Web Weapon: No-Frills Servers

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Web Weapon: No-Frills Servers

Companies Like Quanta Computer Make Inroad Against IBM, Dell, Cisco

By Shira Ovide

June 9, 2014 8:02 p.m. ET

Barry Lam, CEO of Quanta Computer, in a file photo from 2010. Bloomberg News

Quanta Computer Inc. 2382.TW -0.50% of Taiwan got its start in 1988 building laptops, and later, computer servers sold under brand names like that of Hewlett-Packard Co.HPQ +0.18% As that business slowed, Quanta Chairman Barry Lam, known for his fashion-forward suits and frank statements, started to cut out his customers and sell servers directly to corporations.

These days, Google Inc., Facebook Inc., FB +0.61%Amazon.com Inc. AMZN -0.66% and other Web giants order directly from Quanta's factories. Wall Street banks and other companies are experimenting with servers and other equipment from Quanta or other low-frills hardware makers, technology executives and analysts say.

The hardware industry's new breed is sparking faster and less-expensive tech services and disrupting businesses of giants such as International Business Machines Corp.IBM -0.08%

Quanta's selling points are lower prices and a willingness to tailor gear to a company's needs. Facebook, for example, discovered that the plastic logos emblazoned on most computer servers impeded air flow and raised cooling costs. Quanta stripped off its logos, saving Facebook about 25 watts of electricity per server.

Facebook says it saved US$1.2 billion on energy and computer-management costs over three years by redesigning its software and hardware. Facebook executives say Quanta was a contributor.

Facebook also is testing Quanta switches, which help direct Web traffic. Cisco Systems Inc. CSCO -0.12% and Juniper Networks Inc. long have dominated that market.

Original-design manufacturers, as companies such as Quanta are called, "are definitely an important part of the disruption," Frank Frankovsky, former vice president of Facebook's hardware design and supply-chain operations, said earlier this year.

Quanta's Mr. Lam used to sell pocket calculators, and now is known for his extensive personal art collection. He also isn't afraid to court controversy. He once compared netbooks, or stripped-down laptops, to a "malnourished child."

Mike Yang, who runs Quanta's two-year-old U.S. subsidiary, said Mr. Lam recognized the need to shift the company to meet Web companies' need for customized computing equipment. Mr. Yang said he wasn't so sure.

Mr. Yang initially passed on bidding for a Facebook contract several years ago because of worries of competing with Quanta's own customers, such as Dell Inc. The choice was awkward, Mr. Yang said. Quanta reconsidered, and won a deal to supply Facebook with self-designed servers for a Prineville, Ore., computing hub.

A Quanta complex in Fremont, Calif., houses about 2,000 workers in a nondescript office park, where they assemble the thousands of components inside computing equipment. Signs in English, Chinese and Spanish reflect the diverse workforce.

The fallout from low-cost, generic hardware is becoming evident. IBM earlier this year agreed to sell its mass-market server business to China's Lenovo Group Ltd., and analysts cited low-cost competitors such as Quanta as a big reason. H-P's revenue from the most popular computer servers is down 12% from three years ago.

"We consider hardware a commodity," said Wesley Jess, vice president of business operations for Rackspace Hosting Inc., which buys Quanta gear to run computing hubs for more than 200,000 businesses. "A lot of the hardware guys hate that."

IBM has said the server sale is part of a plan to exit lower-margin businesses. An H-P spokesman said it offers "support, services, scale and innovation" that the low-cost manufacturers can't match.

Dell executives concede that the company has lost some sales to Quanta and its peers. But Forrest Norrod, a vice president in Dell's server business, said the rivals "are procuring a very small segment of the value chain at a very low margin."

Thin profit margins are something Quanta knows. Its gross margin—the portion of revenue left after the cost of building a product—is about 4%. Analysts estimate that most of Quanta's revenue comes from the fading personal-computer market. Quanta's first-quarter revenue rose 9% to 216 billion New Taiwan dollars (US$7.19 billion).

Quanta and other low-frills producers accounted for 13.4% of the most common type of computer servers sold world-wide last year, up from 3% in 2008, according to market researcher IDC. The combined share of H-P and Dell fell to 52% from 60%.

Quanta hardware isn't for everyone. EBay Inc. says it is more cost-effective to stick with traditional suppliers and tap their technical expertise.

Some smaller companies don't want the hassle of dealing with equipment bought directly from the factory, and they are not willing to skip the service or warranties that come with brand-name gear.

"For us, having the standard vendors and support is better than screwing around," Steve Tarr, who leads information technology for Emeritus Corp., which operates more than 500 retirement communities.

Quanta's big customers are finicky—and not necessarily loyal. Facebook hires another company to test and assemble gear it buys from Quanta. Facebook says it is a sensible check on a supplier but that it also means less revenue for Quanta.

Still, some of Quanta's customers say they can't imagine buying computing hardware the old-fashioned way.

Matthew Prince, chief executive of CloudFlare Inc., which runs websites and protects them from digital attacks, last year switched from H-P servers to a Quanta model that initially was about $1,000 less expensive. Quanta also let him select the computer chips, flash drives and software tailored to CloudFlare's needs. Skipping H-P's proprietary system shaved several minutes off the time needed to restart a server.

"Quanta was willing to do the engineering work to build a version that met our specs," Mr. Prince said. "This is a conversation you just can't start to have with a Dell or an H-P."