There's an old computer industry saying that IBM (IBM) never gets into a line of business unless it promises to be worth at least $1 billion annually. There should be a second saying, as well -- that IBM never stays in a business that's on its way out, even if that business is still turning a profit. The company sold off its PC business to Lenovo years before others saw the trouble that industry would have.
Now, IBM is reportedly ready to leave the small server market and has been in discussions with Lenovo and Dell. Given market dynamics, it's probably a smart move for IBM, but it might also foretell another significant shift in the computer industry.
When IBM exited the business of selling PCs -- the product that it helped invent and define -- there was some shock. Even with all the lower-priced competition, IBM was selling three times the volume that Lenovo had. It was, at the time, a multi-billion dollar business.
But the PC business was already having problems. Prices continued to be
driven down. Margins were thin and a sober assessment was that the trend would continue. It was a commodity business, not one for the
profit-focused IBM. Eventually, the market proved the move a smart one. Years
later, big names like Dell and Hewlett-Packard (HPQ) would
at best feel ambivalence toward the product category.
It's not the only time IBM has made a significant shift in its business model. In the early 2000s, CEO Lou Gerstner put the company squarely in the consulting arena. He realized that services had the potential for high margin while hardware more frequently did not. Even in mobile computing, IBM looked toward the infrastructure, software and services, rather than spending time on handset design and revenue, that would eventually also become a near commodity.
Now, IBM is moving away from small servers because, although they sell well, that's not where the money will be going forward, at least not for its traditional large customers. Cloud computing will be the replacement. Providers will offer computing power, software hosting, and data storage for annual fees. Hardware will follow a pattern already in place in corporate data centers, which now run efficiently on a fraction of the machines once needed. Software and services will see growing margins as a result, because there are fewer capital dollars necessary per customer.
This also applies to smaller companies, who could see even
more savings than larger ones, by dumping their small data closets and turning
to cloud hosting for all of their computing needs.
Companies considering snapping up IBM's server business should be mindful. IBM could
well be offloading a future white elephant now, while it is still possible to
command a decent price.