Editor’s note: Sever and related data center hardware revenues are shrinking. Proprietary server and storage revenues, for example, fell 7.7 percent last year. But there are areas for growth, such as flash storage. That’s big news for Lenovo, HP, IBM, Oracle, Dell, EMC, Cisco and others. Why? Technology advances and changes in customer demand are forcing changes in the data center server market, according to a new report from Technology Business Research.

HAMPTON, N.H. –  According to Technology Business Research, Inc.’s (TBR) 4Q15 Data Center Benchmark,benchmarked vendors’ average revenue and gross profit slipped year-to-year as demand for legacy hardware implementations declined.

However, benchmarked vendors still achieved $23 billion in revenue and avoided more severe declines by adjusting their go-to-market portfolios and selling models to capture emerging opportunities.

“Industry-standard server (ISS) has a growing impact on the global data center hardware market, composing an increasing share of the data center market and retaining the largest share of total revenue,” said TBR Data Center Senior Analyst Krista Macomber. “TBR estimates average ISS unit shipments increased 1.8% year-to-year, indicating the growing impact of hardware commoditization and the low pricing strategies used by vendors such as Lenovo and Huawei.”

Commoditization of high-end storage hardware and competitive pricing across the storage market drove down benchmarked vendors’ proprietary server and storage revenues 0.4% and 7.7% year-to-year, respectively. These areas’ declines stem from the challenged value proposition of traditional storage hardware as customers increasingly migrate less-critical workloads to public cloud solutions, creating a shift in sales opportunities to ISS and networking segments. To offset declines in these areas,

TBR believes vendors will increase investments in emerging areas such as flash, object storage and hyperconverged.

However, as the number of customers transitioning to public cloud solutions is growing rapidly, the value proposition of storage solutions will shift from hardware to software.

Networking hardware revenue continued to record the highest growth of benchmarked segments in 4Q15, with market leaders Dell, Hewlett Packard Enterprise (HPE), Huawei and Juniper achieving year-to-year revenue growth in this segment.

“As the networking hardware market has not been as heavily impacted by commoditization as the server and storage markets, the proliferation of software-defined networking (SDN) will have an increasing impact on vendors’ growth strategies. To adapt, vendors must evolve their R&D, alliance and acquisition strategies to enhance their SDN and cloud capabilities,” said TBR Data Center Research Analyst Kathleen Kilbourn.

Average benchmarked data center hardware revenue in the Americas declined year-to-year for the first time since 3Q14, as vendors including Huawei and Lenovo pressured revenue leaders Dell and HPE on price.

In APAC and EMEA, average benchmarked revenue grew year-to-year, as U.S.-based vendors leveraged strategic alliances in these regions to gain market share. Notably, HPE achieved its largest quarterly networking revenue in China to date, with revenue in the region improving due to new customers brought in by its deal with Tsinghua Holdings, which is expected to be finalized by the end of May 2016.

(Note: The 4Q15 Data Center Benchmark includes research on Atos, Brocade, Cisco, Dell, EMC, Fujitsu, Hitachi Data Systems, HPE, Huawei, IBM, Juniper, Lenovo, NEC, NetApp, Oracle, Quantum and Unisys. For additional information, contact heather.waters@tbri.com.)