This is one of those times when my inherent laziness comes back to bite me. I was writing an in-depthy article about the reasons behind IBM moving their chip works over to GlobalFoundries, but I saw that Reg Hack Ted Worstall has already published a very nice story. So I’m looking at the situation from a different angle – what are the implications on IBM’s systems business?
I agree with Ted that the brutal and implacable economics of the chip business forced IBM’s hand here. Manufacturing microprocessors is a hugely capital-intensive undertaking, with massive fixed costs for the buildings and equipment necessary to churn out shiny new CPUs. It also costs a lot of dough to acquire and hold onto the highly specialized people who can design and build cutting-edge silicon.
IBM Microelectronics just didn’t/doesn’t have the volume to justify the kind of ongoing investment required to keep running on the process treadmill. Last year, the division booked revenues of around $1.4 billion, but netted a loss of $700 million – a bitter pill when you consider the future investments that will be needed to remain competitive in the microprocessor race.
The $1.5 billion IBM will be paying GlobalFoundries (in $500 million annual installments) to provide Big Blue with processors and other stuff is a bargain compared to the cost of moving from their current 22nm process to 14nm and beyond.
GlobalFoundries will book around $10 billion over the next year in capital expenditures – which shows you just how expensive it is to compete in the chip-building side of the industry. For their part, IBM will be still be investing $3 billion in advanced chip research over the next five years, but this will probably end up being a cooperative effort with GlobalFoundries.
One of the constant refrains I noticed in the comments to Ted’s story was that this move means IBM is leaving the systems business. Over the next few years, they’re supposedly going to drop both their mainframe and Power systems business.
IBM Dumping Systems? Really?
I don’t see it.
IBM’s hardware sales have decreased, that’s for sure. And they’re probably going to drop a bit more, at least in the near term. In the medium term, the mainframe business is going to continue at pretty much the same pace. They’ll sell plenty of MIPs, but margins will drop over time – which is natural, given that mainframe alternatives are constantly improving. But they won’t be capturing a lot of new customers and workloads with the mainframe.
The sale of their x86 business to Lenovo leaves IBM’s stable with only one horse they can ride in the system sales derby. That horse is Power8. (I guess the saddle and tack is the system hardware.)
But just because IBM has only one horse left to ride doesn’t necessarily make that horse a good mount. (Ok, this is a horrible metaphor; I’m ashamed of myself for it.)
Power vs. x86
IBM’s tried to use Power to displace x86 systems before. With previous Power boxes, IBM had performance and efficiency advantages vs. comparable x86-based systems. But that goodness came at a cost.
First, you’d have to run their commercial UNIX variant (AIX) and use AIX ports of popular apps. If your shop doesn’t already run a fair amount of commercial Unix, you probably wouldn’t be too keen on adding a new o/s to your existing mix.
You’d also pay more in terms of both acquisition and ongoing service costs. IBM would argue that the higher performance, RAS, and utilization rate of a Power server tipped the TCO (total cost of ownership) math in their favor. However, it’s a complex argument to prove, and the results will vary from data center to data center.
So even though IBM hoped that Power would displace a chunk of x86 servers, it didn’t happen very often. Customers mostly installed Power boxes to replace incumbent Solaris and HP-UX systems.
Endian Givers & Chip Chalk Talk
However, Power8 is a different animal. (No, not a horse, I’m giving up on that metaphor.) The biggest deal is that it’s little endian, meaning endian-compatible with x86. When you had an endian mismatch, like with previous Power/RISC processors vs. x86, application providers would have to go through what can be a long and complex porting process. Because of this, and a smaller potential market, ISVs weren’t eager to port apps to the big endian Power processors.
Power8 is what IBM calls “bi-endian”, meaning it can access data stored in either big or little endian styles. What this really means is that little endian-based software can run on Power8 boxes with only a recompile to translate the instruction set differences between Power and x86. Software using interpreted languages like Java should run right out of the box on Power8.
The new Power8 boxes also run Linux operating systems (right now Ubuntu, with Debian, openSUSE, and maybe RHEL on the way) on bare metal. This opens up a whole new universe of closed- and open-source Linux applications to potential Power8 users.
IBM has also addressed the cost issue with the Linux versions of their Power8 product line. IBM figures the best place to build their beachhead vs. x86 is in a few areas – namely infrastructure and analytics workloads. With that in mind, they’ve priced the boxes (including the O/S and virtualization) to sell at par with a comparable x86 Linux/VMware solution. Service and support is also priced at x86-like levels.
Power8 has some technical advantages that can yield significantly better performance vs. x86. For example, each of Power8’s processing cores can support 8 threads vs. 2 threads for x86 CPUs. Power8 has larger processor caches, 100MB on chip plus 128 off chip vs. the 37.5MB on Intel’s latest chips. The biggest advantage is in memory bandwidth, with Power8 able to pump 230GB/s through the chip, while Intel’s processors are limited to 85GB/s.
However, Intel system can support 1.5TB of main memory on a 2-way box today, while IBM’s Power8 boxes can only support 1TB.
Some might argue that all this hardware talk is irrelevant. Who cares about systems these days? Hardware is a commodity, and the profit margins are so low that no one cares anymore. Those people are wrong.
It’s important for IBM to make this Power gambit work.
MBA Dimbulb-ery, Marginal Thinking
The example I’ve been using with clients is to imagine that a newly-minted MBA is looking over the products sold by an auto supply chain. He sees that lug nuts (the nuts that hold wheels onto the car) are the highest-margin product in their tire-related product line. His advice to the chain is to stop selling lower-margin tires, wheels, and those little pine tree air fresheners in order to devote more shelf space to lug nuts. It’s pretty obvious that this is a stupid strategy, right?
While IBM makes the highest margins on software, from a financial standpoint, that software is usually part of an entire IBM solution. If IBM were to abandon hardware, that will make it more difficult (and costly) for them to provide those complete solutions.
You can argue that customers are rolling their own solution suites, which is true; but a company like IBM can still sell piece parts to play into whatever the customer is trying to put together.
There’s also something to be said for getting more ‘wallet share’ with customers. If you’re successfully selling software and services, adding hardware gives you a larger share of customer spend, and as long as the hardware portion is sold at a positive margin, it’s always better to have a bigger sale than a smaller one.
In finance, this is the “High Internal Rate of Return vs. Net Present Value” problem. They present it as an example where Project A has a relatively low cost, but a very high return over several years. On the other hand, Project B has a much higher cost and a much lower rate of return. Which project do you take on? You always pick the project that provide the most cash, after discounting for the time value of money.
The point all this blathering isn’t to argue that IBM is going to bludgeon the life out of x86 with their Power8 boxes. I’m saying that IBM will stay in the hardware business for at least the foreseeable future. The return they get from hardware and the accompanying ability to sell complete solutions is higher than the cost savings they’d realize by abandoning it.
However, IBM needs to put all of their considerable resources behind their new hardware initiatives. They have to execute on their plan to build Power based systems into a worthy x86 replacement, meaning they have to hold the line on prices while continuing to improve the underlying technology.
It’s not going to be an easy road, as I’m sure the comments on this story will point out.