Will Big Blue Deep Six Its X86 Server Biz?
April 22, 2013 Timothy Prickett Morgan
It was a sea change in the personal computing industry when IBM, which lost billions of dollars in the commercial PC business that its brand helped establish, sold off that business to Chinese PC maker Lenovo Group at the end of 2004 for $1.25 billion. And it might be another sea change for the IT industry, with IBM out on the leading edge again, as it is apparently in discussions with Lenovo to sell off all or part of its System x X86 server business to Lenovo.
I know what you are thinking. IBM is the number three maker of X86-based servers in the world, behind Hewlett-Packard and Dell, and it has fought hard for decades to maintain that position. The chatter for years is that there is very little margin for IBM in stock rack and tower servers based on Intel and Advanced Micro Devices. IBM tried to make higher margin products, like the BladeCenter and now the FlexSystem and PureSystem machines, that adopted X86 technology, and has similarly moved its production of X86 servers out of the United States and Europe to try to cut costs and maintain profitability. But it may not be enough.
For the past several years, the X86 business at IBM has generated roughly as much revenues as both its System z mainframe and its Power Systems, and it is remarkable that IBM would walk away from a business that generated somewhere around $5.6 billion in revenues in 2012. This business has to cause IBM a lot of grief for it to be considering selling even a part of it off for maybe $5 billion to $6 billion to Lenovo, as a report last week in CRN claimed based on anonymous sources familiar with the negotiations between the two companies. The Wall Street Journal poked a few IBM sources and similarly confirmed that something is going on. Everyone at IBM clammed up big-time on the subject, and all that Mark Loughridge, IBM’s chief financial officer, said about it on the call with Wall Street analysis going over IBM’s first quarter financial results is that he doesn’t comment on speculation and rumor.
The deal, whatever it is, could fall apart and never be announced. If IBM does sell off its business, it will very likely become a Lenovo reseller and move its channel over to Lenovo, in effect become the largest channel partner for Lenovo’s System x-turned-ThinkServer product line. I have a very hard time believing IBM will give up its BladeCenter blade servers or its special iDataPlex hybrid rack-blade boxes, but anything is possible and I think that IBM’s new CEO, Ginni Rometty, and Systems and Software general manager Steve Mills, are probably very keen on pushing FlexSystem and PureSystem modular machines into enterprises at a higher profit margin than is possible with bare-bones System x iron. IBM is worried about the rise of Cisco Systems in the data center and is trying to pitch its converged server-storage-networking box as the answer to IT’s many problems. Raw capacity that makes no profit and possibly is sold at a loss is not something Big Blue is interested in, and if PureSystems is selling well, this is what IBM will focus on going forward.
IBM is also keen, as we report elsewhere in this newsletter, in ramping up sales of the Linux-Power Systems combo to enterprises, and presumably because it makes some dough from that. There is still money in the IBM i-Power Systems combo, and IBM has pretty much vanquished Oracle and Hewlett-Packard from the Unix server space (with a little help from Oracle buying Sun and then Oracle questioning the future of the Itanium chip), but this market is declining and chip factories, which IBM needs to make its Power chips, keep getting more and more expensive with each generation.
This is the same pinch all processor makers are feeling, and as I have said before, not only am I not surprised that IBM wants to check out of the cut-throat X86 server business, I will not even raise a Spock-like eyebrow when IBM sells its fabs to GlobalFoundries, which is an amalgam of a bunch of different foundries that the government of Abu Dhabi has snapped up to become a player in the chip market and have a business that is not so dependent on the price of a barrel of oil.
I will also not bat an eyelash if IBM outsources manufacturing of Power Systems machinery at some point, but for political reasons it may not be able to for a number of years.
At that point, the IBM we all know will be truly gone. It will just be International Business.