Lenovo Licenses X64 Server Designs from IBM to Build Boxes

Published: January 30, 2008

by Timothy Prickett Morgan

Well, here's an interesting turn of events at the low-end of the X64 server racket. IBM, which has big-time aspirations in the X64 server market as it relates to companies that are gauged as small or medium in size in terms of revenues and employee count, is licensing its server technology to Chinese PC maker Lenovo, which bought its PC business back in 2004 for $1.25 billion. Why on earth would IBM sell its server designs to Lenovo, possibly creating another competitor?

You might just as well ask yourself why it would partner with Intel for microprocessors or Microsoft for operating systems on the original PC. You can see how well those partnerships worked out for Big Blue in the long run, right?

Under the deal, which IBM quietly announced on January 24 and which Lenovo says nothing about on its Web site, IBM is licensing to Lenovo the designs for rack-mounted and tower servers with one and two sockets based on X64 processors, presumably including designs for Core 2 and Xeon processors from Intel and Athlon 64 and Opteron processors from Advanced Micro Devices. (You can read the little bit that IBM did say about the licensing deal at this link.) IBM refers to Lenovo as a "trusted ally," which presumably means IBM trusts that Lenovo is not going to pull an Intel or Microsoft maneuver and use IBM's technology as a means to get into customer sites and establish its own brand as a server of choice among SMB shops.

You would presume that, right?

Well, here's how the deal works. IBM licenses its designs for said rack and tower servers to Lenovo, which uses its own supply chain to get the parts and its own manufacturing operations to make them. (Recall, again, that IBM has not made its own X64 servers for years and contracts out the job to Sanmina-SCI; IBM only makes Power and mainframe servers and BladeCenter blade servers at this point in its nine-decade history of manufacturing excellence for mechanical and electronic devices.) The resulting Lenovo servers are branded with the Lenovo logo, have unique Lenovo ID numbers, are made by Lenovo itself, have service and support managed by Lenovo, and employ setup and configuration tools created by Lenovo. In short, the former IBM Personal Systems business is back making servers again. What Big Blue gets out of this deal is that its Global Services group is providing Level 1 tech support and maintenance services on a global basis for the iron and providing financing for customers who want that as well. The resulting Lenovo boxes only go through the Lenovo channel, and the existing IBM boxes go through the IBM channel.

"This is part of IBM's ongoing business strategy to license key technologies to a range of IBM business partners to drive innovation in the industry," IBM's statement about the deal explained. "In the case of this deal with Lenovo, it may also help IBM further extend the reach of its X86 servers in the small business segment."

The question, of course, is who gets the credit for the sale? It's a Lenovo machine, after all. IBM could just offer Dell customers support and it could make a lot more money without so much effort.

I don't know what is really going on in this deal, and a lot might have to do with the original deal struck between IBM and Lenovo, the latter of which is sponsoring the Olympics in China. That means Lenovo needs to have servers to do that job and, besides, any PC marker has server aspirations of its own because they like profits--something that are hard to come by in the PC business, but which are easier to rake in in the server biz. Maybe Lenovo was going to strike a deal with Intel to peddle its server designs, or maybe even Super Micro was a possibility, and IBM thought it best to get its services piece of the action in a market that it is not currently serving as well as Dell and Hewlett-Packard in the United States and Fujitsu-Siemens in Europe and Asia. Maybe the Chinese government leaned on IBM to play nicely if it wanted to get its hands on that fast-growing IT sector in China. Maybe IBM thinks Lenovo has no chance of getting sales in its key geographical markets, and that it has no chance selling against Lenovo in China. Who knows? One thing for sure: IBM and Lenovo are not going to say precisely how and why this deal went down.

In the end, this may go down as one of those monumental blunders that changed the course of the IT market (like the IBM PC and the partnerships with Intel and Microsoft did), or it may go down as a deal that changed nothing (there are too many of these to list). It will be interesting to see which way it goes. A lot depends on if Lenovo can have success selling PCs against IBM and others in North America and Asia. The one thing that seems obvious is that all of those former IBM PC channel partners who are now Lenovo channel partners are going to be watching very closely as products and prices come out for the Lenovo entry server line--particularly if they are already selling IBM System x gear from its Modular Systems division.

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