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HP teams up with Foxconn in new effort to win cloud server business

The company's HP Enterprise Services unit in Plano, Texas
Mike Fuentes | Bloomberg | Getty Images
The company's HP Enterprise Services unit in Plano, Texas

Computing giant Hewlett-Packard and Foxconn, one of the world's biggest manufacturers of computers and other electronics, will today announce a joint venture to manufacture a new line of servers aimed at filling the data centers of cloud computing companies like Google, Amazon, Facebook and others.

In what the companies are describing as a "strategic commercial agreement," the two say they will build a new line of servers intended for the data centers of large Internet companies, a segment of the market often referred to as the hyperscale business. It's a portion of the server market that the research firm IDC reckons will grow at a compound annual rate of 15 to 20 percent between now and 2018.

It's also a segment of the market where HP, which is the world's top vendor of servers, is not winning. The servers sold to hyperscale companies tend to be stripped-down, super-fast, low-cost machines, purchased by the thousands and packed into football-stadium sized data centers.

The deals are intended to raise HP's game against new entrants in the market such as Taiwan-based Quanta Computer. Like Foxconn, Quanta has historically operated as an "original design manufacturer" or ODM. The phrase is computer industry lingo for a company that builds computers and other gear under contract for companies like Apple, Dell, and even HP itself.

But in more recent years, Quanta has been selling directly to the cloud giants — Amazon, Google, Facebook, Rackspace — building servers to their demanding performance specifications and aggressive prices.

By selling directly Quanta, Super Micro and companies like them have undercut companies like HP — known as a original equipment manufacturer or OEM — in the process. To Patrick Moorhead, the head of Moor Insights and Strategy, a research firm based in Austin, that makes today's alliance "a counterattack of the OEMs."

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"The people at the large public cloud companies have been designing their own servers and getting them from companies like Quanta and Super Micro, and forcing companies like HP, Dell and IBM to adapt or change," Moorhead says.

Dell has responded with customized products aimed at the hyperscale customers. IBM opted to sell its low-end server business to Lenovo for $2.3 billion earlier this year.

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In choosing Foxconn for a partner, HP is siding with the one ODM company that hasn't yet sought to build its own business of selling servers direct. "Foxconn hasn't yet drawn any competitive blood," he says. "This is its reward."

Quanta has been a regular supplier to Facebook since it started construction on its first data center in Prineville, Ore. and has been a regular collaborator on the Facebook-sponsored Open Compute Project, an open source recipe book for how Facebook designs and sets up its servers and other gear in its data centers. Google and Amazon are also a Quanta customers.

Other potential targets for the HP-Foxconn partnership include eBay, where HP's CEO Meg Whitman ran for a decade as its CEO, and financial institutions like Morgan Stanley and JPMorgan which operate large hyperscale-like data centers of their own, Moorhead says.

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ODM companies like Quanta can sell servers with slimmer profit margins than HPs and Dells of the world, Moorhead says. And that has given them the edge in the hyperscale market where the fastest machines that cost the least tend to win. HP and Dell tend to dominate more mainstream segments of the server market, where prices and profit margins are higher because there are more features.

For HP, the more it can act like an ODM company, the better chance it stands to win business from the hyperscale companies. "It's a segment where there is very little loyalty to any one supplier," Moorhead says. "What gets the job done best and at the lowest price point always wins. If HP and Foxconn come to Facebook or Google with something that they like, they'll drop Quanta like a hot potato."

CNBC's parent NBC Universal is an investor in Re/code's parent Revere Digital, and the companies have a content-sharing arrangement.

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