IBM System x GM Talks About The Future With Lenovo
It has been almost a year since the first rumors surfaced that IBM was looking to sell off its X86 server business and that Lenovo Group emerged as the front runner. The $2.3 billion deal was announced two weeks ago, and customers and competitors alike have had time to absorb the news and start pondering the consequences.
Given the politics and national security issues involved, it will probably take some time before Lenovo closes the acquisition. But with Lenovo having a strong presence in North Carolina and being committed to expanding that presence in the wake of the IBM deal, it stands to reason that US government regulators will eventually approve the sale, much as they did the $1.25 billion deal in 2005 when Lenovo acquired Big Blue's PC business. The fact that Lenovo has actually been a licensee of a number of System x designs since 2008, when the two companies first formed a server partnership, will no doubt help IBM's and Lenovo's cause. So will the fact that Google will be arguing that Lenovo should be allowed to buy its Motorola smartphone business at the same time as IBM is arguing that Lenovo should be able to buy its X86 server unit.
The System x Division generates around $5 billion a year in revenues from System x rack and tower machines, BladeSystem blade servers, PureSystem converged systems, and iDataPlex and NextScale hyperscale machinery – a portfolio that will move over to Lenovo once the deal is done. To get a better sense of how IBM's System x business meshes with the ThinkServer business of Lenovo and how current System x customers will be served in the wake of the acquisition, EnterpriseTech sat down with Adalio Sanchez, the general manager of the System x Division, to talk about the details of the deal and what it means for enterprise customers and the partners that serve them.
Timothy Prickett Morgan: There has been a lot of speculation about why IBM sold off the X86 server business. Can you explain the reasoning behind the deal with Lenovo?
Adalio Sanchez: The reasoning is actually very simple. IBM continues to evolve its business models, as it has throughout its hundred year history. It is very good at looking at inflection points in the marketplace and looking at how do we continue to evolve. And when you look at the overall X86 server space, a lot is changing with the advent of cloud and so forth. IBM will continue to development the enterprise systems with very strong backs as well as to continue to participate in the X86 space by way of clouds through the SoftLayer acquisition.
When you look at the X86 space, as you know we have been a leader in innovating, as evidenced with what we did with PureSystems and more recently two weeks ago with the System X6. But there is a dynamic in the marketplace that in order to be competitive, it is getting to be more and more challenging and you need more scale and you need more flexibility. The huge scale and capacity and flexibility that Lenovo can bring can really make this business the best that it can be.
TPM: One of my observations watching this over the past few years is that vendors almost need to stay in the PC business to get the volume chip deals with Intel and to a lesser extent AMD to help their server businesses. Is there some credibility to this line of reasoning?
Adalio Sanchez: Clearly, as we move forward, having scale matters, and now with the relationship between IBM and Lenovo, we pick up that scale and IBM continues to be able to get access to superior X86 technology through the collaboration that is part of this deal. And at the same time, we can collectively provide a broader and more robust set of capabilities to our clients and our partners.
TPM: IBM has very long and deep relationships with enterprise customers. What has been the reaction of these large enterprises now that the deal has been known for a couple of weeks? You shared some initial thoughts with me on announcement day, when you had just talked to a few HPC shops and enterprise customers, but you have no doubt talked to many more enterprise customers by now.
Adalio Sanchez: Many of the customers we deal with today are Lenovo customers. Lenovo is supplying to virtually every Fortune 500 company, give or take a few. So in many respects, Lenovo already has a relationship with these large enterprises, and so do we. This is not 2005, when Lenovo was not as well known of an entity as it is today. It is a respected firm and provider in the marketplace.
Once clients know it is Lenovo and that we are committed to their success and that we will transition their business thoughtfully, carefully, in this transaction – and that we will continue to service and support them for five years – that gives them a certain piece of mind. Quite frankly, the reception by large clients has been very, very positive.
As part of the deal, Lenovo has acquired the service and support contracts for the in-scope products. That means they will be responsible for the pricing, offerings, and that kind of thing. The service delivery will be done by IBM for at least five years. The same tech that they know and love today is the one they will have tomorrow. So there is a very smooth transition. And by the way, Lenovo continues to leverage IBM today for support in the PC space today even nine years later. So this is not a new thing. This is an extension of what has been done in the past.
TPM: I assume that there are maybe several thousand large customers who are the dominant buyers of IBM gear such as System z mainframes and Power Systems machines in the world. Who are the large customers for System x gear, and are they a different set of customers?
Adalio Sanchez: The key verticals in the X86 space have been the financial services sector, distribution, and the public sector. There is some concentration in the industrial sector as well.
