vol 9, issue 2

Business Focus: IBM's standard server sale marks strategic shift to the Cloud

10 February 2014
By Bob Cervi
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IBM presentation slide

IBM is looking to a ‘new era’ of computing

Ben van Buerden

Shell CEO Ben van Buerden

Global giants in computer services and oil exploration both look to offload assets as they focus on new strategies.

The huge $2.3bn deal that IBM recently struck with Lenovo is a tale of two emerging trends in the global computing industry. In one corner is the American behemoth that wants to get out of the low-cost, low-margin servers market. In the opposite corner is a growing Chinese giant whose success seems to rest on providing competitively priced hardware and services. In selling its ‘industry-standard’ x86 server business to Lenovo, IBM is withdrawing from the high-volume servers business to pursue higher-margin services. Back in 2005, IBM moved out of PCs when it sold that business to Lenovo. Since then the Chinese firm has overtaken Hewlett-Packard as the world’s top PC maker, but has also become a leading smartphone and tablet producer. It has also just confirmed its plan to buy the Motorola handset business currently owned by Google.

IBM’s focus on high-margin activities is necessary if it is to stay highly profitable, according to analysts. In 2013 the company saw a 5 per cent drop in sales to $99.8bn, and a 1 per cent fall in profits to $16.5bn, compared with 2012. As a result, IBM revealed, all of its top executives will forego their bonuses for 2013.

Senior management is looking very much to the cloud to shore up its fortunes. Steve Mills of IBM Software and Systems said the sale of the x86 division would enable IBM to focus on “innovations that bring new kinds of value to strategic areas of our business, such as cognitive computing, big data and cloud”.

To underline the strategy, IBM also announced major investment in these areas, with $1.2bn to be spent on its data centres and cloud storage business. Fifteen new centres will be built globally this year, bringing the total to 40, the company said. This follows last year’s acquisition of cloud services firm SoftLayer for $2bn.

IBM is also investing a further $1bn in its cognitive computing activities, which it says can enable customers to process vast amounts of information faster than the human brain. Its Watson super-computer, famed for beating human contestants in the US TV quiz show ‘Jeopardy’ in 2011, will be available via SoftLayer to help businesses and consumer problem-solve, the company said.

For Lenovo, the acquisition of the x86 business will help it to compete more strongly with the top two players, HP and Dell, in the industry-standard market. It says the deal will take its share of the sector to 22 per cent, positioning it at number three.

Lenovo chief Yang Yuanqing said the group was confident it could grow in this server market “just as we have done with our worldwide PC business”. HP and Dell should take note.

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Shell reacts to profits slide

The last time Royal Dutch Shell issued a profit warning was 2004, a year in which it was embroiled in a scandal about overstated oil reserves. The following year the oil giant was prompted by shareholder anger to introduce guidelines on management accountability for its exploration activities, and to set up a single holding company for the split group - what we now know simply as Shell.

Ten years on, after another profit warning, what fresh strategy will the brand-new chief executive unveil? Well, Ben van Beurden had to tell investors that earnings for 2013 were $19.5bn. In 2012 the figure was $25.3bn. Profits for the fourth quarter of 2013 had almost halved from the same period in 2012: $2.9bn against $5.6bn. The markets had expected the figure to be somewhere between these two extremes, roughly $4bn.

Van Beurden said the figures were “not what I expect from Shell”, adding: “our focus will be on improving Shell’s financial results, achieving better capital efficiency and on continuing to strengthen our operational performance and project delivery”.

The company blamed the earnings dive on higher exploration expenses, increased maintenance hitting production output, the weakening Australian dollar, and security concerns in Nigeria. Shell is now stepping up its disposal of assets as part of “changing emphasis” at the corporation aimed at making savings worth $15bn this year, the CEO revealed.

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