Legacy IT makers IBM, EMC and others deal with, um, interesting times

To paraphrase the alleged ancient Chinese curse, legacy IT providers are living in interesting times. The question is whether they will survive intact, get merged or acquired, or go the way of the dinosaur.

The business models of IT superpowers like IBM(s ibm), EMC(s emc), Cisco(s csco), HP(s hpq) and Oracle(s orcl) are being buffeted by a profound change in the way customers buy (or, increasingly, rent) technology. And it’s unclear how these vendors will be able to sustain their leadership — or perhaps even relevance — going forward.

Bloodbath predicted

Earlier this week, Cisco CEO John Chambers fed the fire, predicting “brutal, brutal consolidation of the IT industry where out of the top five players, only two or three of us will be meaningful in as quick as five years.” As reported by Business Insider, Chambers predicted (naturally) that Cisco will come out fine but networking rivals like Juniper Networks(s jnpr), CheckPoint, Palo Alto Networks(s pan), Avaya, Brocade and others will be gone by 2018. Per Chambers’ vision, Dell, HP, IBM, Oracle and “white label” hardware makers will survive. But neither HP nor IBM has seen revenue growth for the last two to three years.

While Chambers’ view of who wins and loses is debatable, I don’t think he’s wrong about the sheer ferocity of the consolidation ahead. IBM, in particular, seems to be feeling the heat — announcing a series of disappointing quarters, selling off its X86 server business and fleeing late but as fast as it can to cloud and related services. The question is whether it’s too late. IBM Softlayer CEO Lance Crosby, the executive in charge of IBM’s cloud push since IBM bought SoftLayer last year, can weigh in on this next month at Structure.

dark cloudsIt seems clear now that Ginni Rometty, who took on IBM’s top job two years ago, got a lot more than she — or any other CEO — could have bargained for. IBM hardware sales fell off a cliff and even the company’s prize enterprise customers were putting workloads into Amazon’s public cloud, with or without IT sanction. Some female journalists joked halfheartedly that, as usual, the IT world’s worst job “went to a woman.”

This week’s Bloomberg Businessweek cover story “The Trouble with IBM” tackles Big Blue’s conundrum, using IBM’s loss of the CIA cloud contract to Amazon Web Services last year as a key point. This paragraph sums it up:

“Rometty is by many accounts a smart, vigorous CEO — who turned out to have inherited a far more dire position than she, or much of Wall Street, may have realized. The megatrend is corporate America’s move to the cloud. It’s not just Amazon that IBM needs to worry about: In an August 2013 study of 15 cloud infrastructure providers, research firm Gartner rated IBM worst, behind Microsoft, Rackspace, and Verizon .

EMC and VMware — better (all) together?

Storage leader EMC and its protégé VMware are also in the spotlight. (EMC owns about an 80 percent stake in the server virtualization leader.) As Cisco, HP, IBM and Oracle push converged storage/compute and networking hardware, EMC’s rapport with partner Cisco is under stress. EMC, Cisco and VMWare formed a third entity, VCE, to sell vBlock bundles of EMC storage, Cisco servers and networking and VMware virtualization — but it’s been an uneasy alliance. And it’s become clear lately that the EMC/VMware part of the triad is increasingly at odds with Cisco.

That stress, combined with the macro forces at work, led Wells Fargo senior analyst Maynard Um to conclude that it’s “strategically imperative” for EMC to bring VMware in-house so that it can compete with the industry’s “top 5” vendors — which he defined as IBM, HP, Cisco, Dell and Oracle.

According to Um’s research note, the reasons for EMC to bring VMware in house are:

1) growing secular shifts over the past couple of years (converged systems), 2) the consequent market pressures on standalone “point products,” 3) the heightening friction and battle against peers-turned-competitors (Cisco, Oracle, HP, et al) as well as ramping competition from others (ex., RHT, et al), 4) the duplicative overlap in go-to market for EMC/VMW and 5) the need to combat these secular forces with broader converged solutions.

Neither VMware nor EMC would comment, but EMC typically points to its federation of aligned but semi-independent companies — including Pivotal, RSA Security and others — as a key advantage because these loosely coupled entities can attack different opportunities and win more business.

Grim outlook for hardware giants

At this point, when you look at legacy vendors — especially those rooted in hardware — it’s hard to see any upside. Server vendors face consolidating buying power among web-scale providers — Amazon(s amzn), Facebook(s fb), Google(S goog) and and Microsoft(s msft) — as well as big SaaS providers like Salesforce.com(s crm). These companies can dictate how their hardware is built, by whom and at what price. And none seem particularly interested in high-end, pricey “engineered” systems when they can get exactly what they specify at a low price from Wistron or Quanta or some other white-box maker.

Outside those mega-buyers, big enterprises will buy some servers, but less of them over time as more workloads flow to SaaS providers or to cloud. There’s no way to argue that the market is growing.

And that’s why it’s hard to buy into Chambers’ strategy, since Cisco is ramping up its server and converged hardware pitches. As one VC source commented, “Cisco looks at HP and Dell, that’s its future. The server and PC OEMs are now getting crushed by generic ODMs like Quanta.”

Is it time to start a “Dead Yet?” site for legacy IT players?