Channel Weighs In On IBM PC Sell-Off

Officially, IBM is saying very little. When asked about the deal Friday, company officials reiterated what they often say about stories such as this -- that it is company practice not to comment on rumor or speculation. Yet selling off its PC business isn't coming as a total shock. Company officials have admitted that they have studied the idea from time to time, and industry analysts view it as a logical step for the IT giant.

For some time now, IBM has languished a distant third in the PC space, with 5.6 percent of market share. That's well behind leader Dell and second-place Hewlett-Packard. And despite top-notch, innovative technology, exemplified in its ThinkPad notebooks, IBM has not been able to compete effectively in a market that has largely gone commodity.

"The PC market is driving toward optimal efficiency in manufacturing, so companies like Dell do extremely well because its supply chain is so efficient that it can be profitable even when margins are thin," says Mark Margevicius, an analyst at Gartner. "IBM made lots of progress here, but they are not anywhere near best of class."

Many VARs, including those who have sold or currently sell ThinkPads but who look to other products for their profits, agree with the assessment.

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"It's the ultimate commoditization of the PC," says Robert Schaffer, president of Source Micro, a Randolph, N.J.-based systems builder. "Having the PC business doesn't hold value for IBM anymore."

This type of move isn't unprecedented for IBM. The company has a history of shedding commodity or low-performing businesses it no longer considers strategic, including its disk drive and networking hardware groups.

The one surprising element to this potential sale is what it says about the PC business, according to Margevicius. For years, IBM has put up with low margins and tepid revenue growth from its PC business because it considered its desktops and notebooks "door-openers" to corporate accounts. The desktops, as the thinking goes, pave the way for IBM to sell more lucrative servers or software, services and support.

"If IBM no longer views PCs as strategic in that sense and customers see no value-add to their technology, it makes no sense for them to stick around," he says.

For VARs, the relentless pricing pressures of the past decade have created a market in which PCs are in some ways a necessary evil. "The channel is more into a personal business model, where you're not selling the hardware, you're selling the relationship," Schaffer says. "The PC is still the focus of the sale, but it's kind of along for the ride. You're really selling your relationship with the customer."

Despite any ambivalence toward selling PCs, VARs could suffer if IBM does indeed bail on the PC business, according to analysts. Existing IBM PC customers, for their part, are unlikely to feel too much pain because IBM is the poster-child for supporting legacy products in perpetuity. But the channel will feel the pinch of further consolidation in the PC space.

"It's a signal that Dell is getting stronger," says Ray Rueda, president of Honor International, a Miami-based systems builder. "IBM was feeling that the intense competition in PCs wasn't worth it."

Reuda believes a sale would further squeeze HP and put VARs in an even more intense battle with Dell. "The gap between Dell and systems builders is as small as it can be -- we're extremely close on costs," Rueda says. "In some cases, we're less. In others, they're less."

The company with which IBM is reportedly in serious sales discussions with is Lenovo, formerly known as Legend and currently China's largest PC maker. The price tag of $1 billion to $2 billion, which has been floated in reports, does seem at least questionably low for a business that represents 12 percent of IBM's $92 billion in total revenue. IBM had in the past year sold off some of its manufacturing facilities, but still maintained the engineering, R&D and intellectual property on the PC products.

And yet, Margevicius believes that the low number might accurately reflect the PC market reality. "What kind of differentiation does IBM offer? They have best technology, but that tends not to matter as much to customers as it once did," he says. "Valuation can get affected by that."

IBM put PCs on the map some 20 years ago and has continued engineering innovation into them right up to the present. That was evident this summer when the company was among the first to produce desktops featuring Intel's new cool and quiet BTX form factor. (BTX, for Balanced Technology Extended, is a new motherboard specification that changes component layouts to maximize cooling. Slower fans can be used and the units run more quietly than today's ATX systems.)

On the notebook front, Big Blue's ThinkPad line has carved out a reputation as a highly mobile family of machines, which tend to be thinner and lighter than much of the competition. Notably, IBM recently added a biometric security feature in the form of a fingerprint reader and encryption software to its T42 ThinkPad.

All told, IBM has achieved a higher innovation profile in its beefier systems. There, IBM has garnered some serious industry buzz for its multicore P5 processor, released earlier this year. The chip, which is a competitor of Intel's Itanium and Sun's UltraSparc, appears in IBM's eServer P5 family of midrange Unix/Linux servers. Those systems implement IBM's micro-partitioning technology, which support the ability to run multiple, virtual servers.

The P5 boxes have been snapped up eagerly by IBM's channel partners, which see buyers in enterprises and among midmarket customers considering server consolidation in their IT operations.

Along with the P5 machines, IBM has simultaneous rounded out the rest of its eServer line. The upshot is a broad range of servers, which have propelled the company to the No. 1 position, with a 31.7 percent market share, in IDC's recently released server sales rankings for the third quarter of 2004. That's a far cry from IBM's standings in the PC market.

In the end, that disparity might be influencing IBM's thinking. IBM has been moving further into high-end software and hardware while it has been transforming itself into an IT services and consulting giant.

Despite these market realities, some VARs are nonetheless surprised over the prospect of IBM getting out of PCs. "It's surprising," says Dan Love, vice president at Siwel Consulting. "PCs are like the destroyers around the aircraft carrier. They are on the periphery of the battle. They're the front line. If they don't have them, they're letting people get closer to the mother ship."

Steven Lang contributed to this story