IBM's Portfolio-What about Hardware?

There’s been a lot said about IBM’s (NYSE: IBM) consulting, software and services recently, and these business elements have had a positive impact on profitability.  It might look like hardware is being phased out.  But no, it’s still an important core business, including the “big iron” which Big Blue is known for.   The mainframe business (hardware plus related software, services and other items) continues to be an important business for IBM.  BusinessWeek recently stated that analysts estimate sales of the big computers represent less than 4% of IBM's revenues in a good year. However, the combination of mainframe hardware, storage, software, and services account for nearly half of IBM profits. Clearly the mainframe hardware is still a key element of the solution sale.

In addition IDC reports that IBM was the world's No. 1 server vendor in 2008 in terms of revenue, with about 32% market share, followed closely by HP with about 30%.  It’s not the hardware per se that’s the issue, rather the margins which can be derived from the hardware.  As IDC analyst Crawford Del Prete said

 IBM "will judge the future of hardware on its ability to drive profits. What people forget is that differentiated hardware can be very profitable.  It's when it goes to commodity, it becomes a problem. Today, IBM can drive profit from its hardware products. If that continues, I think it stays."

Big Blue decided to step away from the commodity PC business divesting it to Lenovo some time ago.  So, it’s not afraid to walk away from low margin businesses. On the other hand, IBM does see the value in OEMing hardware as part of the solution mix. It has succeeded in maintaining an OEM relationship with Cisco (NasdaqGS:CSCO) despite Cisco’s recent offensive into the blade-server market. Cisco’s actions caused a rift with long time ally, HP (NYSE:HPQ), but not so with IBM and Cisco.  In addition, IBM has recently announced expanded ties with Brocade and continued relations with Juniper to round out its solutions.  So, Big Blue isn’t backing away from hardware, rather it has lots of options and is just being picky about which hardware fits the bill. Channel partners should also be picky and choose hardware that not only fits the solution but bolsters profits.

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