IBM deal will raise Lenovo’s EMEA profile: IDC
Research firm shares insights on what Chinese vendor’s x86 foray will mean for region
Technology market research company, International Data Corporation (IDC) believes Lenovo's recently announced acquisition of IBM's low-end server business unit could mean a considerable elevation of its brand in the Europe, Middle East and Africa (EMEA) region.
"In EMEA, IBM is the third largest supplier of x86 servers after HP and Dell, with a market share of 13% and revenue of around $900m in [the first three quarters of 2013]," said Giorgio Nebuloni, research manager, Servers, IDC Europe.
"In its before-acquisition status, Lenovo had less than 1% market share in EMEA in both units and revenue. This means that a new top-three vendor is potentially born out of this deal as far as Europe and EMEA is concerned."
IDC believes that, for EMEA, the deal will mean Lenovo will acquire a solid customer base, skilled sales force, channel relationships, and brand recognition. Because integrated solutions such as PureSystems and blades are included in the deal, Nebuloni believes Lenovo will become a more attractive brand to potential large customers.
"For competitors like Dell and HP, this could potentially mean stronger competition in SMB environments, where IBM had been less aggressive in the past, especially given that Lenovo has experience in building and growing an acquired business in the form of IBM's PC unit," said Nebuloni.
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IBM sold its PC business to China-based Lenovo in 2005 for $1.75bn. Last year, the two companies held talks about Lenovo's purchase of the server unit, but were unable to agree terms because IBM priced the business a lot higher than Lenovo did. Nebuloni believes IBM's recent decision to accept Lenovo's $2.3bn offer for the server unit stems from the US giant's inability to build the scale in the x86 business that would make it a market-leading contender.
"Additionally, as confirmed in recent statements of intention, and with SoftLayer's acquisition last year, IBM believes it can and should address most of the infrastructure needs of its customers with IaaS cloud services, competing with vendors like Rackspace, Amazon Web Service and Microsoft," he said.
IDC estimates gross margins in the x86 area lie mainly in the 15% to 25% range and rely strongly on "operational efficiency and volumes". Nebuloni compared these figures with 40% to 50% in legacy higher-end servers and over 70% in software, to explain IBM's decision to concentrate on those areas.
Even IaaS services, despite the widespread assumption of low profitability, might be more profitable for IBM," he said.
Nebuloni said little would change in the medium term for channel partners and customers in Europe. He pointed to the fact that Lenovo's business is "even more channel-driven" than that of IBM, with almost all current server sales achieved through distribution.
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"We recommend IBM partners and customers avoid disruption to day-to-day work with the vendor, while at the same time using this as a window to assess their longer-term strategy in terms of infrastructure consumption - on-premises, off-premises, managed, etc - as well as supplier framework. However, as the buyout is far from complete and in particular US regulators could pose hurdles, IDC advises against any rushed moves in any direction."
IDC's conclusion is that the acquisition fits with the broader strategy of both vendors, as Lenovo seeks to diversify from its core PC business and IBM sets its sights on cloud services.
"The interesting bit will be related to how the companies will manage the transition for the richer x86 blade environments, which in some areas have replaced legacy UNIX platforms as the building block for core enterprise applications," said Nebuloni.
"IBM will retain only the Power-based portion of blade environments, yet this will require a long-term joint work with Lenovo in several customers currently using both x86 blades and Power or System Z mainframe environments or even storage blocks, which IBM will keep in its portfolio. We don't know the details of this switch, and as they say, the devil is in the detail".