While the single cloud is no longer on the futurists’ radar, in their research into Schneider Electric’s evolving data centre strategy presented below, 451 Research analysts Rhonda Ascierto and Andy Lawrence explore some of the market response to a particular form of consolidation – the rise of the hyperscale facility, and the decline of the on-premise enterprise data centre. Describing Schneider strategy as “astute yet challenging,” the analysts find ample evidence of the company’s determination to target the growing hyperscale community in R&D, sales and support change aimed at facilities development principles that have been the hallmark of the hyperscale, including, high levels of custom design engineering, scale through prefab data centre modules, equipment standardization, and emphasis on software defined infrastructure management.
The demise of the on-premise enterprise data centre is perhaps a bit Mark Twain (commenting on his own obit, Twain famously quipped in the New York Journal in 1897 “Rumours of my death are exaggerated.”) – the market is more likely flat than in measurable decline - Ascierto and Lawrence are on solid ground in pointing to an advantage in growing hyperscale markets that Schneider may uniquely exploit – expertise in power and electrical platforms that customers are unlikely to reproduce, as they may servers, networking and similar IT gear. A good example is Schneider focus on medium-voltage distribution equipment that is used in large facilities. For an interesting overview of Schneider positioning here, and in new areas such as software and services, read on. The research report concludes with an evaluation of Schneider prospects for creating new opportunity and in head-to-head encounters with traditional and new rivals. (ed.)
Schneider Electric, a leading supplier of datacenter technologies and services, is attempting to respond to and anticipate the changes in demand brought about by cloud and hyperscale datacenter operators. The company is repositioning its datacenter research, product and sales strategy to exploit opportunities within the growing hyperscale sector, limiting its exposure to its core yet shrinking base of private, on-premises enterprise datacenters. It is an astute yet challenging strategy.
The 451 Take
Hyperscales are a different animal from Schneider Electric's core enterprise constituency, forcing change within the company on a number of levels. Its R&D pipeline is almost unrecognizable from a few years ago as it moves from mostly enterprise mass-scale to more (hyperscale) customized engineered-to-order product development, and even collaborative product designs. To support hyperscale and other major datacenter projects, new dedicated sales and support offices are being set up. Schneider's line of prefabricated datacenter products has expanded, and its software is being integrated at every possible level. This is all adding up to a significant investment, but one that is likely to pay off in the long run. Profit margins for much of the company's new hyperscale equipment are likely to be relatively low, yet the volume of business from Internet giants should compensate.
Schneider Electric, which trades on the NYSE Euronext's Paris Stock Exchange, is an industrial behemoth specializing in power distribution across several markets spanning utilities, industrial automation, buildings and smart cities. It provides datacenter power and cooling equipment, complete datacenter designs, and software and services. Datacenter technologies account for roughly one-sixth of its business, a growing and high-margin segment.
The company recorded fiscal 2015 total revenue of €24.9bn ($27bn), roughly balanced across North America, Western Europe, Asia-Pacific and the rest of the world. Datacenters and networks accounted for about 14% of its revenue, or roughly $4bn by our estimation.
Few rivals can match Schneider's breadth in the datacenter technologies space. It is one of two leading suppliers of datacenter equipment (along with Emerson Network Power), and is also one of the leading vendors of datacenter infrastructure management (DCIM) software. Its datacenter products include power distribution (medium- and low-voltage switchgear, transformers, PDUs, panel boards, cable management, busways and meters), power quality (modular and rack UPS), cooling (economizer, air handling, room/rack/row-level units and variable speed drives), security and lighting.
We believe enterprise datacenter sales within Schneider – and its large competitors – will shrink as more businesses outsource more of their compute and consolidate their on-premises capacity into fewer, oftentimes larger, facilities. However, demand from colocation and public cloud and Internet giants is booming, a trend that is set to continue.
