IBM’s vestigial hardware business – 15.5% of Q4 company revenue – continues to slide. This won’t end well.

In its Q4/2013 earnings call, IBM’s profits were higher than forecast, but revenues were lower. Hardware was the major culprit.

Total Systems and Technology segment sales were down 26% and profits were down 79% year over year. They don’t break out server shares, but the System x – as in x86 – business that they sold to Lenovo was down only 16% compared to mainframes – down 37% – and Power Systems – down 31%.

Storage did the best, declining only 13% to about $950 million. I’d expect their margins to be good – ≈60% – unlike the low-end server business. Here’s the slide from their Q4 call:

Margin drives all
IBM’s margin concerns led to the sale of x86 business, just as earlier concerns over disk, enclosure and printer margins led to those sales. We’re seeing a long, slow, going out of the-hardware-business sale.

But why would an almost $1B multi-billion dollar business with good margins fail? Because there is a meandering spiral towards a hardware exit, like water down the drain in slow motion.

Storage sales dynamics
Every system company has endless internal debates over the relationship between server and storage sales. “Your storage wouldn’t sell without out servers!”

“Yes, but we make the margins that keep us in business and the products that make your server a system!” The arguments continue because they’re both right.

IBM is no longer a hardware company, but software and services. With the low-end server business gone – which I expect counts for a lot of dollars – even fewer IBM reps are going to care about hardware.

The guys who sell mainframes – System z – are in a world of their own. They’re servicing the legacy apps that fly beneath the radar these days because the action is elsewhere. Those systems – and storage – are cash cows, even if they aren’t generating much cash relative to IBM’s size.

As I noted last May:

IBM‘s storage business is at risk. While they have great technology, none of their hardware products are even a strong #2. . . .

IBM top management is not sentimental. Given the disposal of once-core assets, such as disk drives, and IBM’s shrinking storage market share, it is clear that IBM will likely sell off or shutter some hardware product lines to focus on higher-margin storage. The Texas Memory Systems solid state arrays, storage software and mainframe storage are likely safe.

But at some point – and that point will come sooner rather than later due to the cloud’s competitive pressure – IBM’s management will decide that the overhead and investment required to support 3rd place and worse products isn’t worth it.

The StorageMojo take
As cloud storage and radical new products continue to punish traditional storage products, more customers will look beyond their server vendor for storage. With no market leading hardware, the IBM sales force will focus on defending – not expanding – market share.

That leads to a low-investment strategy reduces sales force mindshare and shrinking storage sales. Which leads to less investment.

Its clear that several traditional vendors will leave the general enterprise storage business over the next decade. IBM will be one.

Courteous comments welcome, of course. It still amazes me that after decades of storage leadership, IBM fumbled in the 90’s.