The problem with being in a mature market is you can't convince investors that huge growth is just around the corner, so they start looking at things like 'profit' and 'dividends'.
And when you have HP and Compaq and Dell producing basically the same thing, you can't charge much of a premium as your customers can easily switch suppliers.
That's because social websites are in the business of taking money from speculators and unsuspecting investors. The valuation doesn't represent their revenue-producing capacity, just the fact that they can be traded by speculators for the (remote) possibility of becoming the next Facebook.
LINE, a free messaging app in Japan, made $194m in a single quarter, and its high margin business continues to grow fast. It's monetized through virtual goods and partnerships. And yet, it's nearly unheard of in the US.
I'm not sure if SnapChat is a winner and if their multi-billion dollar valuation is correct, but there's there's still whitespace in the market and plenty of money to be made.
LINE makes 80% of its revenue from stickers (20%) and games (60%). I can't see stickers as a workable revenue model outside of Asia. As for games, it may work, but I don't think Westerners like the idea of integrating their games into their messaging apps/services. After all, Facebook tried this with games, but nowadays people prefer to play standalone game apps on their mobile devices.
I'm thinking less about Zynga-like in-browser games, and more like Candy Crush (solo game but it's arguably more fun with others, and def faster/cheaper) and Quiz Up (obv a two person game). For the same user, they'll have different friends lists on SnapChat vs Facebook, and may want to play games more with former vs the latter.
Agree about sticker, but other virtual goods are open. Farmville was rumored to be making $1m a day, and I believe it. Who knows what other iterations we'll see.
It's also notoriously difficult to break into (in the software space) for Western companies. With Japan, there's the isolationist culture, and with China, there's the Great Firewall.
For those who did not get the reference, Valve paid out 400K$ in the first week of 2014 [1] to item creators for Team Fortress 2 and Dota 2, which are purely cosmetic video game items ("hats") [2].
Yeah, I don't see it. This is Dot Com Bubble 2.0. Nothing but hype. I don't care how many teenage eyeballs SnapChat has. You don't suddenly become Tencent or LINE or whatever tomorrow's out-of-the-ass comparison will be. SnapChat is going to have an uphill battle moving their users to anything that is not a simple picture transferring app. And they only have so much time left. If there is one thing teenagers do not do, it is use something past its trend expiration date. The fact that SnapChat hasn't been monetized yet probably means it's already too late and they have no clue where they are going with it, other than hoping to get bought out for an even more outrageous sum of money.
The challenge for SnapChat is to shift from novelty and entertainment to utility. Facebook was fun early on, especially when adding friends and reconnecting with old ones that you hadn't talked to in 10+ years. However, it's shifted to more of a utility for sharing photos and keeping loose tabs on family and friends. SnapChat needs to bridge that, and it can enjoy life far beyond a fad.
> SnapChat is going to have an uphill battle moving their users to anything that is not a simple picture transferring app.
SnapChat is kind of being used as a text messaging app already. That's been my observation of young users, and Bryce Roberts mentioned this as well: https://twitter.com/bryce/status/424600001868599296 (not that a VC has a crystal ball, but it summed up my thoughts.). I think older folks have written if off as an Instagram substitute and the young crowd is only interested in it because it's trendy.
Not really, nope. Very small user base here comparatively. LINE and KakaoTalk were huge in Korea when I was there last but when I came here no one had even heard of them.
I believe that Whatsapp and Groupme are the two popular apps in the U.S. I personally use both, but prefer Whatsapp and use Groupme only because my workplace does.
WhatsApp is really big in some European countries, especially Spain. But apps provide a non-exclusive messaging market, so I suspect people can fairly easily switch to alternatives.
WhatsApp is huge here as well, but many people started using LINE after the 1 dollar scare (99% of users here literally can't pay because of the lack of international credit cards).
Well, in part though these social networks can theoretically be worth the amounts they state - that is if they're not factoring competition and that users are mobile and can easily start using another service very quickly. This is why governance of the ecosystem is the next competitive advantage layer.
I realize there is a bit of snark in that comment but the interesting bit is known as COGS. Part of the "value" of a business is the rate at which it can make money, and the server business is limited in its rate by how many machines you can build and the price you can sell them for. Most internet businesses (like Snapchat) are limited only by the amount of money you can extract from users and the number of users you can sign up. While the sunk costs of hosting servers and infrastructure is non-zero, the marginal cost of an additional customer is tiny compared to the marginal revenue they could generate.
This is the fundamental way in which the information economy is different than the goods economy. And that makes comparing a business in one, with a business in the other, invalid.
