The tech headlines this week have certainly been eye-catching.
Cisco, which in this downturn is still making a 60 per cent gross profit margin and operating profits of more than 20 per cent of revenues, is risking upsetting long-time allies like HP to get into servers – a business in rapid retreat where profits have collapsed.
Now comes news that IBM is in advanced talks to buy Sun, reversing its steady march away from the hardware business into more consistent and profitable software and services. This amounts to a big change in course: after focussing on small software acquisitions, Big Blue looks like it’s about to become a consolidator in Unix servers.
What is going on here?
It makes sense, if your core markets are maturing, to move into an adjacent one (Cisco) or gobble up market share (IBM). Only, you have to have a better way to make money than the person you’re trying to displace.
Both IBM and Cisco have a similar belief: that while they won’t make much money from blade servers, they could stand to make a bundle by selling things alongside them. For Cisco that means all the fiber channel, ethernet and other gear used in modern datacentres. IBM is hoping to push more software, services and lease financing, demonstrating that making a hardware sale is still central to its broader business.
Of the two, IBM’s strategy is the higher-risk one. This is not a company that does big acquisitions. IBM will have to work out how to integrate the operations and hold on to Sun’s top talent. Then there will be the question of what to retain from the multiple computing platforms it will be left with – not to mention the doubts that always creep in as customers question whether the technologies they have invested in have a long-term future under a new owner.
But if IBM gets it right (and if the regulators let it go ahead) the payback could be huge. The server market hasn’t seen this much excitement in years.
