Evaluating technology companies’ market share is a complex business; technology moves fast and old metrics must constantly be reevaluated. We’ve witnessed this complexity firsthand at Nutanix as we’ve shifted our business model twice in the last two years. We’ve endured a radical change in the name of transitioning to a software-only company, a model that best serves our customers and enables us to focus on what we do best. But with this shift, we were also forced to confront and rethink how we calculate market share — and educate analysts on what needed to change.
In an effort to quell confusion and ensure that customers and other key external constituents have an accurate view of HCI market share, we worked with IDC to create and be included in a new software-only perspective (versus just a “software-centric” one that still included hardware). It was a long process, but a necessary one — and we’re thankful to IDC for recognizing the need for an update.
This shift to a software-only view represents a major milestone for us, but with our move to subscription now, it’s not the last time we’ll have to confront market share complexities. I think it’s important to call out what had to change and why, as well as what we can do to combat confusion in the future.
What we had to change
As a company, we’ve always been willing to disrupt ourselves on behalf of our customers, even if it meant facing bumps in the road along the way. That’s why we stayed hyper-focused on our transition to software from the get-go, even if it meant decreasing the amount of revenue we reported in any given quarter and negatively impacting the traditional method of market share calculations for our market. At the same time, we also knew there was a better way to represent our success in this transition.
As a clear response to customer consumption trends, both Gartner and IDC added a software view of the hyper-converged market about a year ago. Gartner now calculates a true software-only view, which they term “HCI.” In this view, Nutanix holds the lead in market share by nearly 5 percentage points, with approximately 48% market share. Gartner also provides a second view, which they call an “appliance view,” or HCIS (system). The sum of both views equals the full HCI/HCIS market. In both views, the majority of our revenue is tracked within the HCI view (software only).
IDC currently only offers a “software-centric” view — which is often misinterpreted and causes a lot of confusion in the market.
Here’s why: IDC offers two views of the market, one an hardware-centric view and the second a software-centric view. In both methodologies, IDC included both the hardware portion and the software portion of the HCI market to report a “complete” HCI market view. In the hardware-centric view, they determined share by whose company brand was on the bezel, and in the software-centric view, they determined share by whose operating system was running the solution. For example, in the hardware-centric view, DX, the Nutanix software packaged on HPE’s appliance would be counted as HPE revenue, however, in the software-centric view, DX would be accounted for as Nutanix revenue.
That’s where things get tricky. In both the hardware AND software views, hardware is included. Due to their use of this methodology, hardware can (and does!) significantly impact IDC’s market share calculations. For example, the hardware values that the IDC report associated with Nutanix software varies significantly by hardware provider. For every $1 of HCI software sold by Nutanix, IDC’s market share methodology layered on between $1.30 to $4.50 of hardware, with an average in the low $2’s. This is due to the significant discrepancy of the values of HCI hardware that these vendors report to IDC (subject to significant variation). While the market value of servers across vendors was similar in the marketplace, IDC reported approximately one-third the value for SuperMicro-branded hardware as compared with many other brands. This significantly and negatively impacted Nutanix’s market share.
By continuing to focus on hardware, even in the software-centric view, IDC simply did not account for our changing software strategy of rapidly expanding and diversifying hardware platforms — enabled by our VAR partners — all in the name of customer freedom of choice. We knew there was room to make it more accurate and clear for our customers. After several quarters of discussions with IDC on methodology, the firm recently agreed to calculate market share with a “software-only” view of the entire software-defined data center market including a separate view for HCI. We are delighted AND thankful.
This new view of software without hardware will be a major step in the right direction — as we now move to a subscription business model, we’ll only face more confusion around market share.
The next phase
While our subscription transition is critically important for Nutanix’s future and ultimately provides our customers with far greater choice, it will significantly impact our market share for the foreseeable future. Because our competitors sell “life of device” licenses that have longer implied useful lives, our new subscription model will, in many cases, result in us recording less revenue up front, with the opportunity for more over time, upon renewal (comparable to leasing a car and paying less upfront but more as time goes on and it is continually leased).
As we work through our subscription transformation in the near term, we encourage everyone looking at market share data to evaluate it on their own — remembering that our subscription method means we will, in the aggregate, record less revenue upfront — and to recognize it will take time for the old metrics to catch up. Customers, analysts and anyone else reviewing our market share must do so at their own discretion, recognizing the limitations of these methodologies when comparing different revenue models.
Accurately understanding technology companies moving toward subscription will mean a focus on moving away from traditional growth metrics and instead looking at software and subscription metrics that are designed to show progress for companies in transition. Just as annual recurring revenue (ARR) became a trademark of cloud software success, analysts will start to recognize metrics like annual contract value (ACV) as critical KPIs for enterprises like Nutanix during times of transition (and beyond!). Big companies like Adobe and Microsoft have pulled off major organizational shifts before, but we’ve also seen that it takes time and patience to bring everyone up to speed on these changes.
Nutanix is ten years old, but we’re just at the beginning of our journey. We’ve learned that change is the only constant in the path to building a successful company, so we know to expect many other shifts in the products we build — and in the way we go about bringing them to market. We look forward to continued progress with analysts to ensure market share is communicated clearly in the long-term as this dynamic market continues to evolve.