Not only that, but nobody forked over billions for Snapchat. The company took investment at a price that suggests we can extrapolate a total valuation in the billions, but nothing like that amount of money has actually changed hands. Lenovo is putting up $2 billion in cash for this deal.
Again, that's not cash on the barrel head. That's a rumor. Was it $3 billion in Facebook stock? Was it $1 billion plus a performance bonus? Would Snapchat continue to operate independently, or was it a huge acquihire?
We know what IBM's server business is worth. Snapchat's valuation is just speculation.
Well this estimate http://techcrunch.com/2013/11/19/how-many-users-does-snapcha... is that snapchat probably has at least 10M users. So let's say you wanted a 10% return on your $3B value, you would have to generate $30 in net income per user per year ($300M). If you charge a 'membership' fee of $3/month [1] that gives you $360M a year, leaving $60M/year (or $5M / month "burn" rate).
So would people pay that? I don't know. But it would be the sort of math you would go through evaluating that deal.
To evaluate the server deal you have to look at how many units you think you are going to ship, what your COGS are on them, and your gross margin. You can't really give someone 'free server' for a year because you have money sunk into building it and shipping it.
Further your revenue probably doesn't change if 100 people use a server or 1000 people do.
My point remains that it is not possible to compare 'goods' economy companies with 'info' economy companies.
[1] [Edit: added the RPM rates] Conversely, in advertising terms with 400M snaps per day you would need a RPM of $2.50 to generate $360M/year in revenues.
I highly doubt SnapChat's audience of majority less than 18-year-old population (with most in their early teens) are going to pay $30 a year for a way to send auto-deleting pictures to each other. Especially when there are numerous other free multimedia messaging apps. Getting even 1% of that audience to pay would be impressive.
An RPM of $2.50 is also equally unrealistic for an audience of the mostly non-credit-card holding teen demographic, even more so when they're looking at the autoexpiring content for mere seconds before moving onto reply. Not only that but I'd bet a lot of those snaps per day come from a small subset of the 10M users.
So lets say you take it as a given that snapchat is mostly teens. They look at their snapchats, there is a way to know they have seen them. Lets say you are the GAP and you want to get the latest "look" out there, so you pay SnapChat $.05 every time Snapchat shows a Snap of someone in the "look". Snapchat has to show 50 "Gap" snaps in every 1,000 to make $2.50 per thousand. Typical user will see them on one in 20 'snaps', if the average really is 30 snaps looked at in a day, that is one per day.
I'm not saying you are wrong, what I'm saying is that I can imagine how they would make it profitable should they need to.
What I read out of your comment is that though comparing both kinds of companies is invalid, valuations on information economy companies is at present nonsensical at best.
To be fair, the lower-end of IBM's server business is much like dell; they don't actually manufacture any of the complex bits, they just sell them. Your CPU is made my intel, your ram by Samsung and your raid chipset by LSI, just like if you bought a SuperMicro; In fact, it wouldn't surprise me at all if SuperMicro did more of the board layout work in-house than IBM or dell.
That said, the IBM has... much more market share than I thought in the server market[1] so even if it's mostly a sales game, it's not a small sales game.
"IBM's System z mainframe running z/OS experienced its third consecutive quarter of growth, increasing revenue 9.9% year over year to $1.2 billion, representing 9.8% of all server revenue in 2Q13."[0]
IBM makes some big systems. To me, it's not terribly surprising they'd be willing to part with their lower-end units. Mainframes are where the money is for IBM.
>IBM makes some big systems. To me, it's not terribly surprising they'd be willing to part with their lower-end units. Mainframes are where the money is for IBM.
Yup. even if that's only 10% of their revenue, I bet it's a lot more of their profit. Margins on assembling servers are driven down by massive competition, and by the fact that it's really difficult to 'differentiate' x86; your product is the same microchips as the competition on very similar boards in very similar metal boxes. (Which isn't to say the margins are zero, it's just that the customer has a lot more negotiation ammo. Your sales person has to work a lot harder.)
This situation is very good for the consumer, of course; they can reasonably play one supplier off of five. But it isn't as great for the suppliers.
The value is probably closer to reality. Don't know what is Snapchat really, but other hip online whatever (instagram, tumblr, facebook, ...) are insanely overvalued for some weird reason.
Revenue matters, but the valuation is driven by the amount of profit. Margin in the server business must be very low (5%) and hence the valuation is a multiple of profit and not revenue.
I should have qualified that number right from the beginning as a back-of-the envelope estimation:
If we assume a 10x multiple to profit and a 5bn revenue, it results in 5.4% margin.
