We're Still In The Ring: IBM Comes Out Swinging With New Storage Products, Partner Incentives

With only months to go before IBM completes the sale of its x86 server business to Lenovo, IBM CEO Ginni Rometty had a message for investors in her annual letter to shareholders: "We are not exiting hardware."

Rometty was countering nagging rumors that IBM was looking to jettison its struggling storage business and focus instead on high-margin areas such as software and services. Instead, Rometty stressed, storage was a company imperative: "IBM will remain a leader in high-performance and high-end systems, storage and cognitive computing," she wrote in the March letter.

Soon after, IBM's storage strategy kicked into high gear.

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In May the Armonk, N.Y.-based company began a major storage offensive against competitors EMC, NetApp and Hewlett-Packard, refreshing its entire hardware line of storage products and introducing new software-defined Elastic Storage technology. The push also included new partner incentives, so-called funded head counts, and a boost to margins on storage hardware by as much as 20 percent.

The moves are all part of a concerted effort, IBM said, to make storage one of its biggest new lines of business within its hardware-centric Systems and Technology Group. IBM executives also said storage is a channel partner’s biggest new IBM opportunity. "Partners are saying, 'Help me get a seat at the table with the people that have a bigger share of the IT wallet and can invest more,' " said Jamie Thomas, general manager of storage and software-defined systems in IBM's Systems and Technology Group. "Those investments are increasingly around storage. That includes analytics, clouds and people who are dealing with this data explosion. It's a huge opportunity for IBM and partners."

That storage opportunity, according to experts, is aimed at buoying IBM's ailing hardware business and an attempt to stanch the bleeding of its struggling Systems and Technology Group from nearly eight consecutive quarterly losses, with a loss of $2.4 billion reported in its most recent quarter in April.

NEW STORAGE PRODUCT PARADE

At IBM's platform-focused partner conference Edge 2014 in Las Vegas in May, IBM unveiled updates to its flagship V7000 storage hardware that include real-time compression (without sacrificing performance, according to IBM); rolled out new DS8870 Flash enclosures for companies with the speediest of storage needs; and unleashed what it said was "breakthrough" tape technology that allows data management of tape libraries to be more efficient.

IBM also took the wraps off its software-defined Elastic Storage technology at Edge 2014. Elastic Storage is based on IBM's General Parallel File System technology and runs on its own FlashSystem flash array. The software allows a company to quickly scale its storage needs automatically and intelligently, supporting any vendor's storage system and allowing access to any type of data across all of an enterprise's storage systems in multiple locations, according to IBM. With its Elastic Storage technology, IBM touts a 90 percent storage cost savings based on the technology's ability to automatically move less-used data from across storage pools into less-expensive commodity storage, leaving faster and more expensive resources such as flash for more urgently needed tasks.

NEXT: Can Lenovo Save IBM's Storage Business?

CAN LENOVO SAVE IBM'S STORAGE BUSINESS?

IBM’s storage push is occurring at the same time it's selling a key hardware asset, its x86 server business, to Lenovo in a $2.3 billion deal. The deal is expected to close later this year pending regulatory approval.

"IBM is either crazy or brilliant," said David Kiraly, senior account executive at Agoura Hills, Calif.-based IBM partner Key Information Systems. He and other partners point out that IBM's storage sales are closely tied to the sale of IBM's System x servers. Once IBM is out of the x86 server business, IBM will have to redouble its efforts to maintain its storage business, Kiraly said.

IBM counters that the server sale to Lenovo actually could boost storage sales. Through OEM deals baked into IBM/Lenovo agreement, Lenovo partners will continue to sell IBM storage alongside IBM's System x servers. IBM said it is hoping Lenovo will do for its x86 server business what it did for its ThinkPad sales and become the No. 1 x86 server maker worldwide.

More x86 server sales equal more drag-along storage sales, said Carl Boisvert, vice president of global storage channel sales in IBM's Systems and Technology Group. According to Boisvert, IBM's storage products have long been an upsell with existing System x server sales -- driving a significant percentage of the group's storage sales. "We expect Lenovo's sales motion to continue," Boisvert said. "IBM's storage products are engineered for System x."

IBM partners, such as Kiraly, confirm a good part of their storage business is connected to x86 servers. Many already have been firming up their alliance with Lenovo ahead of the sale.

The wild card, some partners and analysts point out, is Lenovo's relationship with storage kingpin EMC. Currently, EMC storage products are sold with Lenovo's ThinkServer line of hardware. For example, EMC storage solutions and products such as its ThinkServer SA120, which is a modular and scalable rack-mount, comes with a direct-attached storage enclosure.

It should be noted, however, that Lenovo's EMC relationship for now is focused mainly on EMC's entry-level Iomega technology, which mainly targets SMB customers, traditionally not a focus of IBM's storage business. But given the deepening strategic relationship between EMC and Lenovo, there is nothing to stop Lenovo from selling higher-end EMC technology.

Another variable that could impact IBM's hopes to increase its storage business with help from Lenovo is the fact that Lenovo's traditional enterprise server stronghold has been the China market. If Lenovo cannot break into the global enterprise business with the System x server line, prospects for IBM's storage business could dim.

"Lenovo is doing about $40 million a year with EMC storage, at best. It doesn't bother anyone at IBM the fact they have that relationship. Lenovo will move a lot more than $40 million of IBM Storwize storage gear," said Boisvert.

IBM EYES HIGH END OF STORAGE MARKET

For IBM, the low end of the storage market is not the goal. Rather, if IBM wants to chip away at EMC's market dominance and lock out upstarts such as Pure Storage, Violin Memory and Nimble Storage, it will have to make gains in the high end of the storage business with its Storwize V7000 Unified Disk System, DS8870 high-performance Flash Enclosure and its Elastic Storage software-defined storage technology, said David Hill, principal with the Mesabi Group.

