The IBM hardware business has seen better times. Big Blue posted its sixth consecutive quarter of revenue declines, as overall sales performance is dragged down by a slump in hardware sales, underperforming emerging markets and a slow shift to cloud and software sales.
The big question: Will the hardware slump lead IBM to renew efforts to sell its server unit?
In its earnings statement, IBM reported a 4 per cent revenue decline to $23.7bn for its third quarter. So far this year, the company has lost $713m in its hardware business compared to $253m in profit in the first nine months of 2012.
Revenue is also under pressure by declining sales in emerging markets, particularly China. For years, multinational vendors such as IBM relied on foreign markets to make up for flat or declining sales in mature markets such as the US and Europe. Emerging markets have either plateaued or started to decline, making them a less reliable sales source.
IBM says its System z mainframes continue to sell well. The bigger culprit is declines in other hardware products. While IBM didn't say System x servers, it's a safe bet to say the weakness is in this product line.
Ironically, IBM regained the top market share position in servers in the second quarter of the year. But recapturing the top of the market share mountain isn't as satisfying as it once was. According to IDC, IBM holds 27.9 per cent of the global server market, but server revenue is down 10 per cent year over year. And, compared to 2012 market share, IBM's share shrunk 1.2 per cent.
The same story is seen among other traditional server vendors. According to IDC, HP's server market share shrunk from 29.5 per cent in 2012 to 25.9 per cent in the first half of 2013, and revenue fell 17.5 per cent. Oracle's server business - the former Sun Microsystems business - saw server revenue fall 5.7 per cent. Only Dell and Cisco saw server revenue increases, but Cisco's increase is due to growth against a relatively small base.
Overall, global server revenues are down 6.2 per cent even as unit shipments climb. Part of the reason for the revenue decline and increasing demand is the shift to cloud computing. As service providers buy more servers to build out their infrastructure, they're gaining buying power that leads to commoditisation.
IBM isn't oblivious to its hardware challenges. Its recent activities in cloud computing, security and software are evident of the company trying to rebalance its portfolio against the commoditised server business. IBM paid more than $2bn to buy cloud service provider SoftLayer to augment its cloud business and delivery capacity. It also reportedly paid $800m for Trusteer, a security company that specialises in detecting and stopping financial fraud and identity manipulation. And it sold its customer service unit to distributor Synnex for $505m.
In April, reports started circulating that IBM was trying to sell its System z server unit to Lenovo. The deal would have been reminiscent of the 2005 deal in which IBM sold its ThinkPad unit and brand to Lenovo, jumpstarting the Chinese company to the top of the PC market.
Talks between Lenovo and IBM reportedly broke down in May for undisclosed reasons. However, it's not inconceivable that IBM would reconsider jettisoning its server business so it can focus more energy and resources on its cloud and server business, which are growing but not fast enough to make up for declines in hardware.
Lenovo is a strong would-be buyer, as it has high ambitions in the server market. Just this week it released two new, low-cost servers designed for high-performance, virtualised and cloud environments. It continues to ply partnerships with EMC and VMware to develop cloud and storage products.
And it's carefully deploying more products through its reseller channel to penetrate the US and global server markets.
If servers are dragging IBM's overall performance and hindering transition to cloud computing, broader software sales and services, it's not inconceivable that Big Blue will renew its divestiture efforts. Unlike HP, which jealously hangs on to underperforming units, IBM has proven time and again that it has no compunction for dead weight.
The clock may have already started ticking on IBM's entry and midrange server business.
As part of our special editorial partnership, CRN is republishing this article from Channelnomics
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