If we just say it was a 8x multiple, then it is 6.75%
It goes to 7.7% margin if we make the multiple to be 7x
I thought Marc Andreessen's take was pretty plausible:
"""The bull case on Snapchat is that there's a company in China called Tencent that's worth $100 billion.
And Tencent is worth $100 billion because it takes its messaging services on a smartphone and then wraps them in a wide range of services—things like gaming and social networking and emojis, and video chat—and then charges for all these add-on services.
And it has been one of the most successful technology companies of all time and is worth literally $100 billion on the Hong Kong Stock Exchange.
Maybe that's [CEO Evan Spiegel's ] plan. Maybe Evan's plan is to transplant the Tencent business model into the U.S., which nobody has actually been able to do yet."""
IBM is already IBM, and they're in a market with diminishing margins. Snapchat... Who knows?
Consider IBM is lucky to fool Lenovo into it. It puzzles me what's in the world has Lenovo been thinking to spend that much money on that. Different from thinkpad, x86 server business is already doomed. Might Lenovo see a private data center future than public cloud dominance?
I believe they are referring to a shift to cloud-based servers that usually aren't stock IBM/HP/Dell, etc... machines, but rather custom builds for the cloud.
I wouldn't go so far as to say doomed, but it will be a shrinking business until is his a steady level.
Lenovo has done a pretty good job with the PC/workstation side of IBM that it bought a few years ago. There's no reason to think that they wouldn't do just as well with the servers. Just because IBM doesn't want to spend time for the small (to them) profit in servers doesn't mean that there isn't some real money to be made in that market.
We use computers to help us solve so many more problems today then we ever have before and we have much higher expectations of IT-system today. So, the metal scraps used for this keeps piling up in data centres all over the world.
Anecdotal observation: Many of my clients avoids using cloud services often cited reasons: cost and worries over ownership of data.
Based on the my observations my prediction is that traditional server vendors will keep on growing their business for many years to come but it's very likely that cloud services such as PaS/IaS will grow at faster pace ...
The question is what is the longer term stability and volatility of that value? In both cases. Also, how much of that value is perceived and how much is calculated.
Snapchat is better than IBM's entire lower-end server business. I know this is not a popular opinion, but I think what Snapchat has done is spectacular and what IBM has done is pretty meh.
>Walk in to any datacenter. HP and Dell absolutely dominate. Third place is Sun. Fourth is Supermicro.
This is also what I thought. (though, places I've worked, ODMs and supermicros dominated, followed by dell, with hp dead last, but yeah, the quote from IBM never even made it to technical evaluation where I would see it.)
However, I went looking for a source[1] before I posted further up this thread. Apparently, IBM sells more servers than dell or hp (but not more than both put together)
Hm. reading further, I see numbers between 10% and 30% of IBM's server revenues being the high-end stuff they are keeping. So that could bump them below both dell and HP, in terms of just x86 servers, but even knocking 1/3rd off, they still sell a lot more x86 than I thought.
Snapchat is an entertainment product. It could go away tomorrow and the world would be just fine. On the other hand, losing all our server products would be catastrophic. Fortunately, this will never happen because servers are important. Should they become scarce, they would quickly become a very lucrative business resulting in an increasing supply.
IBMs servers may not be as good as the competition, but to compare them to an entertainment product is silly.
That's ridiculous - you just said "Snapchat is an entertainment product, it could go away tomorrow and the world would be just fine" - IBM's servers could go away tomorrow and the world would ALSO be just fine - unless you LITERALLY mean they disappear without time to replace or back them up, but I don't think that's your point.
If ALL Entertainment products were gone tomorrow, the world would NOT be just fine it would be SHIT. Just like if ALL servers went away, which is what you jumped to.
Snapchat, incidentally, is not an entertainment product anymore than texting is an entertainment product. It's an entertaining communication product.
You can easily replace an IBM server with any other comparable x86 machine. You can't easily replace Snapchat and the user networks it hosts with another similar service.
My point is that as a class of product, Snapchat could disappear and not be replaced and no critical infrastructure would halt nor any innovation or science be stopped. At worst you would have some grumpy people.
It's silly to compare this to a product class that is crucial to our society and claim that it is better. The relative worth of one server to another is one thing, but the class of server products is infinitely more important than the class social picture sharing products.
Would you also say Facebook could disappear tomorrow without "any innovation or science be stopped" ? That seems like a silly way of determining if something has value or not.
I'm not immersed in either business but I think you're making your argument too black-and-white. Snapchat is doing something valuable (I don't exactly know what) but I do not think it's better than what IBM is doing, IBM has been a powerful innovator in the computing industry for a long time and there's a lot of infrastructure powered by IBM's technology, even indirectly. I'm sure Snapchat is indirectly influenced by IBM - so writing either one off as better or worse is silly I think.
