
Lenovo Agrees to Buy IBM Server Business for $2.3 Billion - rickdale
http://dealbook.nytimes.com/2014/01/23/lenovo-buys-ibm-server-business-for-2-3-billion/
======
matthewmacleod
Fascinating that IBM's entire lower-end server business is worth about two
thirds of Snapchat.

~~~
coliveira
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.

~~~
chaz
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.

[http://www.techinasia.com/line-app-
financials-q3-2013-sees-r...](http://www.techinasia.com/line-app-
financials-q3-2013-sees-revenue-194-million-bucks/)

~~~
w1ntermute
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.

~~~
jasonlotito
Stickers are as crazy as hats.

~~~
jfim
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].

[1] [http://steamdb.info/blog/43/](http://steamdb.info/blog/43/)

[2] [http://ca.ign.com/articles/2013/04/16/how-to-make-a-
living-s...](http://ca.ign.com/articles/2013/04/16/how-to-make-a-living-
selling-virtual-hats)

------
lispm
The US continues to puzzle me.

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?

[http://www.reuters.com/article/2013/11/27/us-china-
defense-u...](http://www.reuters.com/article/2013/11/27/us-china-defense-usa-
idUSBRE9AP0X320131127)

Note the US government needs to approve such deals:

[http://www.bloomberg.com/news/2013-02-14/make-it-easier-
for-...](http://www.bloomberg.com/news/2013-02-14/make-it-easier-for-china-to-
buy-u-s-businesses.html)

~~~
rayiner
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.

~~~
Gracana
They do?

~~~
rayiner
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.

~~~
mindcrime
_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.

~~~
rayiner
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."

~~~
mindcrime
_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.

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porlw
Note, only their low-end x86 business, not the POWER servers.

~~~
cones688
Or even more profitable MainFrame (Z Series) which is still growing

~~~
Shivetya
Z for mainframe, I for iSeries (think AS/400 - but now these machines are
huge), and P for AIX.

the installed number of those three is immense and in many organizations most
people would never suspect.

~~~
anatoly
Like what organizations for example?

~~~
hga
Look at, for example, Jack Henry & Associates
[http://en.wikipedia.org/wiki/Jack_Henry_%26_Associates](http://en.wikipedia.org/wiki/Jack_Henry_%26_Associates)

Their core banking stuff, which powers the $600 million capitalization local
bank I use, is System i (AS/400) based as I understand it.

~~~
anatoly
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.

~~~
zmonkeyz
I believe O'Reilly auto parts has an AS/400 at each of it's stores.

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ktavera
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.

~~~
iends
I'm not sure IBM wants to be a pure services company, in fact, software sales
is a high margin business that makes IBM a huge chunk of change.

------
balozi
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.

------
afhsfsfdsss88
International [used to make]Business Machines

~~~
psaintla
They should just be International Patenting Machine

~~~
bigdubs
International Consulting Machine

~~~
eonil
International Virtual Machine

------
wcchandler
Here's the press release which gives a bit more information:
[http://www-03.ibm.com/press/us/en/pressrelease/43016.wss](http://www-03.ibm.com/press/us/en/pressrelease/43016.wss)

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chrisgd
But not in time for IBM to include the one-time gain to offset the one-time
losses in the earnings report this week.

~~~
iends
Surely the deal could have been announced earlier in the week, if they wanted
it to. Some other reason caused them to wait to announce it.

~~~
gtirloni
They are saving it for the next quarters.

They will run out of things to sell soon enough, IMHO.

------
mtgx
I'll repost my comment from TheVerge:

 _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,”

[http://www.bloomberg.com/news/2013-04-18/ibm-said-to-be-
in-t...](http://www.bloomberg.com/news/2013-04-18/ibm-said-to-be-in-talks-to-
sell-low-end-server-unit-to-lenovo.html)

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.

[1] -
[http://www.computerworld.com/s/article/9245530/How_Intel_is_...](http://www.computerworld.com/s/article/9245530/How_Intel_is_buying_a_piece_of_the_tablet_market)

~~~
smackfu
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.

~~~
dagw
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.

~~~
lmz
They already make servers:
[http://shop.lenovo.com/us/en/servers/](http://shop.lenovo.com/us/en/servers/)

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mariusz79
Is that because 2.3B was not enough to buy Nest? :)

------
gtirloni
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.

------
mindslight
Too bad IBM didn't trade it and get Thinkpad back.

~~~
scott_karana
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.

------
daniel-levin
> 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.'

------
manishsharan
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.

~~~
codingdave
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.

~~~
jzwinck
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.

------
dandare
It immediately reminded me of the mini-mills example from Clayton
Christensen's amazing talk on Disruptive Innovation
[http://www.youtube.com/watch?v=B5FxFfymI4g](http://www.youtube.com/watch?v=B5FxFfymI4g)

------
Oculus
Isn't Lenovo beginning to encroach into monopoly territory? I keep hearing how
they are purchasing large chunks of the current PC market.

~~~
jzwinck
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.

~~~
vonmoltke
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.

~~~
shiftpgdn
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.

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chiph
They were dumb to get rid of the "Netfinity" branding. And even dumber to sell
the division. $20 EPS, here we come!

~~~
johnward
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...

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Grue3
What does IBM even do these days? It's like Nokia selling their mobile phone
division to Microsoft.

~~~
johnward
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.

~~~
jzwinck
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).

~~~
johnward
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.

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kamilszybalski
After IBM acquired softlayer technologies, this is a natural move.

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caniszczyk
kind of fun watching IBM just disintegrate in slow motion

~~~
Nelson69
Well, they're changing...

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.

------
midas007
So the bazillion dollar question is: when will there be more open source
hardware in commodifying desktop and low-end servers businesses?

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soDotNet
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.

