Cray decided to sell its supercomputing business to HPE for $1.3 billion last week in part because it was worried about the long-term impact of cloud providers like Amazon Web Services and Microsoft on its business, its CEO said in a letter to employees after announcing the deal.
The decision to merge two historic high-performance computing brands came after Cray management and its board of directors concluded that the risks of competing in an enterprise computing world increasingly dominated by bigger companies outweighed Seattle-based Cray’s potential of expanding its business beyond its traditional customer base, CEO Peter Ungaro said in a letter to employees released to the SEC last week.
“With our current operating model, it’s challenging to make the investments we need to fully take advantage of these opportunities. At the same time, our size often inhibits us from getting the same prices on components that our competitors do,” Ungaro wrote. Modern enterprise computing is not a pursuit for companies with light wallets, and while Cray has a great track record inside government agencies and top research universities, there are only so many of those organizations to go around.
The independent server market has lost a fair amount of steam amidst the move to cloud computing, as companies that used to manage their own servers shut down data centers at a steady clip. Still, HPE was the second-leading server vendor in the first quarter of 2019 behind Dell Technologies, according to IDC, which gives it some degree of market power when negotiating with component suppliers like Intel.
However, most of the buying power in the enterprise computing market has shifted to cloud vendors like AWS and the rest of Intel’s so-called “Super Seven,” which does not include HPE or Cray. Cloud providers are almost exclusively focused on the mainstream market at the moment, not the supercomputing market that Cray targets, but they have the resources to offer supercomputing-as-a-service one of these days.
“Additionally, we face the longer-term threat of the massive cloud vendors. Making the necessary investments while also delivering profitability over time is a challenge and a major risk for our business,” Ungaro wrote.
In an interview with GeekWire last week, Ungaro and HPE CEO Antonio Neri said that they plan to marry Cray’s supercomputing expertise with HPE’s strong presence in server markets outside the government and education sectors. The transaction is expected to close within the next six to nine months, and while in the internal memo he said many of the integration details have yet to be worked out, the plan is for Ungaro to lead HPE’s high-performance computing division under Cray’s brand.
