I published Issue # 18 of my D2D Newsletter today. The report is an in-depth look at the trends shaping the market for enterprise hardware. This post is the introduction and conclusion of that note. Please e-mail me if you would like a fully copy of the report.

Introduction

While we are still sifting through the aftermath of CES, with gadgets dominating the news cycle, I think the other side of the hardware market is actually much more interesting. The Consumer Electronics (CE) market is unlikely to see much change this year, but the Enterprise Electronics (EE) market is shaping up to have a potentially tumultuous year. I think the EE industry is poised for significant change, and for an analyst, that is much more fascinating. A lot will change here in the next few years, and making educated guesses about those changes is much more interesting than tracking the much more gradual changes taking place in CE.

In particular, I think the EE industry has been upended by the changing pattern of customers. A small number of webscale companies, maybe two dozen buyers, now consume around 30% of industry revenues. Coupled with the rapidly changing software ecosystem, new forces have been unleashed on the once staid hardware industry.

While it is too early to make any credible predictions about the shape of the industry five years from now, I think we can identify five forces that are going to reshape the landscape. These are not new, but with radical shifts in the way developers build and operate their applications, the door is open for these forces to wreak significant change.

• Hardware abstraction and white box vendors
• Hardware integration and the equipment majors
• The bridging role of intermediaries like Value-Added Resellers (VARs) and systems integrators (SI)
• The rate of dispersion of IT skills from webscale to other companies
• The rising promience of companies from China, both as consumers (e.g. Baidu, Alibaba, and Tencent) and as suppliers – especially Huawei and ZTE.

We face a few years of shifting technology, new architectures and changing stacks. This is going to bring us to a place with a very different company landscape. We are already seeing rising consolidation and partnerships. More change is coming. I will not call it disruption, but I could see why others may be tempted to use that term.

Conclusion

Hardware is a big universe, with a lot happening. I think that following this universe in coming years is going to prove very interesting, and potentially very rewarding for people who need to make capital investment decisions. Of course, it also holds considerable risk.

The evolving software landscape has given incredible new tools to developers. Companies that take advantage of this will be able to build competitive edges in their own industries. This will put pressure on those companies’ IT systems to keep pace. At the same time, those new software tools are opening up the doors to change within the hardware ecosystem. This is not so much ‘disruption’ as it is a redrawing of abstraction layers. The end result will be a new distribution of industry economics. Old structures and partnerships will dissolve along with the blurring of product definitions.

It is too early to predict how this will play out, but we can already see the forces which are in contention.

The incumbent hardware vendors are seeking to push their bundled solutions further into new segments. At the same time, the largest customer segment is seeking to eliminate those bundles within their own IT stacks. If they can spread their ‘vision’ (architecture?) beyond a few dozen webscale players, then the legacy equipment giants will find themselves under considerable pressure.

An important, but poorly understand, constituency here is all the middlemen who make a lot of IT purchasing decisions for others. These companies will need to balance their customers’ interests against their own set of challenges. These companies will consolidate, change and possibly disappear, but the category itself will retain very potent influence.

To further complicate matters, China’s hardware makers are on the rise. They can use the power of open source software and their already established distribution channels to gain considerable share. These vendors have much less at stake and can use industry forces against their global peers who have to defend their incumbent status with legacy gear.

I have been saying all along that this is hard to predict. Nonetheless, I know where I will be watching and have to make some guesses to stay ahead of things. I think the challenges coming from China are going to prove far more disruptive than many people expect. I am less convinced about the white box hardware movement and trends like SDN. Those may find a place, but at this point it seems more likely that the equipment majors will co-opt those technologies and include them in their own offerings.

That makes for a compact Watch List of companies:

• Arista
• Cisco
• Dell/EMC
• Huawei
• ZTE

But I also think it will be very important to track changes in the software landscape. I think watching these companies, and seeing where they win or lose deployments will be a crucial leading indicator for changes in the hardware landscape. This a very short list of software companies to watch as bellwethers for the hardware industry. The software industry is huge, I just think these three names will come up time and again in any discussion of hardare:

• Cloudera and the Hadoop Ecosystem
• Oracle
• VMWare

Finally, watching the distributors and other middlemen will tell us a lot as well.

• Accenture
• CDW
• IBM
• Ingram Micro
• And many others

I am definitely NOT recommending any of these as stocks to buy at this point. The lists above contain a set of potentially mutually exclusive winners and losers. Not all of these companies will thrive, and if some do well others on the list will definitely not do well.

This is only a partial list. I know that I have left out many names, so feel free to drop me a line with suggestions. I plan to update these thesis regularly.

The Enterprise Electronics space is going to change, and that will make a seemingly dull space very interesting.