IBM/Lenovo: The Real Beneficiaries
By Rob Enderle
March 9th, 2005
Now that the US government has resoundingly approved the IBM-Lenovo deal (which, if rejected, would have required an explanation as to why the flow of technology into China for years suddenly was improper), we get to see the full impact of the deal. Initially, Dell and HP will probably be the greatest beneficiaries, as the two units go through the merger process and seek to address the concerns of long-time IBM customers. But the long term beneficiaries may be Oracle, Microsoft, Intel, VIA, and AMD.
The IBM corporate exposure
IBM is a large holding company that over time has developed an array of highly restrictive rules on the business units it controls. These rules, which have to do with the ill-advised practice of management through massive policies, was largely the cause of the company's near collapse in the 1980s and contributed strongly to the failures of the printing and storage divisions that were spun out earlier. The remaining core units of large systems, software, microelectronics, and services still reside under this oppressive umbrella.
While this was one of the problems that IBM's previous administration, led by Lou Gerstner, had promised to solve, with this divestiture, it is now clear that he and his team largely failed in this effort. This may mean that where the IBM PC division goes, others will have to follow.
Software division
Interestingly, the IBM Software Division has long bridled against these oppressive IBM policies. Decades ago, software engineers refused to wear the white shirt and conservative ties and jackets that were the IBM ‘uniform" of that era. When they found IBM's own centralized services less than responsive, they started their own internal units and remain one of the most independent of the IBM divisions today.
Still, studies done in IBM at the turn of the last decade clearly indicated that IBM could not compete against either Microsoft or Oracle long term. IBM Software has begun to slip behind both Oracle and Microsoft, which have been able to more aggressively acquire companies and technologies.
IBM Software uncharacteristically supports the Open Source movement in general and Linux in particular, which undoubtedly creates massive friction between the unit and many of those at corporate headquarters—the latter are from the old school, which advocates anything but the sharing that is now not only recommended but required.
Due to the string of divestitures, the separation from IBM for IBM software is now once again on the table, particularly given that those who blocked the last separation attempt are gone and the connection between the hardware and software is now even more tenuous than before.
It shouldn't be hard for either Oracle or Microsoft to tell this story and point to a string of actions by IBM's current administration that would result in the sale of the unit. Software at this level is a long-term commitment. Many still remember IBM's broken promises on OS/2, some of which were made after they had decided to discontinue the offering, and will recall that while they were negotiating the Lenovo deal they remained "committed" to the PC Division.
Trust is IBM's greatest asset; breaking that trust relationship has become much easier for companies whose ownership isn't in question. Both Oracle and Microsoft lead that list and may now benefit if they can act on this obvious opportunity.
IBM Microelectronics
IBM Microelectronics has long been a powerhouse of intellectual property and relative inefficiency. They are known for building products that are very competitive, yet they are unable to do so at a price or scale needed to make their partners successful. They are one of the reasons that Transmeta stumbled and their earlier x86 parts were disastrous for those who used them. Currently, Apple is clearly struggling with their inability to meet their needs.
They do dominate gaming, but this is a market Intel actually gave up because it was unprofitable. Gaming hardware is sold at a significant loss, putting massive pressure on those who build the core components, and most have found the business exceedingly painful and unprofitable as a result.
IBM, along with several others, has now developed a new processor that on paper could actually challenge Intel. However, as noted, past efforts have largely failed and the marketing efforts that will now ramp against both the new Lenovo and the old IBM will focus key decision-makers on the problems surrounding both companies.
Of the units, IBM Microelectronics is the obvious next divestiture; this should make all of those already nervous about their relationship with this unit even more nervous. The clear beneficiary of this "nervousness" will be Intel.
For Intel, the sword cuts both ways
This is not all good news for Intel, however. The new Lenovo retains the IBM brand and will likely retain the majority of IBM customers. The old Lenovo has strong relationships with AMD and VIA, both of which have been struggling to penetrate the world corporate market. Given that AMD and VIA just strengthened their partnership and that VIA has promised to come up with a stable platform offering to rival Intel's at a more aggressive price, the opportunity for incursion into what has so far been a near monopoly has never been greater. In addition, the recent anti-trust action against Intel by AMD in Japan has started to bear fruit for AMD, limiting Intel's ability to respond traditionally to this threat. The combination could easily create a strong beachhead for both companies on the critical corporate desktop and show the way for other firms to follow IBM/Lenovo's lead.
HP is already moving in a similar direction with AMD; this could significantly accelerate their own efforts. For Intel, these clearly will be "interesting" times.
Impact of IBM divestitures understated
For each of IBM's divestitures, the impact at the time of the deal was understated. Through Dell, Lexmark became a real competitor for HP. The iPod line owes its existence to the aggressive pricing by Hitachi of the acquired IBM technology. This recent divestiture could easily eclipse the impact of those that preceded it. In the end, IBM may have found an interesting way to regain (for a short time) their power to drive the technology industry. Of course, by doing it this way it probably ensures this will be the last time they will be able to do it as a combined entity. As we move forward, we likely will be increasingly focused on the children, as we watch what appears to be a series of events reminiscent of the path AT&T recently blazed.