Another thing you can blame AI for: Cloud grows but server shipments are down

Investment shifts to meet demand, say analysts. And demand is based on FOMO. WCGW?

The cloud market continues to grow, but at a slowly declining rate, while investment is shifting to meet the demand for AI services, diverting spending away from other projects.

These are the findings from a couple of new reports, one from Synergy Research Group covering the cloud market, and another from Omdia that also covers the underlying datacenter infrastructure.

According to Synergy, the cloud market in Q2 of this year grew by $10 billion compared with the same period in 2022, and this is the third consecutive quarter that this has happened. But adding $10 billion each quarter to an ever larger market means that the year-on-year growth rate is slowly falling; from 20 percent in Q4 2022, to 19 percent in Q1 of this year, to 18 percent for Q2.

Synergy's figures cover enterprise spending on cloud infrastructure services, and it reckons the total was close to $65 billion worldwide for Q2 2023. The economic climate has "crimped some growth" in cloud spending, but the market continues to expand at a healthy rate despite those short-term challenges, Synergy states.

Meanwhile, server shipments continue to fall, according to Omdia, which said it intends to reduce its annual server shipments forecast for this year by 1 million units to 12.5 million, representing an 11 percent decline from 2022.

This seemingly paradoxical situation of increasing demand yet falling server shipments can be explained by a shift in priorities, if Omdia can be believed. Its latest Cloud and Data Center Market Update states that average unit prices (AUPs) for servers are rising due to a richer mix of servers configured for AI processing. Server AUPs are on track for an almost 20 percent year-on-year increase as a result, Omdia claims.

The company said this data backs up the hypothesis made in its previous report that investment in infrastructure for AI model training is now the top priority for datacenter operators, and the expense associated with procuring the costly high performance server kit for AI is being offset by delaying the refresh of existing server fleets and investment in other new projects.

Having more servers configured with AI co-processors should mean greater demand for physical infrastructure that can support higher power densities within each rack, Omdia said – and it claims there is an uptick in infrastructure enabling higher rack densities to support this.

FOMO – that's what it's all about

As if to back up Omdia's claim, datacenter operator Digital Realty has just announced high-density colocation services to support workloads of up to 70 kilowatts per rack with air-assisted liquid cooling (AALC), which it said will be supported in 28 markets across North America, EMEA and Asia-Pacific regions. The company explicitly references demand for infrastructure to support AI as a reason for this move.

Omdia said it expects AI investment to accelerate in the second half of 2023 and this is being driven by "fear of missing a wave of market opportunity" fueled by the rapid adoption of ChatGPT that is pushing both cloud service providers and enterprises toward more AI model training.

For these reasons, Omdia expects spending on cloud services to continue to grow this year, while server revenue is still on track for growth (despite falling shipments, for the reason already outlined) to $112 billion.

Next year, Omdia predicts that investment in computing and physical infrastructure for AI will remain strong, while datacenter builds will continue at a slightly slower pace, and server refresh cycles will start to fuel a growth in shipments.

Synergy reports that the big three cloud operators continue to dominate the market, accounting for 65 percent of public cloud spending worldwide in Q2, with both Google and Microsoft managing to increase their market share by a percentage point since the same period last year.

Infrastructure-as-a-service (IaaS) and platform-as-a-service (PaaS) continue to account for the bulk of the market, growing by 19 percent in Q2, and the big cloud providers control is even more apparent here as they now make up 72 percent of spending on these services.

The cloud market continues to grow strongly in all regions of the world, Synergy said, but the APAC region had the strongest growth in Q2, with India, China, Australia and South Korea all growing by well over 20 percent year-on-year. ®

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