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On Whom IBM Now Depends

IBM's success depends on its services business, notably cloud services.  IBM's cloud services operations depend on SoftLayer, a hosting company it bought about a year ago.  SoftLayer depends on servers from Super Micro Computer, a 20-year-old $1.2 billion-a-year manufacturer based in San Jose, California.  During the past year, Supermicro has grown by something like 25 percent.  In its third fiscal quarter ended March 31, Supermicro reported significantly increased earnings.  IBM is undoubtedly pleased by this.  If Supermicro stumbles, SoftLayer will wobble.  That, in turn, would send tremors throughout IBM.

SuperMicro
Doing Just Super
This fiscal year, which ends on June 30, is shaping up to be a very good one
for SuperMicro, the server maker whose hardware powers IBM's SoftLayer cloud

It might seem a bit odd for IBM to be considered dependent on a supplier that is about one percent of its size in revenue terms.  The supplier provides X86 servers, which meet industry standards and run the same software used on similar boxes made by Hewlett-Packard, Dell and IBM itself.  But in this case, the supplier cannot easily be replaced.  The machines used by cloud hosting companies, from giant Amazon down to regional and local ISPs, are tailored to meet the specifications and eccentricities of their owners.

A company like Supermicro offers computers in a bewildering variety, resulting in a product line with hundreds of major unique configurations, each with BIOS firmware precisely matched to the machine's hardware.  The differences among various servers are often most apparent when it comes to input-output.  In order to give its servers the required connectivity to storage and networks at the lowest price and with the most efficient use of electrical power, Supermicro gives its customers lots of choices.  The company is known for its ability to produce servers that will be run as bare metal machines.  This stands in contrast to general purpose servers that can support a number of virtual machines.

Supermicro happens to also make servers that support virtualization, but its reputation among hosting companies like SoftLayer comes from the precisely sculpted boxes that yield, compared to general-purpose servers, far better results per dollar of hardware cost and per megawatt of power.  The company boasts that it is the "greenest" of the server makers, and while some of its competitors would contest that claim, none would dismiss it as simply marketing baloney.  Supermicro servers really do run lean.

c_liang
Charles Liang
Educated in Taiwan and the USA, Liang founded
and managed what is beginning to look like
the hottest server company
since the early years of Sun Microsystems

Supermicro's vision of the server business is that of its founder and current boss, Charles Liang.  He started the outfit in 1993.  Initially, the company built motherboards and sold them to companies that assembled PCs, workstations, and servers.  Over time the company added other components to its product line and also became a supplier of complete server and server clusters.  Today, about half the company's revenue comes from components, half from whole servers.  Supermicro servers overwhelmingly use Intel CPU chips but a line of high performance boxes also uses Nvidia Tesla GPU-based co-processors to perform vector transformations and other math used in engineering, high frequency stock trading, and big data apps.

Increasing sales volume prompted Supermicro to embark on a plan to boost its manufacturing capacity.  One aspect of this strategy includes arrangements with a related company, Ablecom, based in Taiwan.  Ablecom, with the help of various subcontractors, makes chassis, power supplies, and other components for Supermicro.  It is run by Stephen Liang, the brother of Supermicro's boss.

Another recent development took place closer to home.  Supermicro acquired the property complex that housed Silicon Valley's biggest newspaper, the San Jose Mercury.  The Merc is moving to other offices in central San Jose, but its relocation is taking quite a bit of time and the publication remains a tenant of its new landlord.  The Merc is expected to complete its move during the next few months, opening the way for Supermicro to renovate the old premises and either use the space for its own purposes or rent the property to other companies.  Either way the former Merc offices are expected to become part of San Jose's growing base of high tech manufacturers.

share price
Investor Love
Supermicro, symbol SMCI, has become a darling of the investment community,
standing in stark contrast to Dell, that was hammered and menaced
until it had to go private

The recent lively behavior of Supermicro may have been energized by the presence of IBM on its list of customers, but other parts of the server maker's business are also apparently doing well.  In its current and recent financial reports, Supermicro's disclosures assure investors that no single customer, such as IBM's SoftLayer, is a buyer of more than 10 percent of Supermicro's output.  Still, SoftLayer could be a crucial buyer for some of Supermicro's more advanced products, including the line of 4U high servers that ride two across in a standard rack frame, which the company calls FatTwin.

One aspect of the IBM-SoftLayer-Supermicro relationship that may grow in coming months is the use of Supermicro machines in corporate glass house server farms.

There are quite a few companies that sell and support Supermicro hardware.  Until now, these firms often targeted engineering companies and other user firms that would be willing to buy gear from a smaller supplier to get better performance and value.  But these days users who had turned to IBM for all their servers, including X86 machines, are reviewing their plans.  Shops using Power or IBM mainframe servers will continue to buy these machines as their needs dictate.  But the same shops that have installed IBM X86 equipment, sometimes at a premium price, are aware that IBM has been trying to unload its X86 product line all year, a move that has been delayed or, some speculate, derailed due to security concerns on the part of IBM users who don't want to see future machines coming from a Chinese vendor rather than Big Blue.  When Lenovo gets the IBM X86 operations, it will be less American, if that's the right term for it, than California's Supermicro.

Moreover, IBM, at least in its SoftLayer cloud services activities, seems to be happier as a customer of Supermicro than a customer of its own X86 group.  It remains to be seen which Supermicro resellers will be able to penetrate the glass house markets associated with IBM i, Power AIX, and mainframes, but there is bound to be a lot of low hanging fruit in the stirred-up IBM System x user base.  Supermicro isn't yet doing anything to address the possibility of entering the high-end enterprise market, beyond Xeon E7 servers.  But it would be unwise to think such a move could never happen.

How could one tell that Supermicro spotted a chance to get into the corporate server business? Well, for starters, keep an eye on next year's SuperBowl ad lineup.  If Supermicro wants to put itself on the marketing map, the February 2015 SuperBowl—where GoDaddy's annual self-promotion might be joined by a romance show from IBM and Apple that resembles a Cialis ad—is the place to do it.

— Hesh Wiener August 2014


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