IBM sees SoftLayer as x86 server replacement

Marc Dupaquier, General Manager Global Business Partners at IBM

Marc Dupaquier, General Manager Global Business Partners at IBM

IBM Corp. isn’t necessarily getting out of the server business with the sale of its x86 server unit to Lenovo. It sees its SoftLayer hosted infrastructure services as a replacement for the product and a point of entry for partners to get into cloud computing services.

“Partners selling cloud services like SoftLayer will go relatively fast. It’s not really different from x86 servers,” said Marc Dupaquier, general manager of Global Business Partners at IBM, in an interview with Channelnomics.

IBM is making big investments in its cloud infrastructure business, building and expanding on the foundation of SoftLayer, a hosting service it bought last year for $2 billion. It’s spending $1.2 billion to open more than 15 new data centers around the world to double its hosting capacity.

From IBM’s perspective, the cloud hosting market is divided is now led by three companies: Inc., which is popular among developers and independent software vendors; Microsoft Corp. and IBM SoftLayer, both of which are strong in supporting business cloud consumers. Some may debate whether IBM actually holds a top three spot in the cloud, but its brand presence alone is enough to drive consideration and adoption by businesses large and small.

In selling its x86 server unit to Lenovo for $2.3 billion, IBM is divesting itself of an increasingly commoditized technology. Overall server sales fell 6 percent in 2013, according to industry analysts, and average sale price and margins are declining.

Commodity hardware is not a business in which IBM wants to play, but it recognizes the need for core infrastructure, such as servers, in its vision for cloud, mobility and business analytics. While many of its business partners will transfer to Lenovo with the acquisition, IBM will still maintain relationships with them and encourage them to sell hosted servers.

IBM believes it can make a compelling case for existing and future partners to sell and support SoftLayer services. First, SoftLayer’s architecture gives it bare-metal server capabilities, meaning partners and customers can load virtually anything they want onto the platform. Second, IBM already has 110 software applications tailored for SoftLayer deployments. And third, IBM has security capabilities that make SoftLayer a more viable choice than competitors.

Partners have three choices when working with SoftLayer — refer, resell or white label. In many instances, IBM is offering partners graduated revenue shares for SoftLayer services. Mike Gerentine, IBM’s global vice president of Business Partners and Marketing, says the commission structure for a three-year SoftLayer contract is 10 percent in the first year, 8 percent in the second year, and 6 percent in the third year.

With a predictable annuity compensation model, the opportunity add-on additional software applications and services, and relatively similar sales process to x86 servers, IBM believes SoftLayer could be a point of entry for partners who have not entered cloud computing.

“Partners need the wakeup call because the market is moving incredibly fast,” Dupaquier said.

IBM isn’t necessarily wrong about SoftLayer being a good starting point for cloud novices. However, cloud hosting is fast becoming a commodity offering. Microsoft and Amazon are already engaged in a pricing war to attract new customers. And there’s an oversupply of hosting providers in the market, which means pricing pressure will continue for the foreseeable future.

Moreover, solution providers’ sales experience in selling hardware works against the cloud model. When selling servers, all of the revenue and profit was contained in one sales motion. In the cloud, the compensation is spread out. Over time, the reseller and vendor will make more money, but they must work on volume sales to capture the same short-term revenue.

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