Two years ago, Facebook (NASDAQ:FB) founded the Open Compute Project, aimed at building one of the most efficient computing infrastructures for the lowest possible cost. Under the open source project, the conventional server monolith has been completely deconstructed and components that would normally be found on the same motherboard have been spread out within a server rack.
In other to accomplish this feat, Facebook enlisted the help of Intel (NASDAQ:INTC) for its silicon photonic technology, enabling transfer speeds of 100 gigabits per second, as well as a low enough latency for components to be spread out within the server rack. As a result, Facebook has been able to develop server designs that are 38% more efficient and 24% less expensive to build and operate than today's state-of-the-art servers. This approach not only allows for data center engineers to create custom modular server designs to exact specifications, but also maximizes the life cycle of components.
The apparent shift
Considering that 90% of the world's data has been created in the last two years alone, it's pretty safe to say that data needs have exploded during this time, and can be greatly attributed to the age of cloud computing and always connected devices.
In an effort to save of costs and still keep up with growing data demands, companies have begun to shift their spending away from the server monolith model toward a more homegrown cost-savings approach. In other words, the server monolith is currently being commoditized, and is likely to put continued pressure on the server monolith industry.
Both International Business Machines (NYSE:IBM) and Oracle (NYSE:ORCL) continue to experience hemorrhaging within their hardware divisions. Last quarter, Oracle's hardware systems products revenue experienced a 23% year-over-year decline, which the company attributed to upcoming products hurting current demand and difficulty in closing deals with new sales reps.
In the first quarter, IBM's hardware division experienced a 17% year-over-year decline in revenue, which the company believes is the result of a "shortfall" in sales execution. Naturally, IBM believes that the second quarter should prove to be more fruitful in closing deals.
However, rumor has it that IBM will be selling its low-end x86 server business to Lenovo, which if true would indicate that the low-end server industry has in fact become highly commoditized. IBM exited the consumer PC market back in 2005, far before the threat of mobile computing weighed in on the PC. Perhaps IBM is seeing history repeat itself?
The age of homegrown
We are no longer living in a one-size-fits-all world for data, and this reality directly threatens the one-size-fits-all approach of the server monolith. Data needs do in fact vary greatly between organizations, which emphasizes the growing need for custom-tailored data solutions. The organizations that adopt an Open Compute Project-type approach are poised to save gobs of cash in building and operating their proprietary data centers to exact specifications. However, this cost benefit may come at the expense of Intel and its data center storyline, which is already leaking air.
Fool contributor Steve Heller owns shares of International Business Machines, Oracle, and Intel. The Motley Fool recommends Facebook and Intel. The Motley Fool owns shares of Facebook, Intel, International Business Machines, and Oracle. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.