 

The result of this revolutionary shift?  Enterprises are poised to save significant amounts from their IT budgets (averaging roughly 8%), maintain control of their data stores on-premises through new, multi-tiered, hardware configurations, and realize software cost-savings from cloud services (e.g., SaaS, IaaS, PaaS, etc.).  Enterprises are set to gain all of this by implementing new database architectures that focus on providing real-time analytics.  This reduction in latency means that enterprises' new, exponentially growing databases can be leveraged to deploy "tactical business intelligence (BI)."  How is this accomplished while still at a cost-savings?  The availability of 64-bit x86 server technology, increased CPU speeds, multi-core processors all combined with the more favorable memory pricing and densities (see Credit Suisse, ibid., p.82).

The roughly 32% annual growth in data volume by large enterprises (see Credit Suisse, ibid. p.71ff) coupled with the demand pressures arising from the Consumerization of IT through SWD adoption (tablet PC and smartphones) dictates new data management solutions.  While the present market situation for memory is not favorable, and we are (again) seeing historically low ASPs with increasing inventories, there are exciting growth cycles ahead.  The opportunities to be realized by leveraging the now more available (due to pricing) DRAM and NAND Flash memory coupled with the CPU and other hardware device improvements are also presenting exciting new software architectural opportunities for the IT industry.  By leveraging the near-zero latency now available from hardware and the new, varied architectures for deploying different, heterogeneous hardware solutions to manage the growing data sets, the intertwining of software and hardware is well underway in data centers, both public and private.

The long-term DRAM and NAND growth for servers is mixed, following on the heels of the outlook for storage for 2H11 which is mixed but growing increasingly positive (see this SaaS revenue forecast from Gartner showing 21% rise in 2011).  Presently financial analysts' reports range from "subdued HDD" growth in 2011 to a more positive view of "low HDD inventory sets up for strong C3Q[11]" from Barclays Capital ("U.S. IT Hardware" 6/3/11) and Morgan Stanley ("Tech Hardware Insights" 7/7/11), respectively.  The reason for the positive growth outlook for memory is based on the present DRAM increases per server "of approximately 5,700% from 2000," as tracked by Credit Suisse in their report "The Need for Speed," p. 73.  Credit Suisse goes on to state that there is mounting "[s]upport for enormously greater physical memory and virtual memory space enables new scenarios [for data management] not possible previously." (ibid., p. 73)  More specifically, data tracking the shipment growth of 64-bit x86 servers is well over 8.6 million shipments (ibid., p. 73).  The advantages to these new hardware solutions for implementation in data management situations is the "tectonic shift" for IT.  The ability to maximize new hardware configurations, architectures and memory densities to provide new, "killer apps" for enterprises is changing the structure of the IT industry.  Based on the opportunities from hardware advances, IT can now provide enterprises the opportunity to leverage their data riches by having near, real-time analytic and tactical BI capabilities.  This type of exciting growth for IT will also ensure the growth of this trend as it expands and necessarily brings the memory sector, CPU and server sectors along with it.

Emerging economies' demand
The third major thrust for significant, new, growth opportunities for the semiconductor industry comes from the global economic shifts underway for years now.  Demand from the emerging economies consumer and enterprise markets is supporting and driving the increase in cloud computing adoption and the ensuing architectural revolutions discussed above.  Emerging economies' demand is both for CE devices from the emerging middle-class consumers and for the computing infrastructure support (hardware and software) for the new businesses which are fueling the positive economic momentum. 

Simply put, demand from emerging economies is focused on support from the electronics industry and IT service sectors combined.  At the center is the need for more cost-effective (but equally sophisticated) devices, solutions and services to support the growing global middle-classes and the new businesses.  While the mature economies are stumbling and proving to be quite volatile, it is these emerging economies and their growth opportunities that are (finally) catching the true attention of not just industries but investors and major OEMs.  The realization of the viability and importance of a geographically diverse market has taken hold of the corporate world, from investors to producers across industries; a position long known to the semiconductor industry. 

The emerging middle class and new businesses are demanding IT and hardware solutions that are agile, mature, and scalable while controlling costs.  The interest in the hottest CE and enterprise devices (tablet PCs and smartphones) is not lost on these demand groups.  With both the Consumerization of IT and the new data management architectures (hardware and software combines) as drivers, it is clear that cost savings and access improvements from cloud services are strong.  The strength of this demand will drive growth both in the emerging economies as well as among industry sectors such as the semiconductor and electronics industry as well as for IT and cloud services.  The tendency for emerging economies to leap-frog technological adoptions based on the slower pace of adoption by mature economies means that as this next growth wave mounts for semi and IT due to the maturing cloud ecosystem and the ensuing data management issues, there will be exciting and diverse opportunities for revenue and unit volume growth. 

Just the beginning
While on the face of it, cloud computing and the cloud ecosystem may not seem like a revolution in the making for the semiconductor and electronics industry.  However, this is not the case.  The cloud ecosystem is, in and of itself, truly revolutionary for the IT industry and has radical implications for data management and BI tools for enterprises, regardless of size or location.

What has been somewhat overlooked by financial analysts and the main-stream press is the hardware implications that fuel and enable not only the cloud ecosystem, but the critical data management necessary as database populations explode at exponential rates.  The opportunities and the radical shift in focus and innovative, architectural collaboration between hardware and software are indeed revolutionary.  The advantages of cloud ecosystems and new data management architectures are revolutionary, not just to businesses but also to consumers globally.  The cost savings and increased features and access of the cloud ecosystem could not come at a more opportune global economic time.

It is with little question that the semiconductor supply chain will experience positive effects and shifts as a result of the "tectonic shift" happening in the IT industry due to the cloud ecosystem.  It is because of this important and likely pervasive shift about to happen in the semiconductor industry, from components to value chain partners alike, that we at MarketWatch present this introductory article as the first in an occasional series on the cloud ecosystem and the semiconductor industry.  In this first article, we have provided an overview of the convergence point of three exciting opportunities for significant and sustainable growth for the semiconductor industry.  The focus of this article has been on the hardware convergence points that are the foundation for the latest momentum increase in cloud services and data storage changes, that is, for the next penetration growth wave we are on the cusp of, and that will provide new and exciting opportunities for semiconductor and IT industries alike.

The new cloud environment is proving to be a fully integrated ecosystem which means that it not only has a different set of geographic, component, and architectural aspects, it is also driving a new set of growth and disruptive technological opportunities for a number of industries.  On the providers' side, IT services is an obvious winner but importantly, and often overlooked, are the opportunities for the semiconductor and electronic industry.  The semiconductor industry has much to contribute to and gain from both the infrastructure necessary to power the cloud(s) but also in shaping the new architectures that support how we think about data handling.  The convergence point is where software and hardware meet to create, support and then manage all that is entailed by the growing cloud ecosystem.

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