Broadly speaking, we see two main camps of hyperscale datacenters. There are the Internet and cloud behemoths that are driving the creation of alternative datacenter designs and operational approaches. They are seeking to simplify (and standardize) and to strip out as many layers of cost as possible, including for physical infrastructure redundancy (they favor software-led redundancy approaches instead). The other camp includes multi-tenant datacenters that also build, buy and design on a massive scale. While they embrace certain 'alternative' approaches (such as medium-voltage power distribution and ambient cooling, for example), they are more traditional in other ways, including building for high levels of physical infrastructure redundancy.
Over the past two years, and especially in 2015, Schneider Electric has been adapting its product lines and organization and sales structure to grow its multi-tenant and hyperscale datacenters, and to support its enterprise customers' increasingly hybrid datacenter environments. In particular, we see changes in the following areas:
Hyperscales: the Internet giants
Until recently, the rise of hyperscale datacenter capacity for Internet giants was widely viewed as a threat to suppliers like Schneider. However, these operators clearly have huge demand for the best in facility and electrical engineering, and are less able to rely on in-house expertise to innovate and build than in some areas of IT (such as servers or network switches).
Hyperscale datacenters' requirements can be very different from those of enterprise and general commercial datacenter operators – and they can buy very differently. Hyperscales are purpose-built facilities that often have medium-voltage power distribution, lower-redundancy power topologies and increased (or entirely) ambient cooling. Their racks may not be traditional sizes and they tend to prefer homegrown datacenter management software (with some exceptions: Facebook, for example, uses CA Technologies' DCIM for monitoring).
Early this year, Schneider opened several sales and support centers for all major complex datacenter projects. They are geared toward meeting customized 'engineer to order' requirements for various datacenter types, with a focus on hyperscales, spread across North America, Europe and Asia-Pacific. These are specialist offices – the company already has a large global footprint and engagement, including in China.
Schneider continues to develop medium-voltage distribution equipment that is used in large facilities (5MW and above), and we believe these efforts will only increase. There is clear demand for better services for UPS capabilities in medium-voltage datacenters, for example.
A growing proportion of datacenter capacity is moving not just to Internet giants, but also to colocation and service providers. Schneider intends to move with it. The company is developing new colocation features for its DCIM platform, details of which have not yet been publicly announced.
After a long period of testing the market, Schneider backed its interest in prefabricated datacenters with the acquisition of Spain-based AST Modular in January 2014. The company feels that a significant but likely minority portion of datacenter capacity will be most economically served with prefabricated products. .
Schneider has now broadened its portfolio of prefabricated modular (PFM) datacenters to target most types of customers. It has developed scalable PFM facilities for service providers and large-scale deployments. It also has a range of pre-engineered datacenters for enterprises to incrementally add to their local capacity (typically due to bandwidth cost, latency pressure and data-governance issues). This is important, since few enterprises are building completely new facilities, preferring to retrofit and expand existing ones.
In June, Schneider launched a new line of PFM offerings that target micro-sites, ranging from networked closet-type use cases to mini datacenters with a considerable amount of IT capacity. Micro datacenters are particularly suited to applications where local compute and storage are required for various reasons – some workloads generate an enormous amount of data that is costly to move over the network; other applications, existing and emerging alike, consistently require low latency; while availability, security and compliance concerns make the case for keeping some business-critical applications on-premises. We think it likely that Schneider will pursue new integration endeavors, including for emerging Internet of Things opportunities.
Software and services
Schneider has been investing heavily in the DCIM software sector for more than five years but, with enterprise datacenters only spending cautiously, it has adopted an approach based on establishing a larger footprint for its software, embedding it in prefabricated datacenters, and more directly using it in its own datacenter services.
The company's DCIM software platform, StruxureWare for Data Centers, is a comprehensive suite with components that can be deployed in a step-wise fashion. It includes monitoring, business impact analysis, asset and capacity management, and energy optimization, as well as operational and business modeling, such as scenario planning and financial impact and trending. Its related (but fundamentally different) StruxureWare for Buildings software can also be deployed in datacenters as a building management system (BMS) and for energy management in mixed-use datacenter-office facilities.
