The recent sale of IBM’s x86 server business to Lenovo has people in the industry talking.  Some of the conversation has centered around the selling price.  Lenovo picked up IBM’s servers for $2.3 billion, which is almost 66% less than the initial asking price of $6 billion two years ago.  That price drew immediate comparisons to the Google acquisition of Nest, which was $3.2 billion.  Many people asked how a gadget maker with only two shipping products could be worth more than the entirety of IBM’s server business.

It says a lot for the decline of hardware manufacturing, especially at the low end.  IT departments have been moving away from smaller, task focused servers for many years now.  Instead of buying a new 1U, dual socket machine to host an application, developers have used server virtualization as a way to spin up new services quickly with very little additional cost.  That means that older low end servers aren’t being replaced when they reach the end of their life.  Those workloads are being virtualized and moved away while the equipment is permanently retired.

It also means that the target for server manufacturers is no longer the low end.  IT departments that have seen the benefits of virtualization now want larger servers with more memory and CPU power to insert into virtual clusters.  Why license several small servers when I can save money by buying a really big server?  With advances in SAN technology and parts that can be replaced without powering down the system, the need to have multiple systems for failover is practically negated.

And those virtual workloads are easily migrated away from onsite hardware as well.  The shift to cloud computing is the coup-de-gras for the low end server market.  It is just as easy to spin up an Amazon Web Services (AWS) instance to test software as it is to provision new hardware or a virtual cluster.  Companies looking to do hybrid cloud testing or public cloud deployments don’t want to spend money on hardware for the data center.  They would rather pour that money into AWS instances.

I think the disparity in the purchase price also speaks volumes for the value yet to be recognized in the Internet of Things (IoT).  Nest was worth so much to Google because it gave them an avenue not previously available.  Google wants to have as many devices in your home as it can afford to acquire.  Each of those devices can provide data to tune Google’s algorithms and provide quality data to advertisers that pay Google handsomely for those analytics.

IoT devices don’t need home servers.  They don’t ask for DNS entries.  They don’t have web interfaces.  The only setup needed out of the box is a connection to the wireless network in your home.  Once that happens, IoT devices usually connect back to a server in the cloud.  The customer accesses the device via an application downloaded from an app store.  No need for any additional hardware in the customer’s home.

IoT devices need infrastructure to work effectively.  However, they don’t need that infrastructure to exist on premises.  The shift to cloud computing means that these devices are happy to exist anywhere without dependence on hardware.  Users are more than willing to download apps to control them instead of debating how to configure the web UI.  Without the need for low end hardware to run these devices, the market for that hardware is effectively dead.

I think IBM got exactly what they wanted when they offloaded their server business.  They can now concentrate on services and software.  The kinds of things that are going to be important in the Internet of Things.  Rather than lamenting the fire sale price of a dying product line, we should instead by looking to the value still locked inside IoT devices and how much higher it can go.