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With IBM's POS Sale, History Really Does Make A Difference

Written by Greg Buzek April 18th, 2012 Greg Buzek is the president of IHL Services and is most likely the analyst who has tracked the POS space the longest. The POS industry on Monday (April 16) had the most significant announcement in the last 10 years, as Toshiba TEC 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 a joint venture where Toshiba owns 80 percent and IBM 20 percent for the next three 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 in revenue reported in the release. Pretty much everything that wasn't mainframe or core supply chain fit under RSS. As IBM shifted both its strategies at a corporate level and its retail focus to a services-and-software-led sales approach, it has added acquisitions in business intelligence, analytics, CRM, supply chain, optimization and other technologies. These acquisitions expanded the retail business but split the new strategic parts into the software organization. Increasingly, more of IBM's influence both internally and in its retail accounts has 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, India and other emerging economies. In IHL's POS Vendor Market Share Data Service, IBM and Toshiba TEC Worldwide currently have 18.8 percent of the worldwide installed base of units and about 13.7 percent 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, such as 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 IHL's recent Mobile POS Study, we found that, among U.S. specialty stores, 72 percent were planning to move to offer mobile POS in the next 12 to 18 months. Additionally, this same group said they would be purchasing 20 percent fewer traditional POS terminals going forward.
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IBM doesn't have a mobile story, but Toshiba TEC does. IBM has never traditionally been strong in Japan. In fact, NCR has 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 ran through the early 1990s, IBM has had an overall dominant position (70 percent or higher) in grocery, drug stores, mass merchants, supercenters and warehouse club segments in North America. Even among several software product missteps in the 1990s and 2000s, Big Blue maintained its 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 from the C-level relationships, advisory councils and overall retailer vision it is able to offer the enterprise. IBM has always sold the vision of "this is how your company could operate," because it could offer the entire IT infrastructure, support, consulting, etc. Although IBM sells this vision of the company, competitors were limited to pushing point packages 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 bathroom fixtures. Not that there is anything wrong with the RSS business but, in the next couple of years, it will quickly lose that advantage and need to stand on its own. Will customers continue to choose the Toshiba TEC/IBM approach? Some will and some won't. But for the first time in nearly 25 years, a huge part of the U.S. 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. One thing still to be worked out is other vendors' relationships with Toshiba TEC. For several years, Toshiba TEC has acted as contract manufacturer for NCR printers as well as other vendors and products. When it was Toshiba TEC only, it was a minor player in the U.S. and this was never an issue. Now, this could be a big problem. For those of you who have read this far, I will share a little-known industry secret. Most don't know that IBM was actually formed out of NCR in a way. Tom Watson once worked for John Patterson, CEO of NCR. When Patterson fired Watson, Watson vowed to build a firm that would dwarf NCR, and he did. Years later, the two companies buried the hatchet. They even went so far as to create a patent sharing "we won't sue you if you violate our patent" agreement, I think in the 1950s, 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. These firms have always been "good" competitorsnot 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 Toshiba TEC and NCR certainly do not share such an agreement. From my perspective, both IBM and Toshiba win here. It's 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 Toshiba TEC gains access to markets it never has been that strong in (North America, EMEA and LATAM), but without the benefit of the huge IBM influence in the account (over time). IBM won many accounts, because "no one got fired for buying IBM." What percentage of those accounts won't hold on over time because the company is now Toshiba TEC or this new joint venture? Other winners I think are HP, which has grown to number 2 worldwide in PC-based POS shipments (number 1, if you include off-the-shelf HP PCs that get used for cash registers); NCR and Retalix, which now will have a more level playing field in certain segments; and Epson, which will have more opportunities to sell its printers.
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You can reach Greg Buzek by E-mail.

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