IBM Ponders Future of System x

With Systems and Technology segment revenues flat in the first quarter, some analysts believe that IBM could be ready to leave the low-end of the x86 server market.

When IBM released its first quarter 2008 financial numbers this week, the company's upbeat report, coupled with Intel's quarterly numbers, signaled that two bellwethers of the IT industry had so far weathered the tumultuous U.S. economy.

While Big Blue's numbers were positive, there were signs that not every division had done as well as others. Within the Systems and Technology segment, revenues hit $4.2 billion, about 7 percent less than the same time last year.

Of particular interest to some analysts was that the company's System x revenues were flat, which lead to a question: Would IBM jettison the low-end of its System x offerings, specifically its one- and two-way systems, and concentrate on its high-end x86 platform offerings and its BladeCenter hardware?

IBM does have a history of cutting away parts of its portfolio-hard disk drives, PCs, printers-that are highly commoditized and where there is little value the company can add to those products. In addition, IBM and Lenovo announced a licensing agreement earlier this year that will allow Lenovo access to IBM technology and allow it to create its own line of one- and two-socket servers.

These developments and the flat revenue from System x both this quarter and in quarters past seems to indicate that IBM might be ready to leave the low-end of the server market-high volume but low margins-to companies such as Hewlett-Packard and Dell.

"IBM has positioned itself to move out of the low-end x86 server business with its partnership with Lenovo in which IBM has granted Lenovo licenses to sell one- and two- way System x servers," wrote Josh Farina, an analyst with Technology Business Research, in a April 17 research note.

"Based on IBM reporting flat System x year-to-year growth in [first quarter 2008] and 31 percent blade growth, IBM's non-blade System x sales declined for a second quarter in a row," Farina added.

That's not to say that IBM will leave the commodity x86 server market altogether.

The company has had success with its BladeCenter systems. IBM and HP control about 75 percent of the worldwide blade market combined. IBM also has a number of multiprocessor (MP) x86 systems that command much higher margins. This is also a segment where the company still adds value, such as its chip sets for its X series architecture, which the company builds into MP systems to work with Intel's high-end Xeon processors.

Charles King, an analyst with Pund-IT Reseach, calculates that IBM has about a 12 or 13 percent share of the low-end x86 server market, and while IBM could one day leave this part of the market behind, he does not expect IBM to make that decision anytime soon.

The overall x86 server market was worth about $7.8 billion in revenue during the fourth quarter of 2007, according to IDC, which means there is still plenty of profit to be made for IBM and other vendors.

"I think within industry standard servers, there are still a lot of discrete markets out there that IBM can reach and the company still remains one of the leaders in the commodity space," said King.

Joe Clabby, an analyst with Clabby Analytics, agreed that IBM can still find value to build into its System x line that should keep it viable for years, such as ASIC (application-specific integrated circuit) that functions as a hypervisor at the hardware level.

"I don't think x is in any trouble of being -commoditized into death,'" Clabby wrote in an email.