AT first sight, IBM’s decision to merge its PC operation with China’s Lenovo might not seem like a major story for Reseller News.
After all, the days when the channel revolved around selling desktop hardware are long gone.
Over the past decade or so, what was once a lucrative business has been hit by a double whammy of ever-thinner margins and lower overall price tags. These days all you get when you sell a PC is a measly few percent of bugger all.
The IBM-Lenovo deal is just one in a series of recent events that has seen the PC market landscape tilt in a new, potentially more competitive, direction.
None of these developments mean we’re about to see substantially higher margins or a healthy leap in overall system ticket prices, but change brings opportunity.
For IBM, the most obvious opportunity is an improved balance sheet.
Although the company has been doing just fine in recent years, it turns out IBM’s PC business was haemorrhaging cash. By the time the Lenovo deal was announced, the accumulated deficit had reached more than US$1 billion.
In effect, IBM bailed out of a loss-making market where there’s no ob-vious upside in sight, in order to focus its capital, collective intellect and marketing energies on more lucrative products and market sectors.
For example, the company’s technically impressive line of server products remains profitable and the gross margins on its consulting business are substantial.
The company’s business partners stand to make more money from these activities than from shifting PC boxes.
One interesting and plausible theory suggests the reason the company cut a deal with Chinese government-owned Lenovo rather than, say, Hewlett-
Packard, was in order to build a stronger base in what will soon be the world’s largest market for computer products and services.
Some people in the industry have painted IBM’s withdrawal from the PC business as a defeat. That’s rubbish. As far as shareholders are concerned, the decision was a triumph. Getting rid of the low-margin, no-margin PC millstone allows IBM’s growing, financially rewarding divisions to flourish.
Incidentally, IBM’s move is almost the mirror-image of what Hewlett-Packard did when it acquired Compaq. That US$19 billion transaction saw a healthy company with relatively high gross margins bulk up by shackling itself to a failing low-margin competitor.
At the time, HP’s leadership justified the acquisition as an effort to create a PC powerhouse large enough to slow Dell Computer’s relentless advance.
That merger went well from an integration point of view and HP picked up some great technologies. On the whole the products are good. However, although HP is now the clear number two in terms of PC sales, its strategy did not succeed.
Since the takeover, Dell has widened its lead over the combined companies.
Moreover, HP’s PC division now has an officially reported operating margin of less than one percent. In reality it’s probably losing money. Analysts say this is unlikely to improve anytime soon. It’s that same few percent of bugger all, but on a grander scale.
HP’s struggles illustrate concisely what has, until now, been the PC industry’s problem: hardly anyone other than Dell can make money from making and selling small computers.
Dell rewrote the rules. The company sells direct, so there’s nothing for the channel. It steadfastly refuses to innovate, so PC technology has stagnated. It’s staggeringly efficient so there’s little room left for anyone to make money from selling rival products.
However, Dell is not invincible. The biggest threats to the company’s business model come from two distinct directions: innovative niche players and more efficient, lower cost competitors.
Lenovo falls into the latter camp. Manufacturers rarely get leaner or meaner than in China. It also helps that the company has the advantage of huge economies of scale in its home market.
Combine this with the prestige of IBM’s brand and its innovation in the notebook area with its Thinkpad product and there are now three powerhouse global PC brands rather than two.
That could sharpen competition. It could also spur innovation. And it should create fresh opportunities for the channel; Lenovo is going to need help selling its PCs.
A revived Apple looks poised to challenge Dell from the innovative niche player end of the spectrum. Last week’s launch of the headless Mac Mini probably won’t pull the rug from under Dell but it’s exactly the kind of innovative product Dell is incapable of delivering. It’s also likely to be profitable.
Apple’s new baby comes complete with a lot of software, a low-cost Microsoft Office alternative and enough multi-
media and home entertainment integration to challenge the Media Centre PCs.
It’s been a long time since Apple was a serious player in the desktop space, but the return of its prestigious brand, strengthened by the company’s iPod success, could add to the competitive pressures. Apple’s channel will be delighted.
There’s another twist to this. Apple’s Mini Mac, like everything else from that company, is a departure from the time-honoured Wintel combination. The Microsoft-Intel tag team, which was behind the extraordinary success of the original IMP PC, has a real, viable competitor for the first time in a
generation.
Apple is unlikely to claw more than a handful of market share points from Wintel. IBM and it’s partnership with Lenovo might take a few more. Another big threat to Wintel is AMD.
After years of running a distant second to Intel, chip-maker AMD is turning into a serious competitor. The company now accounts for 7% of low-end server processors and thanks to deals with HP, Sun and IBM, could boost its market share this year. Last year it accounted for 50% of retail desktop sales in the US.
AMD also beat Intel to market with industry standard processors capable of dealing with data in both 32-bit and 64-bit chunks.
The company’s Athlon64 and Opteron brands, for desktop and servers respectively, are already well known in geek circles. Now they are joined by Turion which will go head to head with Intel’s Centrino. (Why do chip names always sound like the character list from bad science fiction novels?)
Resellers looking for emerging opportunities in the PC space would do well to keep a close eye on IBM, Lenovo, Apple and AMD over the coming months.