Intel (NASDAQ:INTC) and Oracle (NYSE:ORCL) recently set up huge cloud computing data centers to test out Oracle servers powered by Intel chips. That project, known as Apollo, just completed its testing phase, and the two companies are now ready to sell Oracle-Intel servers to enterprise customers.
This move pits the two tech titans directly against IBM (NYSE:IBM), which sells high-end servers and mainframes. Oracle also announced that it would convince its database and software customers to replace their IBM servers with Oracle-Intel ones instead. Let's take a look at why Intel and Oracle are teaming up against IBM, and what this strategy means for all three companies.
Why Intel wants to take down IBM
In the past, IBM sold Intel-powered low- to mid-range servers. But last year, Big Blue sold that business to Lenovo to focus on selling high-margin servers and mainframes, powered by its own Power processors, instead. That turned IBM from Intel's partner into its competitor in the enterprise server market.
Intel holds a near monopoly in the data center market with its industry-standard Xeon processors, but IBM still controls the niche high-end server and mainframe market. Two years ago, IBM established the OpenPower Foundation, which shares the underlying technology (processor specifications, firmware, software) of its servers with partners. That "open source" strategy was aimed at widening the Power series' defensive moat against Intel's Xeon E-series processors and Oracle's SPARC chips -- which both target its high-end servers.
Over the past few quarters, Intel has struggled with sluggish PC sales. During this time, the data center business has been a reliable pillar of growth, generating 13% sales growth and 11% operating income growth in the first nine months of 2015. Therefore, it makes perfect sense to team up with one of IBM's top rivals to gain ground in high-end servers as well.
Why Oracle is teaming up with Intel
At first glance, it seems odd for Oracle to team up with Intel since Oracle's own SPARC chips compete against Intel's Xeons in high-end servers. But for now, both companies see IBM as a bigger problem. That's why Oracle has prioritized gaining market share in enterprise servers and software over the future of SPARC.
During a recent presentation at Oracle World in San Francisco, Oracle CEO Mark Hurd declared that thousands of customers are still using "large and costly" IBM systems. Hurd claims that the Oracle-Intel architecture will likely offer faster performance than IBM's systems at a fraction of the cost.
To prove that point, Oracle is providing qualifying Power System customers with a free, nondisruptive proof-of-concept migration to demonstrate the difference. In one such demonstration at a major insurance company, the Oracle-Intel system reportedly produced four to 12 times faster performance in certain apps and processes than a comparable IBM system. Hurd claims that these demos have already convinced "thousands" of customers to replace IBM systems with Oracle-Intel solutions. That might sound like a lot, but it likely accounts for a sliver of Oracle's 420,000 customers.
What this all means for IBM
Intel and Oracle's partnership comes at a time when IBM is reducing its dependence on hardware to focus on cloud services and software. A decade ago, it sold its PC business to Lenovo. Last year, it sold the aforementioned x86 server unit to Lenovo and handed off its unprofitable chipmaking unit to GlobalFoundries. All IBM has left in hardware today are Power-based servers, z Systems mainframes, and storage solutions.
Last quarter, IBM's overall hardware revenues fell 39% annually and accounted for less than 8% of its top line. Power Systems revenues fell 3% and system storage revenues declined 19%, but z Systems mainframe revenue rose 15%. The growth in mainframe revenues was surprising since industry watchers had been predicting the death of fridge-sized mainframes for the past two decades.
A tough road ahead
IBM CEO Ginni Rometty has repeatedly said that the company won't completely exit the hardware business. But wolves like Intel and Oracle are ready to devour what's left of IBM's hardware business and offer cheaper and faster alternatives. While that blow probably won't cripple IBM, it would make it harder for its revenues, which have already fallen for 14 consecutive quarters, to rise again.
Leo Sun has no position in any stocks mentioned. The Motley Fool owns shares of Oracle. 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.