Different? Definitely. Providing value in totally different but important wasy? I'm sure. Again, I don't know either business in or out so these are more musings than battle-won opinions.
China is seen as aggressor in Cyberwar, Chinese hard- and software is accused of having security problems, there are lots of discussions about the more aggressive role of China in Asia, the US has a huge trade deficit with China, China is accused of spying, ...
But the US continues to sell its companies and its business to China and imports stuff from there more and more.
Does the US have an idea what to do to balance the relationship - besides sending the Navy or let bomber airplanes fly over disputed areas?
The US government can't reject them for "we don't like that country" reasons, because that's outside of the scope of its regulatory powers. Regulatory approval of acquisitions is based on competition considerations, not trade war considerations. If they rejected a deal for improper reasons, they'd get sued, and they'd lose.
The draft report by the US House Intelligence Committee, obtained by AFP, said an investigation has concluded that the two firms "cannot be trusted" to be free of influence from Beijing and could be used to undermine US security.
It said US authorities "must block acquisitions, takeovers or mergers involving Huawei and ZTE given the threat to US national security interests".
The panel launched its probe over concerns that China could use the fast-growing firms for economic or military espionage, or cyber attacks.
Is this really the case in the US? Because in Canada, there have been numerous cases of the Canadian government vetoing purchases by foreign companies in the name of protecting Canadian interests and security (e.g. MDA selling to an American aerospace firm, Pot Ash Corp, BlackBerry to Lenovo, etc.)
Or even the case of SEC approval or EU approval for major acquisitions.
I'm guessing there are some national security rules too (and possibly some other specific rules), but the point is that they can't just say, "we don't like China so they can't buy our companies". The government simply hasn't been given that power.
What I'm pointing out though is that their point about "national security" really came down to "we don't trust China"/"we don't trust america". And it passed through Parliament fine because it pretty much had the support of Canadians.
You're right that the legislature can pass any law they want; I was just talking about the executive branch's authority to veto deals directly. I didn't think that--at least in the US--there were instances in which Congress had actually done passed a law like that, and wasn't considering that a relevant possibility. But see Galaxity's comment below refuting that; so I'm withdrawing my argument.
Well the Dubai Ports World issue would seem to imply otherwise. Dubai Ports World was trying to buy Us port management companies. After the executive branch approved it uproar caused congress/House Appropriations Committee to actually vote an amendment to block the deal. DPW eventually had to sell the US operations to an American group (they acquired the us companies through the purchase of a British company). The government wasn't sued over it. So it seems the government certainly can block purchases it doesn't like.
"The US" isn't selling anything as "The US" owns relatively few companies. An international conglomerate, with headquartered in the US, is selling of a small part of its business. It isn't up to IBM to unilaterally act against its own business interest to try to uphold US security policy.
What's irritating to me is that many of the people who claim to be pro-national security and defense cheerlead the whole process of outsourcing our sovereignty piecemeal to China.
Many American conservatives, arguably the bulk of the mainstream conservative party, have elevated globalism above national independence by embracing libertarian ideas about the role of national governments with respect to international commerce. At one time, conservatives favored reducing unnecessary burdens on international trade, such as tariffs, as a means to the end of greater national prosperity. Today, they quite often deny the very legitimacy of the national government exercising its sovereign powers to manage or limit trade to maximize national prosperity. This represents a fundamental change in thinking with tremendous implications in light of the continued growth of international corporations.
American conservatives are not a monolithic bloc. The initial post-New Deal conservative movement was made by welding together three different groups: traditionalists (social conservatives), libertarians, and anti-communists (national security hawks). This was done mostly in the pages of The National Review, and the ideological bricolage was performed not by Buckley but by another editor, Frank S. Meyer. Check out the book: Kevin J. Smant, Principles and Heresies: Frank S. Meyer and the Shaping of the American Conservative Movement (2002).
Today, business conservatives are differentiable from national security hawks who are differentiable from the Christian right who are in turn differentiable from the Tea Party. National security hawks concerned about China don't always win over business conservatives, and vice versa. But it's a mistake to think of "American conservatives" as a group lacking in internal political diversity.
