IBM's Smart Move: Leaving Low-End Server Business

It was nearly 10 years ago that IBM (IBM) finally made the bold move to get out of the fledging PC business, selling the business to China-based Lenovo for $1.75 billion. At that time the move was met with some criticism, with many wondering, How could one of the most dominant hardware makers on the planet not be manufacturing PCs anymore?

It was 2005 when IBM began drawing a line in the sand that it is transforming into a more services-oriented organization. Even though IBM Global Services at that time was a force to be reckoned with, the company wanted to (needed to) demonstrate to the market it would be focusing on services going forward and not banging its head against Dell and Hewlett-Packard (HPQ) on PC prices.

The move paid off, as the latest results from Gartner show PC sales and shipments continue their decline. In fact, the fourth quarter of 2013 showed the steepest decline in worldwide PC shipments, causing the tech research firm to believe they have bottomed out.

Now IBM just said it reached a deal to sell its low-end x86 server unit to Lenovo for $2.3 billion. This move gets IBM out of another declining, tight profit-margin business, allowing it to further focus on software development and services.  No one is questioning this move.

In fact, the worldwide server market dropped 3.7 percent in the third quarter of 2013 to $12.1 billion, according to the latest Worldwide Quarterly Server Tracker from International Data Corp. (IDC). That marked the third consecutive year-over-year revenue decline.

Even though IBM held the No. 2 position in the market with 23.4 percent factory revenue share, it dropped 19.4 percent year over year in factory revenue, resulting in a 4.5 percent decline in factory revenue share for the quarter on soft demand for System x and Power Systems, according to IDC. IBM did say it was retaining its higher-margin service offerings, where it has 57 percent market share.

The move is a good one for both companies, as Lenovo has proven to be a good business partner to IBM and can operate more efficiency in a low-margin business while allowing IBM to invest more in Big Data, cloud and other services. It is also good for solution providers, who would rather partner with IBM in these areas than push low-profit hardware.

It also comes on the heels of another disappointing quarterly performance by the company. IBM recently reported its seventh consecutive quarter of declining revenue and its eight straight period of missing expectations by recording sales of $27.7 billion for its fourth quarter of 2013, a 3 percent decline from the same period the year before.

Industry experts showed support for the deal. “The x86 server market has been turbulent with many potential customers opting to either build their own servers or work directly with third party manufacturers. Though this was once considered a high margin market, its growth has slowed and companies largely compete on volume,” according to a Martin Wolf Associates report. “IBM has recently been shedding its lower-margin offerings and instead focusing resources on competing in cloud, big data and higher margin services. IBM is retaining its higher margin server offerings, where it boasts a 57 percent market share, and has also announced plans to spend approximately $1 billion each on its Watson software business and new cloud computing data centers,” the report stated.

It’s a smart move by IBM and one that will also provide more opportunities for its solution provider partners.

Knock ’em alive!