IBM often sells off segments of its business before profit margins fall off a cliff. The most well known example was the ThinkPad division sale to Lenovo in 2005. Even though IBM had strong ThinkPad sales, a robust product lineup, and a healthy following in enterprise organizations, business leaders felt the time was right to exit the market.
Today, IBM is making similar moves. The company recently sold its x86 server division to Lenovo, and the latest word around the water cooler is that Big Blue is seeking buyers for its semiconductor business and its SDN business. I can understand the desire to exit semiconductors. That market is fairly well saturated, and profit margins have become razor-thin over the past few years.
Software-defined networking (SDN) is another matter. The technology has been credited with the ability to completely transform enterprise IT. The potential for growth is said to be enormous -- and we are only in the infancy of development. So when IBM seeks to dump its SDN technologies for $1 billion, it should raise some eyebrows. Considering that SDNCentral projects the SDN market to reach $35 billion by 2018, a $1 billion sale is peanuts.
I can think of three possible reasons why IBM might want to sell its SDN division. First, the company could feel that its product is not on par with competitors. I have serious doubts about this theory, because the technology is still too fluid to be able to start picking favorites. IBM has some amazing engineers, and it's likely their SDN architecture would rival the best offerings from other vendors.
[Need to learn the basics of SDN? Check out our slideshow, "7 Essentials of Software-Defined Networking."]
A second possibility that many point to is the fact that IBM appears to be shedding all things hardware. Instead, IBM wants to be a software and services-oriented company. This in fact was stated in IBM's press release as the rationale for the sale of its server division to Lenovo, so it makes sense the company would stick to that claim for its SDN division as well.
But to me, the idea that IBM only wants to sell software and services doesn't pass the smell test. The company can't be totally averse to hardware. In fact, it's still one of the best hardware manufacturers in the world. So why would IBM give up on the potential of grabbing a sizable portion of a $35 billion market? Likely because it doesn't believe profitability will be near the levels of hardware markets of the past.
Remember, SDN is all about flexibility. Many architects are drawn to SDN precisely because it is open source and can operate on generic hardware. The concept of mating proprietary hardware and software together is often rejected these days. Customers don't want to get locked into a particular vendor. And when technology becomes a commodity, as is the case with open systems, profit margins plummet.
So while the SDN market may indeed flourish, profit margins will be lower because competitors can only compete based on cost. It's my belief that IBM recognizes this, and the risk/reward equation simply doesn't make sense for the company. I have no doubt that SDN will be the next big evolution in enterprise IT, but look for many of the typical players -- including IBM -- to bow out and seek areas where profitability opportunities are brighter.
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