TPM: Do these customers tend to tie their systems deals together and buy everything all at once, or do they do mainframe upgrades separate from System x and Power Systems acquisitions? Do customers do market basket deals to try to get a better price on things?
Adalio Sanchez: These deals are kind of separate. Most clients today continue to, for obvious reasons, tend to buy products independently. And that is because the applications they run on different systems have needs that are different. If you need more mainframe capacity for CICS applications that is different from a new virtualized environment on System x. Tying different deals together is in the minority, not the majority of the time. That's just not how the sales motion usually works in this space. We do have some open infrastructure offerings, where in some cases it is an enterprise-wide relationship, but quite frankly on the X86 front, we have to compete for every deal. And we do.
Let me offer a few reflections about the deal now that it has been out for a week and a half. I think, by and large, customers understand the value that this transaction brings. We have had numerous calls with our business partners – I just had a call with over 1,000 of them last week – we have reached out to all of our channel distributors and next week we will do more at our PartnerWorld event. I will tell you that the reception has been very positive.
Why? They see a tremendous opportunity going forward. They will see System x be more nimble, as we couple our leadership technologies with Lenovo's excellence in supply chain and efficiency. This will help partners optimize their supply chains and that means more margins for them. Lenovo has been at servers for a while, but they are much more at the low end and we are focused on the midrange and high-end, and when we bring the two portfolios together, partners have more things to sell. The other thing is that Lenovo has a big, big customer base through their PC business, and now they will have an opportunity to work together post the acquisition closure to work with PC clients and sell servers into places where today IBM does not.
Our partners are pretty comfortable with this. It is not our partners who are concerned. I think that increasingly it is our competition react and be a little bit concerned about it.
TPM: How much of the System x business today is being driven by large enterprises and how much by small and medium businesses? In days gone by, IBM used to drive a lot of business through the channel to SMB shops, but for all I know this has changed. What is the shape of the business that Lenovo is buying? Lenovo, for instance, is very much focused on the SMB space in the United States and in Asia with some very large cloud customers in Asia.
Adalio Sanchez: We don't break out all of our customer segmentation, but I can tell you that we are more skewed towards large enterprises. Lenovo is in virtually every Fortune 500 firm around the world today with PCs, and I think the real opportunity going forward is much more tilted to the SMB space as you mention, and this is where the opportunity comes into play with our partners. We have thousands of distributors and high single digit thousands of partners that distribute System x products around the world. We will be able to put more systems through more partners to grow the business. Those partners who sell System x today will have the opportunity to sell System x tomorrow. Our existing business partner contracts upon completion of the deal will transfer to Lenovo.
TPM: On the IBM side, will there still be a System x revenue category for when you resell Lenovo gear? Or will the revenue get booked in a Software Group deal, like the Netezza data warehouse appliances do today, or in Global Services, if it is a service engagement?
Adalio Sanchez: As part of the transaction, there were a number of strategic alliances that were announced. And one of them is that Lenovo becomes a supplier of X86 technology to IBM. As you say, inside of the Netezza appliances as well as in our PureData and PureApplication converged systems, there is System x componentry. That same situation will occur going forward, beyond when the divestiture is closed. System x will remain the premier partner for Software Group. Inside PureSystems, we will continue to sell System x, but they will not be sold as System x any more than they are today.
TPM: I am just trying to get my brain wrapped around the situation where JP Morgan Chase, as a hypothetical example, wants to buy 2,000 server nodes for a new cluster. That's a big IBM account, and it looks like it won't be IBM selling those System x machines, but rather Lenovo.
Adalio Sanchez: Right. Over time, we are still in the process of aligning sales and go-to-market. And there may be some things we can announce later on that. Clearly, the most important thing is a seamless transition.
TPM: IBM's SoftLayer public cloud has used Supermicro servers since it was founded and was still using them to build out its cloud after the acquisition of the company by IBM last year. Is IBM in any way contractually obligated to buy Lenovo servers, either embedded in products like Netezza or for use in the SoftLayer cloud, as part of this deal?
Adalio Sanchez: As I have said, Lenovo becomes an IBM supplier of X86 technology. As you stated, today SoftLayer is not based on System x, but that doesn't mean it will stay that way.
TPM: Well, Lenovo obviously knows a thing or two about building hyperscale infrastructure, and with the NextScale systems, IBM was getting better at it, too.
Adalio Sanchez: Remember this thing: There is an intent for both companies to play in the market together. Think of the alternative. Who else would IBM play with? I will leave it at that. You be the judge.