I didn't say conservatives were a monolithic bloc, which is why I started my post with: "Many American conservatives..." That said, your description suggests brighter lines than exist in practice. I'd say the mainstream of American conservatives are both pro-business but also very concerned with maintaining American power, prosperity, influence, and culture. Heck, a lot of those people are quite religious, too. And that amalgam certainly defines the rhetoric of conservatives in the mainstream, especially as you drill down from national to state-level. The question for those people is: what happens when the interests of trans-national corporations are not aligned with the interests of maintaining American power, prosperity, influence, and culture? Historically, they haven't had to grapple with this question, because within the theory of their worldview, what was good for say IBM was good for America. A bigger, stronger IBM only meant more jobs for Americans and more returns for American shareholders. Trans-national corporations overturn these established assumptions.
No they don't, they simply don't believe it's useful in this particular case. American conservatives are happy to support tariffs when it protects their constituents - mostly agricultural and other assorted small business interests.
I really do wish they took the humanist view you describe rather than the tribalist one you promote, but they don't.
Those are the exception, rather than the rule (as a result of the peculiar political power of farming interests, not just in the U.S. but everyone where in the world). Conservatives have embraced business practices that lead to de-industrialization and outsourcing. This has been the result of confusing the means with the ends. Historically, pro-business policies have been a means to the end of greater internal prosperity. But as businesses cross national boundaries, those means are no longer consistent with the stated ends. Policies that favor transnational corporations, even if they might lead to more prosperity at the global level, aren't necessarily those that will maximize prosperity within America.
What world are you living in? There has been no deindustrialization - the US manufactures more than it ever did in the past.
The primary opponents of free trade in labor are conservatives (the laborers likely to be imported are likely to vote against them). Republicans don't generally favor protectionism for industries full of unionized Democrats who vote and mobilize against them. That's not the same thing as opposing protectionism.
Bush was a protectionist, as was Romney, according to both their supporters and detractors.
Today, they quite often deny the very legitimacy of the national government exercising its sovereign powers to manage or limit trade to maximize national prosperity. This represents a fundamental change in thinking with tremendous implications in light of the continued growth of international corporations.
And that's a good thing. We don't need governments mucking about, artificially distorting markets with their heavy-handed intervention. Look at where that's gotten us in the past.
National independence? Who cares, "nations" are an outdated idea anyway. I don't want "national prosperity", I want "everybody prosperity" with no regards for where in the world you live and work.
You're entitled to your opinion, but it's a distinctly radical rather than conservative one. And that was the point of my post: to point out the inconsistency in purporting to believe in national independence while embracing radical libertarian and globalist ideas about international markets. Conservatives don't purport to believe that "nations are outdated" and that "everybody prosperity" is more important than "American prosperity."
You're entitled to your opinion, but it's a distinctly radical rather than conservative one.
Yeah, I have no use for conservatives personally.
And that was the point of my post: to point out the inconsistency in purporting to believe in national independence while embracing radical libertarian and globalist ideas about international markets.
Fair enough. I thought you were saying something else.
When we (Sanmina) owned the manufacturing contract for X-series servers we built them in Mexico and Hungary. When we sold the manufacturing contract for IBM PCs (Netvista), laptops (Thinkpads), and X-series servers to Foxconn & Lenovo in 2008, Lenovo was manufacturing in Mexico & China and Foxconn in Hungary (and probably elsewhere). No one has built any PCs or servers in the US since IBM essentially divested themselves of their huge presence in Research Triangle Park. Dell used to manufacture PCs in the US but moved the last of their stuff overseas in 2010. I'm not sure if there is any HP manufacturing in the US, but I suspect not. Dell, HP, Foxconn, Lenovo, Flextronics, and Sanmina all have a large presence in Jalisco, MX, in and around Guadalajara. ... and in/around Shenzhen, Bangkok, Shanghai, Singapore, ....
The US government will stop deals that they see as "bad" for them. See the canceled buyout of Sourcefire by Checkpoint back in 2006[0][1]. Though, Sourcefire was recently bought by Cisco.
Indeed, though that could very well be that no one else wants to buy it as much as IBM not wanting to sell it. POWER as an architecture seems to have thoroughly lost momentum everywhere except at IBM themselves (the console market dropped it, what remains of PA Semi do ARM based designs in Apple), which is a bad sign. MIPS and SPARC were both here before.
I agree though that's it is a dying architecture and it would surprise me if even Nintendo bothered to use it for their next generation (especially since Dolphin has clearly demonstrated that emulating these PPC chips is viable for backwards compatibility).
Former IBM'er here. Power Systems are not as ubiquitous as you think. Their biggest customers are insurance/banking companies, but that consumer base has been gradually shrinking with organizations migrating to more affordable commodity clouds (Amazon, etc.) and services.
The Power Division within STG has been declining in revenue for at least 6 straight quarters, and employees within that division are first on the list whenever IBM wants to perform a layoff.
