“Sometimes a cigar is just a cigar,” Freud was said to have wryly noted – but then again, sometimes not. Sometimes a business deal, then, is just a business deal – and sometimes there is more to it than just what’s on the surface.
This is the case with the IBM-Lenovo deal. In a follow-up to the earlier sale of IBM’s PC business to the Chinese manufacturer, Big Blue has agreed to shed its commodity PC business to the tune of $2.3 billion. This includes not only the system x devices but the BladeCenter and Flex System lines and even the more advanced, hyperscale-friendly NeXtScale and iDataPlex machines. In one stroke, IBM has pushed Lenovo to the forefront of the white-box infrastructure market on which much of the next-generation data ecosystem will be built.
Why would it do that? Well, $2.3 billion isn’t exactly Grandma’s kitchen money. But beyond that, does this mean IBM is close to finalizing its plan to become strictly a software and services company? And if so, does the enterprise need to shift its focus away from the physical layer as well?
According to technology analyst Eric Lundquist, you cannot view this transaction outside the broader shift from hardware-based data infrastructure to the cloud. This has essentially forced IBM’s hand away from low-end hardware toward enterprise cloud services. While this market is growing, it also operates on margins that are even thinner than servers and PCs, and the space is already occupied by companies like Amazon and Salesforce that are well positioned to play the margins game due to their high-volume business models. Of course, IBM is no stranger to the enterprise, and is likely to pull its substantial installed base into the cloud, but the question is whether even this will be enough to either meet the established cloud providers on price or provide a higher-quality services line-up.
The question of margins is also a main driver for Lenovo. Whenever you’re dealing with commodity markets, whether it is servers or oil or sweet potatoes, size matters. Already, Lenovo competes not just in the computer field, but smartphones, TVs and other products as well. And as Samsung, Toshiba and others have shown, a broad product portfolio is the best way to keep margins as low as possible while still turning a profit (most of the time, anyway). At this point, it’s hard to see Lenovo branching out into refrigerators and heavy machinery, though anything is possible.
But as I said, this deal is more than it seems on the surface, and one of the crucial aspects is how it affects others in the IT tech industry – namely HP and Dell. According to Bernstein Research analyst Toni Sacconaghi, HP is in the worse position in terms of commodity hardware because it can’t seem to rid itself of PCs and other devices without disrupting its entire supply-chain pricing structure. At the moment, HP leads the low-end server market with a 32 percent share, but if those volumes were to drop, the company could see its margins suffer. After all, it’s happened before: just a few months ago when it lost command of the PC market to, well, Lenovo. As for Dell, it’s been said that the entire reason Michael Dell took the company private was to re-align the company’s portfolio toward higher-end IT systems, a process that is likely to unfold over the coming year.
So where does all this leave the enterprise customer? Does physical infrastructure belong to commodity devices while the advanced engineering and architectural activity shift to the virtual or cloud layers? In most cases, yes, although there will always be a need for specialized hardware and customized ASIC designs.
The good news is that the cost of building and maintaining data infrastructure will go down, but it is still very unclear whether many of today’s leading platform providers will maintain their status as key players in the development of that infrastructure, or whether they will survive at all.