Lenovo, IBM Sign Licensing Agreement

By licensing IBM's intellectual property, Lenovo is poised to enter the worldwide x86 server market for the first time.

Lenovo has taken its first step toward entering the worldwide x86 server market.

On Jan. 24, Lenovo announced that it would license intellectual property from IBM that will help the company develop and manufacture one- and two-socket x86 servers for the worldwide market. The first of these systems, both rack-mount and tower servers, will hit the streets in about 12 months.

Lenovo, which is based in Raleigh, N.C., has only sold servers in China, where the company was originally founded. This agreement with IBM marks the first time the company has made plans to expand its reach beyond its traditional Chinese base in order to compete worldwide with the likes of Hewlett-Packard and Dell and, to an extent, with IBM.

The market for x86 servers is competitive and involves the biggest names in IT. In the third quarter of 2007, IBM led all other vendors with $3.9 billion in worldwide server sales, according to IDC. HP had a total of $3.7 billion in revenue during that same time period, while Dell and Sun Microsystems also increased their revenue.

Marc Godin, who previously worked with Lenovo's notebook division and is now the vice president and general manager of the new server unit, said the company plans to focuson the small and midsize business market-an area where Lenovo believes it can make serious inroads with these new systems.

"These will be our products with our name on them and we feel we will be able to offer a real value proposition for the small and midsized business space," Godin told eWEEK. "At this time, we are not announcing new products, but this is the first step and a signal that we plan on coming into the market with a broad set of products."

Lenovo and IBM did not divulge many details of the new licensing agreement. Godin said while his company will now have access to some of IBM's intellectual property, Lenovo will manufacture the servers and assemble the systems through its own supply chain. He declined to discuss whether IBM engineers would help in the design and creation of these servers.

For IBM, the agreement allows the company to fulfill a goal of licensing more of its intellectual property to other companies in order to create revenue for itself.

"This is part of IBM's ongoing business strategy to license key technologies to a range of IBM Business Partners to drive innovation in the industry," said a statement on IBM's Web site. "In the case of this deal with Lenovo, it may also help IBM further extend the reach of its x86 servers in the small business segment."

Since Lenovo completed its $1.75 billion deal for IBM's PC division in 2005, the two companies have remained closely tied together. For months after the sale, the IBM logo remained on both ThinkPad notebooks and ThinkCentre desktops. Through Lenovo, IBM still offers some back-end support for the PCs.

In a telephone interview, Godin said the Jan. 24 announcement fulfills the promises Lenovo made to expand beyond the Chinese market when it bought IBM's PC division. In addition to expanding its enterprise reach with servers, Lenovo announced at the International CES that it would enter into the consumer market for the first time with its IdeaPad notebooks and IdeaCentre desktops.

"Everything we are doing is happening in a timely manner and we are taking a step-by-step approach of developing these different business units," Godin said.

Roger Kay, an analyst at Endpoint Technologies Associates, said the deal makes sense for both companies.

By licensing IBM technology, Lenovo will have instant credibility with customers and a solid foundation from which to compete against HP and Dell-a pair of PC vendors that also have extensive server divisions. Lenovo could not enter the worldwide market on its own with the type of servers it sells in China, Kay said.

"It just wouldn't fly, and these companies want assurances that they are getting Tier 1 stuff and Lenovo is not a name in the server business," Kay said. "A lot of this has to do with getting certification and it's easier to do it when you have a system built using IBM's intellectual property."

By concentrating on the SMB market, Lenovo is also avoiding direct competition with IBM's traditional base of large midmarket and enterprise customers. However, Kay said the two companies will compete against each other at some point, because IBM also has a desire to sell more hardware to SMBs.

"There's nothing in the rules to say that they couldn't compete against each other for accounts, and they seem to have created enough flexibility in the agreement in order to reflect the realities on the ground," Kay said.