IBM no longer has anything to do with embedded PowerPC. That is all Freescale. The lines diverged sometime back in 2005 or 2006. The POWER5, POWER6, and POWER7 are quite a bit different from the PowerPC.
Revenues from the Systems and Technology segment totaled $4.3 billion for the quarter, down 26 percent from the fourth quarter of 2012.
Systems and Technology pre-tax income was $0.2 billion, a decrease of $768 million.
Total systems revenues decreased 25 percent.
Revenues from System z mainframe server products decreased 37 percent compared with the year-ago period.
Total delivery of System z computing power, as measured in MIPS (millions of instructions per second), decreased 26 percent versus the prior year.
Revenues from Power Systems decreased 31 percent compared with the 2012 period.
Revenues from System x decreased 16 percent.
Revenues from System Storage decreased 13 percent.
Revenues from Microelectronics OEM decreased 33 percent.
Ouch, ouch, ouch! Power Systems includes their extremely neat (architecturally, at least) AS/400 derived System i machines. Wonder how significant the loss in System z MIPS sold is, these machines are bought as much or more for I/O than raw CPU (which is I'm sure particularly expensive with these machines). For example, a lot of database queries/batch operations to get the set of all your credit and/or debit cards that did transactions at Target during the theft period.
To the extent everyone is moving to UNIX(TM) derivatives or using them exclusively in startups (OK, let's not forget Windows too), few learn at school System z and i stuff....
Well, I don't think much of the consulting business, but it's clear they had to do something, especially when pretty much everyone lost out to x86 for "big iron" in classic disruptive innovation style and as this move demonstrates they culturally can't compete in that market.
The System i was folded into the POWER server line along with System x (midrange unix) a few years ago. It seems like they're trying to kill both lines with one stone, sadly.
I could replace half my data center with a POWER box and manage the other half with it. Amazing machine if you ignore licensing...
Sadly, I'm old enough to remember the architectural beauty of the System/38, which is not to say I regard the AS/400 as new fangled rubbish. I treasure my copy of The Silverlake Project.
Like huge swaths of the insurance, banking and healthcare industries. (Current iSeries shop here - we are a ticket printing company) Construction is also a huge shop. In fact, iSeries is SAP's preferred platform, but the SAP Windows install consultants won't tell you that because they make way more money consulting on Windows.
Right, that's not actually surprising to me, I know banks still use mainframes, and I thought it was well-known. Same about airlines, and heavy-duty control systems (say, sewage control for a large city or something) that are likely to be legacy. I was wondering what could be organizations I wouldn't even suspect.
In the grand scheme of IBM's business strategy this makes sense. They sold off their consumer PC market to Lenovo already. The hardware game is not where the big money is. Would you rather be selling relatively cheap hardware or have an army of high end consultants billing out at $250+/hour? You can contract IT infrastructure, application development, BPM, legal and many other services from their professional services division. Want to start an international bank? IBM's financial services and global services will help you out. This is purely just the next step in their evolution to a pure services company with some top notch talent.
IBM still has their usual business of building questionable enterprise applications to fall back on. That or continue building $200-million supercomputers for the NSA. Eh...Sorry, I meant Department of Energy.
It just boggles my mind that a decade and a half after Innovator’s Dilemma and Innovator’s Solution came out, which I’m sure every CEO has read so far, there are still so many companies that repeat every damn mistake in the book. Heck, IBM is actually given as prime example for why big companies fail, with their past failure in the micro-computer market.
I mean look how crazy this is. IBM sells the server business because it’s “not profitable for them”:
“It’s underperforming because of the cost of doing business on IBM’s side,” he said.
But on the other hand, Lenovo wants it because they consider it a profitable business:
“Low-cost servers are the fastest-growing, most attractive area of the server business right now, so this would make sense,”
This was written to the letter in Innovator’s Dilemma – a decade and a half ago – and yet IBM still failed to see it coming. Some companies just deserve to burn. There’s no excuse.
Companies getting disrupted need to adjust their cost structures, if not they need to create entirely new business spin-offs that can act as independent businesses. This was discussed in Innovator's Solution. It would've given them the ability to actually make money off of this "fast growing sector" like Lenovo calls it. But because of their current cost structures, they can't do it now.
They are now moving up-market to software and services, and letting Lenovo, a down(er)-market player take this business away from them. What do they think will happen in 5-10 years? Lenovo (or some other PC player/new server player, currently) will move up-market yet again, and do what IBM does cheaper, while still being very profitable, while IBM will be forced to sell that business, too. The solution to disruption isn't to run away (at least not in the long-term).
