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IBM roadmap coming to a fork in the road between software and hardware

Over its 100-year history, IBM has reinvented itself numerous times to remain competitive in hot, emerging markets or, more rarely, just to survive and remain whole.

The last reinvention 20 years ago addressed the second reason when IBM grew too fat and happy about 20 years ago, and missed a couple of important technology trends below the mainframe platform. The company put up an unprecedented three consecutive years of losses, and seriously considered breaking itself up into a loose federation of 13 business units, called the Baby Blues. But then Lou Gerstner came in and took things in exactly the opposite direction, making the units work together more cooperatively.

Today, IBM doesn’t need an immediate reinvention — but maybe it should start thinking about it. For several quarters in 2013, sales of IBM’s mid-range servers, its Power Series, plummeted dramatically. Despite IBM’s steady delivery of new hardware technology and decision to replace Unix with Linux as the primary operating system for Power servers — a wise choice — a growing number of data centers are choosing Intel-based servers instead.

Compounding IBM’s woes, its X Series of Intel-based servers that compete with HP and Dell has shrinking margins. So much so that earlier this year, IBM was engaged in talks with Lenovo to sell off the series.

Most observers don’t see IBM exiting the hardware business any time soon — mainframe sales have actually picked up significantly this year and its Power Series appears to be producing enough profits for now. But others already see Big Blue transitioning to more of a software-and-services company, one keenly focused on cloud opportunities. One that will, oh yeah, also sell some hardware.

“I think you will see IBM move from a hardware-and-services company to a services-plus-software company just because of the way enterprises are consuming software. [IBM] are setting themselves up now for what they see coming over the next number of years,” said Matt Casey, an analyst with Technology Business Research in Hampton, N.H. “If this shift results in growth over the short term, great. But I see this as the beginning of a larger journey.”

This shift in IBM’s roadmap, whether intentional or not, is already taking place financially. At the end of fiscal 2012, IBM generated $25.4 billion in software revenues, with hardware producing only $17.6 billion. IBM Global Services easily holds up its end of the software-plus-services focus, raking in $40.2 billion last year. And the gap is growing wider still in 2013.

But can IBM’s software business grow fast enough to offset its hardware business declining? Unlikely, given the recent growth of IBM’s bread-and-butter server-based applications, and the fact its cloud-based products portfolio, while growing, is only about $2.2 billion right now, with a goal of reaching $7 billion by 2015.

And, are we looking at a smaller IBM over the next few years? The company has always proved adept at growing the top line, even when it sells off billions of dollars worth of business, such as its still-profitable $11 billion PC business to Lenovo back in 2004.

“IBM is a company run by the CFO, so becoming a smaller company would be a difficult case to make with stakeholders,” Casey said. “But if they decide the Intel (server) business and even the Power business no longer fits its core mission, they will sell it.”

Casey adds that IBM would take the proceeds from selling such units and buy or develop whatever it needs to maintain its size and ability to fulfill its core mission as a full-service provider of information processing technologies for large enterprises.

It is difficult to predict if current server hardware trends will force another reinvention of the world’s second-largest IT company, but it will be interesting to see what new directions IBM may take to stay on track.

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For too long IBM has a the same problem that GM suffered from; i.e. too many versions of the same product.

What IBM is doing is developing a line of affordable "mainframes" the zBC12 series and the zBox systems designed to run Linux.

Ford figured this out 90 years ago.. no matter what type of vehicle you bought from Ford they all shared the same set of engines and powertrains, brake systems and other sub-assemblies and components. GM finally started doing it a few years ago.

IBM will do the same, it will lower costs in terms of hardware and software. It will take

a few years I say about 5 to 7 years, but they'll have a family of server engines that can be configured to whatever the customers needs and budget will allow.  The software

will become cheaper also as the same base code will be used and features are activated as the customer moves up in scale. 

Some of this is being done now.

Thanks for the insights, they make a lot of sense. Not sure how IBM will replace the lost revenues from its mid-range Power-based servers. It would seem to ask too much for the company's software business to cover those losses, although I realize their software business (particularly the cloud-based products) is growing. I guess we will have to see how the lower cost zBC12 series and zBox sales go over the next year, and if Softlayer can give the company's cloud-based initiatives an added boost. IBM always seems to figure out a way to get rid of and/or add products that support its core mission, which is catering to the information processing needs of larger corporate accounts, while continuing to grow the top line numbers.