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Hardware Orientation: Asset or Liability for IT Vendors in the Multicloud Era?

Edge computing is driving hardware to the center of the cloud revolution.

Devices are central to today’s cloud-to-edge paradigm. They are the hardware platforms into which AI software is being embedded, infusing data-driven intelligence into practically anything and everything.

Is hardware a dirty word?

Hardware is definitely hip again. Strong hardware engineering and design expertise is an asset in the market for Internet of Things, mobile, embedded, and other edge devices. So why does it still feel like a slight to label some solution provider a “hardware vendor”?

Obviously, hardware is everywhere, including inside the “serverless” cloud-computing environments that are transforming our world. However, hardware-based features may never again be the key competitive differentiators in the multicloud era. Indeed, non-hardware-based revenue models—especially public cloud and SaaS offerings–are where the serious money is being made these days.

So it’s no surprise that IT vendors of all stripes—including those that historically depended on hardware revenues–have shifted to software- and SaaS-based business models, albeit with varying degrees of success.

Even diversified vendors have trouble shaking the perception that they’re focused on hardware

One high-profile vendor that has made this transition successfully is Cisco Systems. Though it is best known as a blue-chip provider of networking infrastructure hardware, Cisco has also become a diversified global provider of cloud computing, data analytics, security, digital media, mobility, mobility, content delivery, VoIP, conferencing, and other application software and services across a highly diversified portfolio.

Since its founding in 1984, Cisco has grown and diversified both through organic development and a steady pace of strategic acquisitions. But Cisco can’t catch a break, it seems. For some reason, they’re still often pegged as primarily a hardware vendor, when in fact they’re just as much a cloud or software provider as, say, IBM, another vendor that was once a dominant enterprise hardware vendor.

To see what Cisco’s up against, perception-wise, check out these headlines in the business technology press over the past decade-plus, on articles that prominently discussed Cisco:

In reality, the “hardware vendor” slap against Cisco has no teeth. What’s interesting about the first article cited is that it mentions Cisco’s forays into online subscription offerings, such as WebEx. Clearly, they were already on a path to transitioning away from pure hardware orientation.

The second article doesn’t actually slam “hardware vendors” generally so much as raise the possibility that some in the internetworking niche might not transition successfully in the era of software-defined networking. However, Cisco, with its Application Centric Infrastructure solution, has transitioned quite well and in fact is a leader in software-defined wide-area networking. You couldn’t make that same claim the other vendors–Juniper, Brocade, Hewlett-Packard and Dell—mentioned in the article (though Dell EMC now owns VMware, a fact that slightly blurs the matter).

That latter article, though praising Cisco, puts them in the same camp as Hewlett Packard Enterprises, another longtime hardware provider. However, Cisco has transitioned far more completely to a software and cloud business model than HPE.

Actually, it hasn’t been difficult for most hardware vendors to evolve into software

Beyond this one vendor, research suggests that legacy hardware solution providers are transitioning quite well, on average, to this new cloud/software era.

In 2017, a survey of 300 manufacturers of “software-enabled hardware” found that many have shifted their revenue models toward software and that the vendors surveyed  were earning an average of 11 percent more income after making the switch. The study found that much of the shift was due to hardware manufacturers focusing on Internet of Things and other edge devices, in which AI and other software-centric innovations drive the bulk of the value added.

To accelerate the shift toward software-centric business models, many of the vendors surveyed have focused on retraining employees, hiring new employees with software skills, and reshuffling the mix of skills in their various functional teams. But making these changes isn’t without problems, as many of the respondents reported that their companies had no coherent strategy for making the shift, hadn’t replaced older sales and operational processes with new software-focused ones, and/or hadn’t yet achieved a staffing model with the right skills to further the change.

Hardware chops may be the key to cloud success

But hardware design and engineering skills may come roaring back as a clear differentiator for multicloud vendors. All of the top public-cloud providers have released or announced premises-based solutions for hybrid-cloud deployments. All of these offerings, except for Google’s, are integrated hardware/software appliances designed for installation in enterprise customers’ data centers. The speed, scalability, reliability, and other core features of these appliances depends on high-quality hardware engineering.

As solutions such as the still-beta AWS Outposts come to market in the multicloud arena, their hardware engineering may prove to be what differentiates them competitively. If that competitive dynamic intensifies, it may be badge of honor for a multicloud solution provider to be known as a “hardware vendor.”

Some public cloud players may fail if they can’t make the transition back to hardware-based on-premises solutions. Crazier things have happened.

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