After jettisoning its x86 server business last year, International Business Machines (NYSE:IBM) has refocused its hardware efforts. While its mainframe systems remain both deeply entrenched in certain industries and highly lucrative, IBM's expensive Power servers have been losing market share to systems built around Intel (NASDAQ:INTC) processors. In the hyperscale data center and high performance computing markets, IBM has been almost completely left behind.
Two years ago, IBM helped found the OpenPOWER foundation, an effort that now boasts around 150 member companies. The goal of OpenPOWER is to create a hardware and software ecosystem around IBM's Power processors, thus providing an alternative to Intel-based systems. Some member companies are building third-party Power systems, and even designing custom Power processors, while other member companies have contributed technology to the effort.
IBM is still building its own Power systems, and earlier this month, the company launched a line of three new Power servers. According to IBM, these Linux servers infuse technology from the OpenPOWER foundation, giving clients more than twice the performance per dollar for certain Big Data workloads compared to Intel-based systems. Here's why these new servers are important for IBM.
Competing on price
IBM's latest Power8 processor comes with a massive memory bandwidth, meaning that it can access data stored in memory at a very high rate, and supports eight threads per core, meaning that it's well suited for workloads that can be broken up into chunks and run in parallel. This makes IBM's Power processors very good at certain types of workloads, like Big Data analytics, and not particularly good at workloads that don't fully utilize these features.
For IBM to have any success at all, its Power systems need to have a significant cost advantage over comparable Intel-based systems, and at least according to the company, this is the case when the workload is right. The design of the Power processor means that IBM is inherently limited in how much market share it could potentially win from Intel, since Power is only a viable alternative for certain use cases. But if Power systems can maintain a meaningful cost advantage for these workloads, it's only a matter of time before Intel's stranglehold on the server chip market is loosened.
IBM is doing a few things with these new servers that are worth mentioning. First, the company is lowering costs by using commodity components, such as DDR3 memory. Reliability may suffer as a result, but bringing the cost down as much as possible will be the key to competing with Intel-based systems. In contrast, IBM's mainframe systems are highly engineered systems with built-in redundancies, leading to a level of reliability that is genuinely unrivaled, as well as a high cost and relatively small addressable market.
Second, IBM is selling pre-configured versions of these new servers directly through its website. This may seem like a small thing, but allowing companies to buy these Power servers in order to test their performance without having to go through an IBM salesperson could encourage more companies to give Power a try.
Another swipe at Intel
Assuming that IBM's internal performance numbers are in the ballpark of what customers will actually achieve, the biggest problem facing IBM's efforts to push Power as an alternative to Intel may be awareness. Intel processors are the default option, and IBM is likely viewed by many as an expensive alternative. IBM and OpenPOWER are making progress, but Intel remains the overwhelmingly dominant player in the server chip market.
However, the server chip market may look very different five years from now. Not only is IBM pushing Power for Big Data applications, with the potential to eat into Intel's share at the high-end of the market, but ARM is attempting to steal away market share at the low-end. Both of these efforts are in their infancies, and both could ultimately fail, but Intel will be fighting a war on multiple fronts in the coming years.
IBM's new Power servers aren't game changing on their own, but they do represent progress in the company's efforts to establish Power as an Intel alternative. If the cost advantage of these Power servers holds up under scrutiny, Intel certainly has something to worry about.
Timothy Green owns shares of International Business Machines. The Motley Fool recommends Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.