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IBM Without Its Business Machines

Last week, IBM announced that it was selling its low-end server business to Chinese hardware manufacturer Lenovo. The deal has been widely summarized in the trade press as the logical result of the commoditization of x86-based servers, in much the same way PCs were commoditized a decade ago. And because IBM tends not to compete in low-profit product lines, this transaction was inevitable and makes simple, straightforward sense. If only things were that simple!

While it's true that IBM has been steadfastly moving out of commoditized hardware sales, the timing of those moves has been significant. When it sold off its disk-drive business, disks were still good business, but the company saw a future of declining margins and shed its HDD unit. Then came the sale of its PC division to Lenovo in 2005. Eight years ago, PCs were not yet the low-profit, commodity items they are today. (Only three years before, HP purchased Compaq in large part because of its PC market share.)

The pattern here is that IBM gets out of profitable businesses before they start a steep descent. Industry analyst IDC projected in 2013 that IBM grossed $3.3 billion in the low-end server market and affirmed that the company was the largest vendor in the space, slightly ahead of HP and significantly ahead of Dell. For IBM to pull out of a market sector in which it held the top spot — something more than a simple, logical event must have occurred. The company must have seen something others didn't see or didn't recognize. And, in fact, it did.

What it foresaw was the steady erosion of servers by the cloud. Hence, keeping a low-margin business that has little prospect of growth because of the cloud made perfectly good sense. It's interesting to note that Big Blue kept its proprietary server lines: the iSeries (formerly AS/400) and the mainframes. The mainframes are core hardware elements because they provide nearly ideal hosts for clouds. (Let's not forget the first commercial roll-out of virtualization was on IBM mainframes.)

That IBM, the enterprise vendor par excellence, is anticipating such an important shift gives us important insight. It truly expects data centers to move to the cloud. In fact, IBM has pinned its future on this vision. But it is by no means alone in this perception. Microsoft, HP, Google, ATT, and many other IT vendors are committed to this same direction (Microsoft especially).

Curiously, I find among programmers, especially older programmers, a certain kind of nonchalant lack of interest in this coming wave of cloud-hosted solutions. The principal strain is laced with suspicion: "Yet another technology like SOA and ESB that's a silver bullet for IT's problems and then steadily disappears from view. I've seen this too many times before."

Given that all of us have seen such solutions arrive with noisy fanfare and then just disappear, why is the cloud different? The first thing to clarify is how the cloud will find its way to the datacenter. It's not likely to be the result of companies migrating existing apps to the cloud. Let's be clear here: As Rakesh Malhotra of cloud infrastructure vendor Apprenda points out, the cloud in and of itself does not provide a cost savings. What it does deliver is flexibility in deployment, scalability at run time, and the ability to try out and test new apps quickly. It's a quick-onboarding, fast deployment, dynamically reconfigurable, easily managed environment that does not incur up-front hardware costs. Not too bad.

Most vendors in the cloud space expect that the cloud will become the default platform for greenfield (that is, brand new) projects: Web apps, services consumed by mobile devices, and enterprise apps that don't require significant access to existing databases. At any other time, a platform that is ideal for new apps would probably achieve traction only slowly. However, we're at an important moment in software development's history, in which many, many new apps are being written — the mobile revolution is one key driver and the cloud itself is another.

It's safe to say that five years from now, IT departments will view their portfolios as including cloud-hosted apps and legacy software. And there will be a sensed pressure to eventually migrate the remaining legacy apps to the cloud whenever the opportunity conveniently presents itself.

This is where the future is heading and IBM, as well as most enterprise vendors and consultants, see the cloud as the true path forward. Says Karen Padir of Progress Software, a vendor of integrated cloud software, consultants building solutions at SMBs prefer developing for the cloud: The low cost of onboarding, the ease of deployment, the scalability, easier management and configurability make it too attractive.

IBM's doubling-down on the cloud by getting rid of its profitable, but low margin, division signals the arrival of the era in which cloud hosting of applications will become the new norm for enterprises. Prepare accordingly.

— Andrew Binstock
Editor in Chief
[email protected]
Twitter: platypusguy

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