Why IBM's server sell-off is a lightbulb moment

We’re not even out of January yet and already the UK's tech channel has possibly seen its biggest story of 2014 after IBM sold its low-end server business to Lenovo.

The two companies have history, of course, with IBM offloading its profitable-but-not-for-long PC business to the Chinese firm back in 2005. Lenovo did rather well out of that deal and is now the global market leader, but the PC industry of late has been in what seems like irrevocable decline.

So who will be the biggest winner this time? Does IBM know something we don’t about the future of low-end x86 servers?

IBM’s rationale in offloading the low-end server business makes complete sense on paper – after all, Big Blue has been moving more into software and services for some time. Cloud and big data may be spurring massive investment in servers, but IBM was finding it increasingly difficult to sell in big enough volumes that would keep its lower margin business profitable and competitive against HP and Dell.

Although IBM did not perform that poorly in the x86 server segments in 2013 – in fact it maintained a 17 per cent revenue share of the distribution channel across Europe - it did fall three percentage points in the UK, from 13 per cent to 10 per cent. And this needs to be measured against a still strong and leading HP with 77 per cent share of distribution. Nonetheless, it seems like a good move for the vendor to keep the more profitable Power Systems and Power-based Flex Servers, System z mainframes, Pure appliances and Storage Systems Businesses.

IBM was also up against the server ODMs including Quanta and Wistron in Asia. Increasingly, cloud giants like Facebook and Amazon are bypassing the middlemen and going straight to these firms to fit out their data centres according to their own bespoke, low-cost and energy-conscious designs.

Enter Lenovo. The company turned around IBM’s PC business, although it took time, and it’s used to selling high volume, low margin kit. Now being the number one global PC vendor, it may also be able to negotiate better deals with components suppliers than IBM due to the scale across the entire portfolio.

Moving up the enterprise food chain

It has long wanted to get into the server biz and the new IBM deal is an ideal complement to its joint venture with EMC in 2012 which saw the firm begin selling sub-$25,000 Iomega network storage products into SMBs. With the higher-end IBM Storwize OEM licensing agreement as part of their strategic collaboration with Big Blue, Lenovo will also be able to move up the Enterprise pyramid of end users. The question may arise as to whether government clients may push back on having Chinese Lenovo kits in their data centres due to "national security" concerns.

In the short term the deal is a win-win for the channel. Lenovo is a company which has an impressive manufacturing machine behind it and has already proven itself more than capable by turning around IBM’s PC biz from a profitable to a very profitable business, in times where mature markets are under economic pressures and have also heavily shifted towards tablets.

How did Lenovo do it? It has strong channel partnerships and has been very agile to respond quickly to its partners' demands - thanks to cutting edge tools and processes - keeping the channel happy. There’s also plenty of overlap with IBM in terms of distribution which will come in handy. In short, the deal suggests the channel will welcome a decent alternative to market leader HP and channel challenger Dell.

Ever-growing data centres... it CAN'T last forever

However, let’s think about this in the mid- to long-term. Social media, big data and cloud services are fuelling an insatiable, power-hungry demand for new data centres. There may be enough energy to meet current requirements but what will happen in five or 10 years’ time? At the current rate of increasing demands and projections, there won’t be enough power to switch on our data centres in the next decade.

I suspect that IBM not only saw that but also didn’t want to keep hold of a business doomed to suffer massive change because of these escalating power needs. Low-end server vendors will have to get used selling fewer boxes or find other ways to sustain their business, whilst responding to customers’ cloud, big data, social and mobility requirements.

HP is also very much aware of this, but as a one of leaders in these segments, and being primarily a hardware vendor, is deemed to be driving those changes, hence has focused a lot of efforts on low-consumption technologies in its hyperscale and data centre businesses. A couple of proofs of concept here are its Moonshot platform, which aims to dramatically reduce the server footprint in the data centre by concentrating more than 45 server nodes on a 4U chassis (reducing footprint and energy by over 80 per cent) as well as its new POD Modular data centre systems which claim similar figures.

Channel partners will be happy about the Lenovo-IBM deal as it’ll offer renewed revenue-making opportunities, from Lenovo-enthused "PC+" (multi-device) customers who will be able to now benefit from serious IBM enterprise tech.

But in the long term it would be smart to start thinking about delivering additional services related to the green data centre, public or private cloud and look at technologies that have a smaller space and energy footprint, not to be left out from a undeniable and unavoidable new market dynamic. ®