Why IBM-Lenovo server deal makes sense

Why IBM-Lenovo server deal makes sense

Summary: The key question is whether customers will stay with System x systems or make future purchases from others.

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TOPICS: Data Centers
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Lenovo announced that it has plans to acquire IBM's X86 business for $2.3 billion. Both companies are hoping for the same success that resulted from IBM's 2005 sale of its PC business to Lenovo. Here's some of what Lenovo had to say about the latest move:

Lenovo (HKSE: 992) (ADR: LNVGY) and IBM (NYSE: IBM) have entered into a definitive agreement in which Lenovo plans to acquire IBM’s x86 server business. This 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. The purchase price is approximately US$2.3 billion, approximately two billion of which will be paid in cash and the balance in Lenovo stock.

Snapshot analysis

It is clear that IBM has decided that it has had enough of the rough and tumble, quick slide to the bottom of the world of industry-standard servers and has chosen instead to focus on software, services and systems in which it controls the majority of the architecture — System z mainframes and Power-based systems that support its System i and System p offerings.

Although IBM's x86-based offerings have been based upon the company's long experience, it doesn't always win because of the bruising competition with HP, Dell, and other suppliers of x86-based servers. Customers have increasingly demonstrated that they are more interested in lowering costs than features such as higher single-system performance, reliability, manageability and security of business-critical workloads; or decades-long experience with virtualized computing environments.

There are many key questions that are not yet answered about this move including the following:

  • Will IBM system customers trust Lenovo to supply systems for their business-critical applications even though Lenovo doesn't have IBM's long track record of success in the enterprise?
  • Will Lenovo be able to provide enterprise-level, on-the-ground support for enterprises that meets the high expectations these customers have?
  • Will future systems be designed with the same level of broad expertise in processors, memory, storage, networking and virtualization IBM has shown over the years?

The answers to these questions can all be summed up in the statement "we'll have to wait and see."

I expect, by the way, that HP, Dell and other suppliers of X86-based systems will immediately start "drop IBM and come to us" campaigns to persuade those who are uncomfortable with the future of IBM's System x to purchase systems from them.

Topic: Data Centers

About

Daniel Kusnetzky, a reformed software engineer and product manager, founded Kusnetzky Group LLC in 2006. He's literally written the book on virtualization and often comments on cloud computing, mobility and systems software. In his spare time, he's also the managing partner of Lux Sonus LLC, an investment firm.

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6 comments
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  • IBM is not a commodity vendor

    PC servers have become commodities. There is little differentiation between manufacturers, so like any commodity, competition revolves around price. IBM is not a low cost manufacturer, Lenovo is.
    Gary Doan
    • That's not entirely true

      Industry standard (X86) servers have long outgrown the "PC Server" name. The midrange and upper end of these systems offer many multiples of what was considered mainframe performance in the late 2000s and early 2010s. We've seen many of these systems achieve over 1 Million transaction per second on the TPC-C benchmark.

      So, enterprise class applications are being deployed on these systems. The question is, will enterprises continue to deploy these workloads on System x systems or will they start buying systems from competitors.
      dkusnetzky
      • @ dkusnetzky

        How can one explain this deal in the backdrop of decreasing Power Systems server revenue share and market share Q-o-Q recently?

        Granted IBM gets to rid of its even lower margin x86 server product businesses but Power Systems servers themselves are declining in both unit and revenue numbers every quarter.

        IBM also looks to separate itself completely from Windows Server and Intel/AMD platforms with this deal. They will be left with the z architecture and the Power CPU based Server products now.
        calahan
  • Lenovo seems to have done carrying on the characterisitics of...

    ...the ThinkPad line. They appear to be highly regarded by businesses (my work laptop is an x230...great system). I expect Lenovo will do the same with the server line.

    Weird IBM is now out of a huge business they started.
    ye
    • It's all about investors

      if they say "servers will grow, but not quick enough to make us the money we want today, sell them off"
      William.Farrel
      • I doubt IBM is so shortsighted...

        I believe it's more about IBM concentrating on products and services which are more profitable, short term and long term. x86 servers require that a company have expenses with very knowledgeable staff, and in hardware, and in software. All of those can be very expensive, and the return might not be enough of a profit to make the effort worthwhile; the effort would be more like a "make work" project, like are found with government jobs. IBM, like a lot of other hardware and software companies, are looking to reduce staff, which could be where most expenses come from.
        adornoe