What's Next After IBM Decides To Get Out of PCs?

On paper, IBM's landmark decision to gracefully exit the PC business that it helped create more than two decades ago makes perfect sense. With profits next to impossible to come by and competition from Dell on the rise, the move to sell off the PC business to China-based Lenovo Group for a total $1.75 billion in cash and stock simultaneously improves IBM's profit potential while removing a management distraction.

But for some of the biggest IBM partners, including those members of VARBusiness' VARBusiness 500 ranking of the largest solution providers in the North American market, the ground-breaking deal raises all kinds of serious issues.

Consider, for a moment, the dilemma of Bob Venero, CEO of Future Tech, a Holbrook, N.Y. based IBM business partner (No. 355 on the 2004 VARBusiness 500). Future Tech has invested more than $1 million building one of the largest ThinkVantage technology centers outside of IBM. It's a world-class facility where Future Tech customers can try out some of IBM's most advanced PCs and it is dedicated solely to IBM. Now, however, Venero, a loyal IBM partner, is wondering when and if he should bring in other vendors. Lenovo, of course, will have rights for five years to sell IBM-branded devices and have broad access to IBM technology, but, in the end, the IBM PC business is likely to go away one way or another.

"IBM's whole play was going to the value play, not the volume play," says Venero. Now he's unsure exactly what to think.

Other VAR500 CEOs are wondering the same. That includes those with longstanding ties to the PC division and even those whose IBM business has been concentrated elsewhere. The questions these and other industry executive raise are many. What, for example, will happen to government contracts that favor U.S. based manufacturers? (Despite the fact that Lenovo is expected to open a New York headquarters and despite the fact that IBM will hold an 18.9 percent stake in the company, Lenovo will still be a Chinese company.)Then there's the raft of questions surrounding support and future development of the product line: Will older IBM PCs continue to be supported, and, if so, for how long? What about spare parts for older machines? And what about IBM's investments into advanced technology that helped to differentiate the IBM product line in a market crowded with me-too devices: Will Lenovo continue to be distinguish the products the way in which IBM did for so long?

For his part, Venero wonders about sales opportunities working with IBM's sales force, partner programs and a host of other issues. Dan Love, vice president at Siwel Consulting (No. 228 on the 2004 VARBusiness 500) sees opportunity for selling IBM PCs made by Lenovo for a while, but wonders what happens after the period when Lenovo will no longer be able to sell products with the vaunted IBM logo. (The two companies have agreed to allow Lenovo to sell IBM products for five years.) "If Lenovo manufacturers PCs under IBM brand name, I don't think it makes any difference," says Love.

Others, including Jeff Medeiros, president of rs-unix, a San Francisco-based IBM business partner (No. 434 on the 2004 VARBusiness 500), says he doesn't think IBM's brand will take a hit. "I would only imagine it would create re-positioning of the volume guys as they find out who the new mother ship is," he says.

One company surely to be impacted by IBM's move is fellow VAR500 company HP, the world's second largest computing company. Despite immense pressure to divest itself of lower-end, commodity lines—something HP has conceded that it has considered more than once -- the company continues to believe that having a portfolio that spans from hand-held to mainframe-class systems makes sense.

Duane Zitzner, executive vice president of HP's PSG division, told analysts on Tuesday that IBM's deal would " cause a lot of turmoil with the IBM accounts out there.""It does give us a great opportunity to go in and our channel partners to go in and offer more stability because we're there," he said. "We [are] beginning to look at this particular area, we don't have a plan per se at this stage of the game, but we certainly are looking at from the deal side on what we can do to go in and target the accounts that they're at today to try to take advantage of the current situation."

Ann Livermore, who heads up HP's Technology Solutions Group, added Wednesday that "there is a fair amount of work we'll do where having the low end servers and the PCs are very close affiliation with each other." She also said that HP is "seeing more and more a lot of services where we will have the opportunity to do this whole implementation with the servers as well as the notebooks or the desktops associated with it."

While HP plans and schemes to make this decision by IBM work on its behalf, other companies assess their positions. Roger Arndt, vice president of marketing for Avnet Partner Solutions' IBM Americas division, sees long-term benefits from the move, even though his company made a strategic a long time ago to steer clear of commodity PCs.

"Certainly, if IBM can unhook itself from a business that was pulling it down, then that's a positive," Arndt says. "It's the best of both world for IBM, because the PCs will still carry the IBM name and brand."

Finally, observers of the IBM-Lenovo dealing are wondering if it will have any impact on Intel, which has long supplied microprocessors to IBM. At its fall presentation before financial analysts in New York Tuesday, Intel CEO Craig Barrett threw cold water on the idea that there would be any immediate changes in Lenovo's supply chain.Barrett told the audience that, while he didn't know any more about the deal than what had been publicly stated by IBM, he expected that Intel would continue to supply chips to whichever company emerged after the sale. Further, he pledged that Intel would work with Lenovo going forward.

Still, the sale to Lenovo could provide a leg up to Intel's scrappy competitor AMD. This fall, Lenovo signed on to use AMD's new low-end Sempron processor in systems intended for sale in the domestic Chinese market.

Sempron is aimed at the so-called "value segment" of the market where OEM and white-box systems sell in the range of $399 to $499. The chip is a shot across the bow of Intel, which has introduced its own value desktop processors in the form of the Celeron D family.

With reporting by Steven Lang, Rob Wright, Jeffrey Schwartz and Alexander Wolfe