IBM Partners Bullish On Possible Sale Of Power Chip Business

Partners say IBM's struggling Power processor business needs a boost, and that selling it off is the best option to drive down pricing on the expensive chips and attract new customers to the Power platform. They say Big Blue's Power processor needs a lifeline as the latest Intel Xeon processor and emerging server threats from ARM pose serious challenges to the Power server platform.

IBM partners are reacting to speculation that IBM is prepping its chip business for sale to GlobalFoundries. Buzz over the potential sale hit an all-time high this week when Bloomberg news reported that IBM was offering GlobalFoundries $1 billion to take the business unit off its hands. Bloomberg reported that GlobalFoundries balked at the deal, asking for $2 billion.

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GlobalFoundries, chip experts say, is at the top of the list of companies that can get the most out of IBM's chip business. Patrick Moorehead, president and principal analyst at Moor Insights and Strategy, said the United Arab Emirates-owned company is the world's second-largest chip maker with six fabs in Singapore, one in Germany and a $10 billion 300-millimeter fab under construction in Malta, N.Y.

"This would be in line with IBM's move to shed anything that isn't core to IBM's business moving forward," Moorehead said. "Most chip makers are fabless these days. That would help IBM keep costs down. The downside is they could lose control over the architecture, but it's not unforeseeable that IBM could be negotiated control into the sale price."

IBM's Power business has been struggling. Its market share, according to analysts, has slowly been dwindling as the industry has made sweeping changes to server architecture embracing AMD, ASIC, ARM, and, of course, Intel’s x86 architecture.

"Right now, Intel is the clear winner," said Moorehead.

Chris Pyle, president of Boca Raton, Fla.-based Champion Solutions Group, said, "I'm not sure it would make a bit of difference if IBM didn't make its own chips."

"IBM sold off its disk drive storage business years ago," Pyle said. "Did that stop me from selling hundreds of millions of dollars of storage devices with an IBM logo on it? No. Not one customer asked me, 'Hey, who actually manufactured what’s inside here?'"

Pyle said he is seeing IBM come under intense competition from x86 competitors such as AMD and Intel, which have been wooing his Power customers to build server architecture on less expensive commodity x86 architecture.

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IBM has tried to fight back, and promised its latest Power8 processor would be faster and more affordable than Intel's closest match. IBM introduced its first Power8 products in June with the chips running at up to 5GHz with up to 12 cores, 96 MB L3 cache and 96 threads. IBM also has tried to broaden the appeal of the Power platform by forming an OpenPower Foundation last August in a push to license its Power chip architecture as it pursues a licensing model similar to ARM.

OpenPower Foundation counts Google, Ubuntu, Samsung, Nvidia and Micron as its key members. But, so far, the alliance has yet to gain much momentum. "I think the initial commitments were impressive, but we have yet to really see those pledges come to fruition," said Moorehead.

In July, IBM said it plans to spend $3 billion on semiconductor research and development in the next five years. The R&D spending is earmarked to create small, powerful chips to be used with IBM's Watson technology and develop microelectronics out of graphene instead of silicon.

Both IBM and GlobalFoundries declined to comment when asked about the possible deal. That leaves many unanswered questions.

"I'd want to know what would IBM retain control of," Pyle said. "Is it just a case of, 'Hey, I don't want to manufacture these things anymore?' Will IBM still be in control of the road map? What's going to be running Watson? Is IBM going to own the testing and development of Power 8.5 and Power 9? Yeah, there are a lot of questions that are going to need to be explained."

Jim McGregor, founder and principal analyst at Tirias Research, said there is a lot on the line for IBM partners.

"First, this doesn't signal a lot of confidence in IBM's remaining hardware business. All of IBM's hardware eggs are in the Power basket. If you're a Power partner, the question to be asking is what is IBM's commitment to Power servers? With the sale of the chip business, will they get the same type of support to build the specialized Power ecosystems?"

McGregor suspects IBM will keep designing chips for its Power systems and rely on GlobalFoundries to manufacture them. "There are certain parts of the business that aren't worth anything. IBM's two fabs in Essex Junction, Vt., and East Fishkill, N.Y., carry a lot of baggage," he said. IBM's chip-making business reportedly loses as much as $1.5 billion a year.

IBM's Essex Junction fab employs approximately 4,000 workers while its East Fishkill plant employs about 3,500. McGregor said staff reductions and plant closings will cost any new owner millions. "If IBM is willing to pay someone to take its business, it's to ensure they transition the manufacturing as smoothly as possible and ensure a consistent future supply of Power processors," he said.

Russell Schneider, a consultant at Jeskell Systems, a large IBM Premier Business Partner, said it makes sense for IBM to get rid of its processor business. IBM would be smart, he said, by saying it is still in the semiconductor business, but will leave the actual manufacturing to someone else.

"As a partner that is heavily dependent on Power, I would be 100 percent behind it," Schneider said.

PUBLISHED AUG. 6, 2014