IBM refocuses hardware strategy on high-value technologies

Roy Illsley, Principal Analyst, Ovum Software

IBM has announced that it will invest more than $1bn in the new IBM Watson Group, as well as $1.2bn to expand its global cloud computing footprint to 40 data centers worldwide in 15 countries across five continents. On January 23, 2014, IBM also announced that it has reached a definitive agreement with Lenovo to sell the Chinese company the majority of its x86 server business in a $2.3bn deal that includes System x, BladeCenter and Flex System blade servers and switches, x86-based Flex integrated systems, NeXtScale and iDataPlex servers and associated software, blade networking, and maintenance operations.

This represents the biggest ever technology acquisition by a Chinese company, and sees IBM exit server manufacturing in all but the System z mainframes, Power Systems, Storage Systems, Power-based Flex servers, and PureApplication and PureData appliances markets.

Is Lenovo IBM’s strategic partner for low-margin business?

In 2005 IBM exited the PC business when it sold its PC business to Lenovo. At the time this was seen as a simple divestiture, but today it looks more like part of a long-term strategic plan to find a safe partner for areas of IBM’s business that are becoming lower margin and lower value.

Ovum thinks that IBM can be seen as a leader in the market and certainly has an uncanny ability to know when to enter and exit markets. In 2005 it exited the PC business, which is now seen as a smart move, and Ovum believes that the current divestiture will be seen in a similar way.

It does, however, raise some questions. First, is the move strategic or is it to fund the cloud and Watson expansion? This, however, is unlikely because IBM has a healthy balance sheet.

Second, what will it do for sales of equipment to government customers? Huawei recently decided to exit the US market because of a lack of trust in the Chinese-owned organization by the US and Australian governments. Questions regarding the security of any equipment will surely surface again for Lenovo, and while Lenovo can point to nine years of supplying PC equipment, the move to servers and switches will be scrutinized.

Finally, what does this mean for Lenovo? Is it just IBM’s low-margin, low-value business strategic partner, where IBM can exit these markets yet retain some influence through OEM deals? The biggest question for Lenovo, however, is how it is going to grow the business and add value, particularly because IBM is retaining its high-end systems capability.

IBM is betting on newer forms of computing to deliver higher growth

Ovum believes that this move demonstrates that system z, power, pure, and storage are more high-value and strategic than low-end x86 servers. It also indicates that the market is set for a more pronounced split in the use of high-end and commodity server equipment.

Ovum believes IBM is moving toward the next generation of computing, and that IBM Watson demonstrates that the future of computing is set to enter a third era based on cognitive and not programmable concepts. The first era was tabular or mechanical computing, and the valve was the development that signaled the move to the second era.

The second era was the transistor-based computer, where the advances in silicon wafer production made servers much cheaper and provided a catalyst for the third era: cognitive computing. IBM Watson shows that instead of programming the logic into the silicon, the silicon can effectively learn by using a deconstruction method of breaking down tasks into inputs and outputs that can be combined in multiple ways.

Ovum believes that IBM’s move away from mass production of silicon-based computing is the evidence that it is close to being able to deliver this third era of computing. The strategic partnership will provide IBM with a link to existing markets and customers as it grows the new cognitive computing market.

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