UPDATED 10:10 EST / JANUARY 23 2014

Lenovo buying IBM low end server business for $2.3 billion : PC business is back again – It never left

Today it was announced that Lenovo has agreed to buy IBM  low-end server business for $2.3 billion.   Not a big surprise to all of us following the industry.

My first reaction: finally shake that “thang.” Focus on the high end performance, converged systems, Big Data, and low power (ARM).  Check and check.  Good move IBM.  

This deal is on top of the landmark deal years ago when IBM sold their personal computer business to focus on turning the company around.  As it turned out, it was a brilliant move by then CEO Sam Palmisano in 2005.  Selling the PC division was a move that saved the company where at the time 90 percent of the profits came from mainframes.  Selling the PC division allowed IBM to focus on services and the focus on large systems.

For IBM, selling the low end servers (basically PCs) allows the company to focus on more profitable software like Big Data and high performance computing, and services around cloud and software defined datacenter.  IBM’s low-end server has annual revenue around $4.5 billion with a $26.4 million loss in 2013, compared with over $100 million in profits for 2012. 

Server computing is changing and the competition; HP and Dell are focusing on the high end with software as the key differentiator.  HP has Moonshot and Dell has some stuff in the works.  When I sat down with Dell CEO Michael Dell recently he told me, “John, we are going to be aggressive…you will see some big time new capabilities in software tied to high performance hardware…”

HP is seeing the high end convergence as well and has build a new business unit around rising executive Tom Joyce that ties all the servers, storage, and networking together.  Dell has Marius Haas who is ex-HP leading the strategy charge at Dell.

Bottom line:  this business will grow and it’s competitive.  Servers are not going anywhere.  

Consolidation is Evolution

 

Dell, @theCUBE Alum, was interviewed in Davos today.  When asked about the IBM deal with Lenovo he said:

“I think certainly there is a trend of consolidation. We have been gaining share in the server space and the client space. We’ve got our PC client tablet business growing again, doing that in servers. And so you see consolidation, this is just another form of it. Switching from the client-only to client-and-server is a fairly significant shift in terms of the sales motion, the processes in the company so they will have some challenges.” 

The product hardware component is still an important part. “Value is certainly shifting to new areas though – in services and software,” Dell continues. “These are areas where we have invested tremendously. We’ve done 30 acquisitions in the last five years, we have built a $21 billion enterprise business in these new areas. Certainly, as a private company, we are absolutely intending to focus more on those areas for our growth.”

The Death of PC – Not

 

The personal computing business is not dying it’s transforming.  Every connected device, from the Nest thermostat to the mobile phone, is a computer.  Some are very personal, with personalization being the core value proposition.   Personal computing is the new mega trend, except it never left.  The hardware is changing and software is eating up the world.   Software to deal with Big Data, the Internet of Things, cloud, and security is more critical than ever before.

The smartphone is the ultimate PC.  Apple is dominating the market but Android is gaining fast. Android phones are gaining great ground and many (including myself) think the PC vs Mac debate will emerge again.  The market uptake by Android in new markets are gaining majority share.   Pricing and new markets is giving Android a boost in volume while Apple owns the high end.

According to Dell, the PC is not dying and it turns out there’s still 1 million of these devices sold every single day.  Dell was asked about the Microsoft and Apple approaches and responded with the following:

“Our tablet business has really taken off in 2013. It doubled from first quarter to second quarter.  It doubled again from second to third; third to fourth about tripled. There is certainly product differentiation, differentiation in services and, of course, the real issue is how do you integrate this securely into a company’s operations, make it work. It’s not just about the product, it’s about software and services and understanding how it works within a company to make it more productive.”

Industry analysts see the strategic nature of this transaction.  “Obviously from a pure financial standpoint this makes sense. The commodity server business never seemed to fit IBM’s image and in a page out of Oracle’s Sun game plan, jettisoning its low margin business is attractive.  But one area I’d like to see IBM focus on is the system / storage relationship”  says  Dave Vellante (@dvellante), chief analyst and cofounder of Wikibon.org.

In Vellante’s view, the storage group should take the lead on bringing flash and x/86 architectures together and develop new hyper scale-like systems for the enterprise where directly attached flash storage is shared across a commodity server farm.  “This is a software innovation and would put IBM in the center of the action. Without the contention of an x/86 server business, the storage group should be more free to pursue this type of approach” says  Vellante.

Can IBM hit the jackpot on divesting a commodity asset twice?  For Lenovo it’s in their wheelhouse.  Win-win deal.


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