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Intitial Thoughts on ToshibaTEC Buying IBM POS Division (by Greg Buzek)
April 19, 2012
On Monday evening the POS industry had the most significant announcement in the last 10 years as ToshibaTEC announced the purchase of the IBM Retail Store Solutions Business. The fact that IBM RSS was for sale was one of the worst kept secrets in the industry among analysts. (We had a lot of fun in those briefings on this issue, for sure.) But it was a bit surprising as to who purchased the company. There are some great synergies here, some potential holes, and some dramatic market disruption. The new company will be joint venture where Toshiba will own 80% and IBM 20% for the next 3 years to aid transition.

Several years ago when Tom Peterson was general manager of RSS it was a much larger group than the $1.15 Billion revenue that was reported in the release. Pretty much everything that wasnt mainframe or core supply chain fit under RSS. As IBM continued to move its strategies corporately and retail to a services and software led sales approach, they added acquisitions in BI, Analytics, CRM, Supply Chain, Optimization, and other technologies that expanded the retail business, but split the new strategic parts into the Software organization. Increasingly, more and more of the influence of IBM in the retail accounts and IBM internally shifted to these software and services components and away from POS.

As HP and later Dell entered the PC-based POS market, RSS continued to get leaner and leaner as the net selling price of POS decreased. Yet at the same time, the overall pie of Retail PC-Based POS has grown dramatically over the last 10 years thanks to the lowering of the cost, the move from ROM-based cash registers in hospitality and the rise of China, Mexico, Brazil and India and other emerging economies. In IHL's POS Vendor Market Share Data Service, IBM and ToshibaTEC Worldwide currently have 18.8% of the worldwide installed base of units and about 13.7% of the shipments. (Keep in mind, we count PCs and Macs being used as cash registers as POS, others may not. So if they only count retail hardened POS, these numbers would be close to double. In addition this includes all hospitality segments like hotels and cruises, casinos, stadiums, etc.) The challenge for IBM has been that the growth has occurred mostly at the low end and in emerging countries, even further challenging margins.

Add to this margin challenge the threat of Mobile displacing POS. In our recent Mobile POS Study (Mobile: A Gutenberg Moment for Retail, a Threat to POS),we found among US specialty stores that 72% were planning to move to offer mobile POS in the next 12-18 months. Additionally, this same group said they would be purchasing 20% fewer traditional POS terminals going forward. IBM doesn't have a mobile story, ToshibaTEC does.

IBM has never traditionally been strong in Japan. In fact NCR has ever dwarfed IBM in the country thanks to a local manufacturing presence - but that advantage goes away quickly with this deal.

There are certain segments of the market that IBM has just owned for the last 25 years. Ever since the 4680 was released and that initial wave through the early 90s, IBM has had an overall dominant position (70% or higher) in Grocery, Drug Stores, Mass Merchants, Supercenters and Warehouse Club segments in North America. Even among several software product missteps in the 90s and 2000s, they maintained that position, enjoying the growth of Walmart, the Dollar Stores, and Warehouse Clubs. We have always joked that IBM's chief strength is account control. Nowhere has this been more evident than in these segments.

But IBM RSS has always benefitted by the C-level relationships, advisory councils and overall Retailer vision they are able to offer the enterprise. IBM has always sold the vision of "this is how your company could operate", because they could offer the entire IT infrastructure, support, consulting, etc. While IBM sells this vision of the company, competitors were limited to pushing point solutions and were often simply overwhelmed in comparison. As an analogy, IBM RSS has enjoyed the benefit of being the master builder selling the house, while others come in selling the kitchen appliances or bathrooms. Not that there is anything wrong with the RSS business, but in the next couple of years they will quickly lose that advantage and will need to stand on their own. Will customers continue to choose the ToshibaTEC/IBM solution? Time will tell. We suspect some will and some won't. But for the first time in nearly 25 years, a huge part of the US market (one that is not dramatically impacted by mobile POS threat) will now be on a more level playing field. This is a benefit to HP, NCR, Microsoft, Epson, Retalix, Dell and others.

Co-opetition
One thing that still needs to be worked out is other vendors relationships with ToshibaTEC. For several years ToshibaTEC has acted as contract manufacturer for NCR printers as well as other vendors and products. When it was ToshibaTEC only, who was a minor player in the US this was never an issue. Now this could be a big problem. It's too early to say.

Weird impact - History lesson
For those of you who have read this far, I will share a little known industry secret. Most dont know that IBM was actually formed out of NCR in a way. Tom Watson once worked for John Patterson, CEO of NCR. In fact Watson was engaged to Pattersons daughter and broke off the engagement. Soon after, Watson came to work to find his office furniture in front of the NCR headquarters on fire; hence Watson was perhaps at that time the most famous executive "fired". At that time, Watson vowed to build a firm that would dwarf NCR and he did. Years later apparently Pattersons daughter married someone else and the two men buried the hatchet. They even went as far as to create a patent sharing we wont sue you if you violate our patent agreement I think in the 50s that still stands today. This is why in a world where Oracle and Google are going at it and Apple and Google and Motorola and Samsung are suing each other, you have never seen that between IBM and NCR. They have always been Good competitors; not in any way that would invite thoughts of collusion, but rather they knew that if the deal came down to one or the other there would never be a race to the bottom. For my own curiosity, I wonder what happens now as ToshibaTEC and NCR certainly do not share such an agreement.

What About The Channel?
Often forgotten, the indirect channel handles an estimated 60-70% of the POS volume for IBM in North America. Even a significant portion of the direct sales are fulfilled through the channel. Many of these are exclusive relationships with IBM. Now that this will be a new company, will these partners open up to other competitors? We could see the greatest disruption here but it will be largely unoticed at the large enterprise account level.


Who wins?
From my perspective, both IBM and Toshiba win here. Its too early to tell if the IBM employees win in this deal but those I have talked to have shared the excitement of the fact that they will be a larger part of this new company, rather than an increasingly smaller part of IBM. I think ToshibaTEC gains access to markets they never have been that strong in (North America, EMEA and LATAM), but without the benefit of the huge IBM influence in the account (over time). Many accounts were won by IBM because no one got fired for buying IBM. What percentage of those wont hold on over time because the company is now ToshibaTEC or this new joint venture? Time will tell.

Other winners I think are HP who has grown to #2 worldwide in PC-based POS shipments (#1 if you include off-the shelf HP PCs that get used for cash registers), NCR and Retalix who now will have more level playing field in certain segments, and Epson who will have more opportunities to sell their printers.


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