"There is a big transition in IT from fixed storage appliances to solutions that handle unstructured data, analytics, cloud and scalable storage solutions," Hill said. "IBM is adapting fast, but it's an extremely competitive market," he said.

"Right now there is an insatiable market for storage," said Kathy Conrad, vice president of sales at IBM partner Lighthouse Computer Systems, based in Lincoln, R.I. Driving that growth, she said, is unstructured data and the need for smarter analytics. "IBM’s storage strategy hits all the right high notes -- scale, agility and ability to take advantage of commodity hardware," Conrad said, adding that Lighthouse's IBM storage revenue has been growing at double-digit growth rates year over year.

IBM's storage strategy, which focuses on software-based intelligent and policy management of data, is right on the money, said Conrad.

"Now that we are selling our x86 business to Lenovo, we need to make sure we can sell storage not as a drag-along sale but as a new line of business," said IBM Global Business Partner General Manager Marc Dupaquier in an interview with CRN at Edge 2014. He said storage is a strategic imperative representing one of the fastest-growing hardware segments within IBM's Systems and Technology Group.

NEXT: Storage Struggles Are Industrywide

STORAGE STRUGGLES ARE INDUSTRYWIDE

But, while IBM may have all the key components, the storage segment overall is seeing declines. In its most recent quarterly numbers in April, IBM cited "substantial weakness in high-end storage" when its Systems and Technology Group’s revenue fell 23 percent to $2.4 billion. IBM reported that storage represented approximately 21 percent of the Systems and Technology Group’s revenue in the first quarter of 2014.

IBM isn’t the only one feeling the storage squeeze on the high end of the market. Research firm IDC reported earlier this month that the worldwide storage market experienced one of its worst quarters, with a 25 percent drop in purchases of high-performance storage systems such as IBM's DS8000, EMC's VMAX and HP's 3Par Storage System.

Market-share data from IDC shows EMC is the undisputed king of storage, owning 29.1 percent of the storage market in terms of revenue. NetApp comes in at a distant second with 15.1 percent, followed by IBM and HP tied with 8.8 percent share. IDC also stated that overall external disk storage system revenue fell 5.2 percent year over year to $5.6 billion.

"Right now there is a lot disruption created by flash and SDS [software-defined storage]," said Mesabi Group's Hill. "That has loosened EMC's grip on the market," he said, adding that IBM has a good shot at taking market share away from EMC. "IBM has the sales partners, deep-pocket resources and a global distribution channel that gives it a huge head start," he said.

IBM LEANS ON CHANNEL FOR STORAGE SUCCESS

To that end, IBM is relying more heavily on its partner community to build its storage business and reach new customers. In an effort to drum up new business, IBM recently introduced initiatives boosting margins on storage products from 15 percent to as much as 20 percent. Another new initiative, unveiled in April, is helping IBM Business Partners by funding the salaries of new storage-focused sales staff, a practice known as headcount funding.

"For partners willing to increase hardware sales goals, IBM will chip in for an outside salesperson, technical resource or an inside salesperson," said IBM's Boisvert. "This will generate about 250 additional head counts into the partner communities in the Americas and Europe."

Partners account for more than 80 percent of IBM's storage sales, Boisvert said. In total, IBM does 20 percent of its business through the channel, according to the company.

CAS Severn, a large IBM partner based in Baltimore, Md., has seen its IBM storage business growing at double digits over the past year. About 50 percent of CAS Severn's business is storage-related.

"IBM is not the biggest seller of spinning disks, but it has made a name for itself as being the most innovative and smartest storage solution out there," said Joseph King, vice president of presales consulting at CAS Severn. Pointing to improvements in IBM's virtual storage controller (known as the SAN Volume Controller), which can integrate with any commodity hardware running any competing storage appliance, IBM could become the VMware of storage, King said.

"In two years IBM has the potential and right technology to disrupt the storage market just as VMware did the server market,’ he said.

Before IBM can become the VMware of storage, however, it will have to contend with VMware and its storage ambitions along with other players' moves in the market.

In August, VMware unveiled a software-defined storage solution that ties to the company's VMware vSphere private cloud and virtualization platform. VMware Virtual SAN, or VSAN, helps advance the storage leg of VMware's plan to develop a software-defined data center platform, which will allow customers to build their own Google-like infrastructures.

On May 5, EMC unveiled its own Elastic Storage solution called ViPR, designed to unify storage pools spread across hardware and multiple locations.

"IBM is pivoting its storage strategy to capitalize on the analytics, social and the Internet of Things trend," Mesabi Group's Hill said. "It has great storage products and know-how. The challenge IBM faces is there are a lot of ankle-biters such as Nimble, Nutanix and Scality that have the potential to hurt IBM and other players."

Lenovo's scale and supply chain efficiencies, however, have the potential to accelerate x86 server sales, fueling IBM's storage sales right along with it, partners said.

"Forty percent of the cost of a storage solution is compute. If Lenovo can do what it does best it will cut the cost on compute and drive costs down, which is good news for my IBM storage business," said Stephen Jones, CTO of Atlanta-based TriDatum Solutions, an IBM partner.

Other partners aren't so sure that IBM can run a successful storage business relying on the success of Lenovo.

"Lenovo is a great company, but I wouldn't want a line of business dependent on the success of another company,’ said one large IBM storage partner who asked not to be identified. "Fair or unfair, Lenovo is facing regulatory and customer scrutiny over its Chinese roots. It may be a red herring, but IBM is going to need to build its own independent server business if it wants to ensure future success," he said.

JOSEPH F. KOVAR contributed to this story.

This article originally appeared as an exclusive on the CRN Tech News App for iOS and Windows 8.