This will happen to Intel, too, within 2-3 years. Right now, Intel makes 70 percent of its revenue from ~$200 chips in the PC market. In 2, maybe 3 years at most, that business will be completely commoditized, as ARM chips reach similar performance levels at much low cost.
Intel has tried, with little success, to enter the mobile market, but right now they aren't making any money, and are in fact losing money with Atom chips, especially since they're paying OEMs to buy their chips [1] (anti-competitive? You tell me).
Trying to succeed with Atom is sort of the right solution, but if they aren't going to make money with their own cost structures, then it's going to fail. Trying to succeed with Core chips by lowering power consumption is a losing proposition because those chips are much more expensive.
I don't think you have a good understand of IBM's business.
IBM is divesting its low margin hardware business. Currently, IBM's gross profit margin is 51% driven mainly by software sales, services, and global finance. IBM wants to jettison lower margin business units (margins have been falling in hardware for years, it's a race to the bottom) and instead focus resources on the more profitable business units.
"They are now moving up-market to software and services..."
IBM is not moving up-market, they've been "up market" for many many years. Low margin hardware revenue has been quite behind software and services for many years. IBM has not failed to see it, instead, this is a move anybody paying attention has known was coming for years.
I don't think you have a good understanding of the Innovator's Dilemma. The research shows very clearly that companies like Lenovo will continue to eat away at IBM's lowest margin business, whatever it is, until IBM is gone has nowhere to go.
Look at the steel mills. They did the same exact thing IBM is doing now. Everyone applauded the massive steel mills the way that you are applauding IBM. And 100% of those mills are now out of business
The "business machines" in the name did not originally refer to computers. It referred to tabulating machines. The market for tabulating machines died, and was replaced by computers. IBM got out of tabulating machines, and into computers.
IBM is not in the business of selling computers. IBM is in the business of solving problems for other businesses. Over the past 100 years, how you solve problems for other businesses has changed, and IBM has changed along with it. Don't confuse the thing sold for the actual business.
Disclaimer: I work for IBM, but do not speak for it.
You are starting off with the wrong assumption that IBM will sit on its hands and just pay their bills with the extra 2.3B (and more from increased efficiency). Just look around. You are at a site which is frequented with brilliant minds teeming with innovative ideas. IBM is budding new business in very promising areas, and they want to focus on these. Just cut them some slack in their decision, because they are the ones who have been in the business in person, they see the whole picture, and they have the neck in the game.
(Disclaimer: I work for IBM, but these are my personal thoughts, and do not reflect company position.)
Heck, IBM is actually given as prime example for why big companies fail, with their past failure in the micro-computer market.
Actually, IBM's PC business was one of the few case studies in "Innovator's Dilemma" where the big incumbent got it right. [1] They spun off an autonomous division to create the PC, and put as much distance between it and the existing org as they could -- both physically (down in Florida, with IBM HQ in New York) and organizationally.
Not to malign your overall point though. I agree, not only does the IBM of today fail to engage in offensive product disruption like the PC, they don't even seem interested in defending against disruption anymore. Their strategy with the Thinkpad line, and now their x86 servers, seems to be to sell before the disruption fully kicks in and there's nothing left.
Defending against disruption is really expensive, maybe that's the lesson here.
One company wants 50% profit margins, and the other is okay with 20%. The same business may be great for one and something that is dragging down the other.
I imagine that when you are already making Intel based laptops and workstation, adding low end Intel based servers to your production line has a lower marginal cost than it would for a company that only makes Intel servers.
The problem is that they are selling the business instead of adjusting it's structure to bring it inline with the levels of profits they are confortable with.
The profits fell over the years because of 'disruptors', IBM could't accept the losses so they decided to sell. It happened 10 years ago in the PC, now it's happening with low end servers, maybe in 10 years high end servers are not going to be profitable for IBM any more and they are going to get rid of them.
If ARM are going to be a long-term threat to Intels $200/chip market, would AMD not be the canary in the mine? Or does moving out of the fab business like AMD make that not-so?
> They are now moving up-market to software and services, and letting Lenovo, a down(er)-market player take this business away from them.
This suits IBM fine, and they have been doing this for the past decade. They would prefer to focus on solving high-margin business intelligence and integration problems for customers. Any h/w business they retain is the more specialist stuff in support of that.
IBM's big interests in the future are smart data analytics and the IoT. Expect to see everything they do geared towards that.
>This will happen to Intel, too, within 2-3 years. ...In 2, maybe 3 years at most, that business will be completely commoditized, as ARM chips reach similar performance levels at much low cost.
Intel continues to be leader in tech process, always being a generation ahead of competition. While they can sustain this advantage, they will produce better laptop/desktop/server CPUs in terms of power efficiency.
