There was a lot of movement on the market as well on Twitter regarding the fact that IBM has outsourced it’s chip manufacturing to Globalfoundries. The fact in singular would not be something strange, especially not for a company like IBM who is making a big part of their business offering Outsourcing (IT) to their customers.
However news seldomly come alone, as it is the case with this one. The news came in conjunction with another missed quarter by Virginia Rometty, by a further steep decline in sales in Hardware (-15% YoY), important decline in Software (-5% YoY) but also with the now very eminent exit of IBM from the X86 Server market, viewed as not being profitable enough. The medicine which will cure all bad now seems to be Cloud. I am not too sure if the profit which IBM will be able to achieve there will be much higher than than the one it had in the X86 Server business, especially considering that they come a bit later to the party where other players have already established very well, like AWS and Google. Both with very aggressive pricing and a long term strategy on profit.
I came across this article on forbes.com “IBM Should take a Strategy lesson from Alibaba”
It’s the very premise of the American free enterprise system, whereby companies exist to deliver customer value, enhancing shareholder value in the process.
What is new is that some American iconic companies, finding complacency and comfort in old glory, have forgotten who is the ultimate boss of capitalist enterprise — the customer, not the shortsighted shareholder.
That seems to be the situation with IBM, in our opinion. The company’s leaders have been too busy trying to satisfy shareholders with buyback programs rather than pleasing customers by coming up with new products that beat the competition.
IMHO this is not only a harsh statement it has a lot to it. Listening to Rometty there was a lot of talk about the so called 2015 Roadmap and to be able to deliver 20$ of EPS to the shareholders. I do not want to put in doubt the thought for profitability at all. It is just and old lesson you learn in business, that you can only squeeze the lemon to a certain limit and that in order to get more juice you need more lemon. Translated you need to be able to sell more and have innovative products people want to buy from you.
So when IBM announced outsourcing it’s chip manufacturing I was exchanging a couple of messages with Holger Muller from Constellation Research asking the question if this is not the beginning of the end of the M in the name of IBM? Pc’s are gone now for 10+ years from their portfolio and nothing has really happened, in contrary it was good for the company and it is almost funny to see how HP is now following. But selling System x (X86 based servers) is a whole different game. Especially where the whole world is building more and more on servers with this particular chipset.
IBM announced then that they would want to focus on a more strategic offering in the Hardware business like System P and System Z. For some reason System P does not seem to recover from its constant decline and has dropped another 12%. There was a big announcement that Google was investigating using the P8 chipset for their own servers instead of the current Intel chipset but little less has been heard of it.
Mrs Rometty seems to hold on to the target of increasing profits without increasing sales which would lead me to think that there are more things for sale at IBM in the future and probably again from the Hardware Division. I would also make a bet that the last thing to go is the System Z (Mainframe). It has always been the most protected asset in IBM, which is natural. But being able to sustain the business on those two platforms which have a small market and in most cases shrinking will be a real challenge.
It might be just my nostalgic POV but the M stands for Machine and I feel that soon there will be no machine left but just Cloud. However, as far as I know the Cloud providers are using HW as well, actually to a very large scale.