Schneider recently merged its DCIM and services groups to develop new software-led (cloud-based) operations and planning services for on-premises as well as other types of datacenters. We expect the first of these DCIM-led services to launch in the first half of 2016.
Datacenter services are a profitable and growing business for the company. It offers broad 'plan to build to operate' lifecycle services for individual datacenters and for portfolios of datacenters (globally). StruxureWare for Data Centers is the platform underpinning all projects, including new builds and retrofits.
In late 2014, Schneider fully integrated smart-cooling software from Vigilent. The latter's software automatically self-corrects temperature and airflow issues such as hot spots and cooling oversupply by adjusting fan speeds, as well as turning cooling units off and on. Dynamic cooling-optimization software like Vigilent's has not yet been widely adopted, but is being increasingly deployed by colocation datacenter suppliers, in particular.
Schneider Electric's largest rival in the datacenter market is Emerson Network Power, the datacenter and telecom division of industrial giant Emerson Electric. It's tricky to determine exact revenue numbers, as neither Emerson nor Schneider break out their datacenter sales separately. We estimate Emerson's datacenter and telecom revenue to be about $5bn. In June, Emerson announced that it would spin off Emerson Network Power as an independent, publicly traded company by September 2016. Freed from its diversified parent, we believe Emerson Network Power will emerge as a more focused, nimble rival.
Eaton is also becoming increasingly competitive. We estimate its datacenter-related revenue to be roughly half that of Schneider's, but Eaton is executing on an aggressive growth strategy. Last year, it integrated its datacenter products, services, R&D and sales teams in the US into a dedicated vertical business unit, an approach it is now rolling out globally. Eaton is integrating more of its datacenter hardware, software and design and lifecycle services, and retraining its salespeople to sell across them all. Earlier this year, it launched a line of PFM datacenters.
ABB is a much smaller player (we estimate its datacenter-related sales to be more than $600m), but one that is also growing stronger. In 2015, ABB plans to expand its datacenter technologies business in North America. While the company still lacks a low-voltage UPS presence in the North American market (it has one elsewhere, including in Europe), last year it become one of just a handful of suppliers of a medium-voltage UPS. (S&C Electric and Fuji Electric are the others.) For hyperscales and facilities with on-site power generation, centralized medium-voltage UPS could be an alternative to the distributed rack-level approach that Schneider and others supply.
Additionally, Schneider vies with other large industrial conglomerates, including Siemens. These large competitors are also contenders in DCIM. The crowded DCIM market ranges from enterprise software providers such as CA to datacenter equipment makers such as CommScope (iTRACS) and Panduit. There are also competitive pure plays such as Nlyte Software, FieldView Solutions, RF Code, and many more.
In the prefab segment, Emerson Network Power, Baselayer Technology, Eaton, BladeRoom Group, CommScope and more than 20 others are the main competitors.
|Schneider Electric's strengths are self-evident. The company's equipment is present in almost every datacenter built. Its brand is very strong, and its reach and capability are global. It is a strategically oriented business capable of aligning itself to growth markets, with the resources to buy or build technologies that it needs.||Schneider Electric has product lines, margins and brands to protect, as well as partners who may be unhappy at its expansion into their areas (such as services). It has yet to prove that it is as effective in software, IT and services businesses as it is at providing facilities hardware – weaknesses the company is working to address.|
|Strategic partners/suppliers to the largest datacenter operators will gain repeat business for decades to come during a period of growth. The PFM market offers an opportunity to control equipment choices and simplify the ecosystem, building margins. There is a very significant opportunity for datacenter services, including remote management.||As an incumbent, Schneider could be vulnerable to lower-cost competition and innovation, particularly from well-invested rivals that are aggressively pursuing greater market share.|