Having worked at IBM I know they will do anything to make the quarter numbers look good. This $2.3bn will help for some time but I wonder what they will sell next.
I've been happy with my Lenovos.
We had a bunch of T420s at my last employer, and they were solid.
Likewise, my personal X220 has held up fantastically.
Some of the new laptops follow annoying market trends (bastardized keyboards, lack of IPS screens, hard to repair, lack of connectivity options), but every other brand is doing that too.
> Lenovo said it would settle the transaction with $2 billion in cash and the balance in its own Hong Kong-listed shares.
Now this is the interesting part of the article. This means that IBM will own $300 million in Lenovo stock. Sure, it may dump them for cash, but it now has a stake in Lenovo, the company that 'has overtaken HP and Dell to become the world’s biggest manufacturer of PCs.'
Is the market for low end servers still viable ? The alternative to a low end server is the cloud server and it is much better option financially.
I think we would see a trend where companies would sell hosted infrastructure solutions ( e.g. MS Exchange, sharepoint etc. , Databases , firewall, etc.) and throw in a cluster of low end servers for free.
We're talking hardware here - whether you own it yourself, or it is "in the cloud", there is still a metal box somewhere behind it all, so there is still a market for those metal boxes.
Yes, but the biggest cloud providers build their own hardware. Google, Facebook, Backblaze, and more to come I'm sure. Intel and Micron and Foxconn will remain happy, but vendors of turnkey servers perhaps less so.
My point was that there may be no viable market for the metal; there may be a very small market of service providers who might might require made to order servers or may be even build their own like here http://www.opencompute.org/ . There won't be any reasonable margins left in the low end server market to sustain a hardware only company
The existing market of SMBs and enterprises for "the metal" is going away.
Hardly. HP and Dell cover most of the same ground, from laptops to mid-size servers. And the consumer space has Apple of course, and the enterpise has...SuperMicro? It has been more or less like this for some time now.
SuperMicro doesn't sell pre-built machines. However, in the case of our small company, they have received the lion's share of the money we spent on high performance hardware in the past couple years, as we no longer buy pre-built machines for our cluster. We buy our desktops and laptops from Dell, though.
Same here. I looked at HP, IBM and Dell but the first two make you go through awful 3rd party vendors that seem stuck in the 90s and while I liked what Dell had to offer it was just too expensive unless you NEED the prosupport in which case it's not a terrible deal.
And if that trend becomes wide spread there will be vendors that will spring up providing those servers. Most businesses can't afford the expense of designing and creating their own server lines. I just don't see the generic server hardware going away soon, more specialized boards and designs may pop up but nothing stops vendors from providing them.
Also there's a lot of money in the support of the servers sold.
Well the article mentioned 7,500 employees so that has to be close to the billion dollar range for salary/benefit reduction. So that is one way to go after $20 eps...
IBM does enterprise software and professional services. It's much more profitable than low end hardware. They are one of the largest software companies in the world. A lot of consumers just don't get as much exposure to the brand to realize how big it is. If you've ever worked in the corporate world you would know.
I have worked in the corporate world for a decade, and the only things I have seen IBM used for were servers (x86 and Z Series). Not once has someone said, hey let's get some software from IBM. Now we'll get our servers from Lenovo. I hope their excellent industrial design doesn't suffer (as it did a bit in the ThinkPad line).
They bring in close to $30b in revenue each quarter and only a small portion of that is hardware. It's quite possible you do use IBM software and don't know it because you know it as another brand they bought or you work with a competing vendor and really don't have any IBM software. It's also possible you aren't in an enterprise shop.
When you log onto your corporate intranet, you may not realize how much of what you see if powered by IBM. They sell a lot of big software packages that cost gobs of money and are often used across an entire corporation, so perhaps you weren't in the position to make the purchasing decision. For example, tons of companies used Lotus Notes for email (now Connections), there are loads of Websphere Portal software add-ons, and they're really into business process management and collaboration software these days (Facebook and Dropbox and wikis and whatnot across the organization).
Honestly, for years watching them sell stuff and gradually back out it's looked like they were dying. Now it's very clear that they are making a gigantic bet on Watson and Watson like technologies. That's exciting.
unfortunately, this is exactly what is happening. I started at IBM's server group (P-Series) and when I left (right around when Sam Palmisano retired) there was a slow move towards changing from a development company to acquisition company. Sad to see it decay.. hopefully they have a plan.
So much butt hurt here...x86 is a low margin commodity with too many companies out there racing to the bottom. I for one applaud to IBM's decision to evolve their business.
