IBM fights back with hardware23 December 2004
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IBM fights back with hardware
By Simon London
Published: December 23 2004 02:00 | Last updated: December 23 2004 02:00
Following the $1.75bn sale of its personal computer business to Lenovo of China, only 20 per cent of International Business Machines' annual revenues will come from hardware. How much longer, ask Wall Street wags, before the once dominant computer company has to drop "machines" from its name?
If these jibes get under the skin of Bill Zeitler, it does not show. Although software and services now dominate IBM, Mr Zeitler's systems and technology division, which makes computer servers, storage and silicon chips, is hardly small. Annual revenues are about $20bn.
While IBM does not lord it over the IT industry as it did in the 1960s and 1970s, it remains the largest seller of servers, with a market share of about 32 per cent. Only Hewlett-Packard, with 28 per cent, comes close. Sun Microsystems and Dell, numbers three and four, hover at around 10 per cent.
Not only is IBM's hardware division big, it is also growing. After losing market share throughout the late 1980s and 1990s, the rot was stopped in 2001. Big Blue's financial performance this year would have been sluggish if it was not for Mr Zeitler's division.
In the nine months to September, IBM's services revenue increased by only 2.8 per cent excluding the favourable impact of currency movements. Software revenue actually declined. Yet hardware revenues increased by 9.4 per cent.
With gross profit margin widening by 2 points to 28 per cent, the hardware business is solidly profitable, too. Hardware sales also help to bring in lucrative software and support contracts for other parts of the group.
A recent report from UBS, the investment bank, concluded: "We believe IBM's hardware momentum is sustainable [through 2005] and should help drive growth in very profitable software and maintenance."
While Mr Zeitler deserves full credit for rebuilding IBM's hardware business, the foundations were laid by Sam Palmisano, his predecessor and now chief executive.
In 2000, Mr Palmisano mapped out a strategy calling on IBM to share technologies more effectively across its hardware line-up, to embrace Linux and other products of the open source software community, and to start building tools to help companies manage increasingly complex IT systems. The project was known as Mach One.
"We gathered a few hundred people in an aircraft hanger down at Westchester Airport and told them the old plan wasn't working," recalls Mr Zeitler "We outlined a new plan - and we have stuck to it."
The most spectacular turnround has come in mainframes, the "big iron" servers on which IBM's fortunes were built. After 12 consecutive years in decline, mainframe revenues started to rise at the end of 2003 and have continued to climb at double-digit rates. Why? Because, in line with Mr Palmisano's strategy, IBM's mainframes have been re-engineered to run Linux alongside traditional IBM-designed operating system.
At the opposite end of the server market are "industry-standard" machines built around Intel chips, similar to those found in personal computers, and running a version of Windows, Microsoft's PC operating system.
Conventional wisdom held that computer companies could add little value to these low-cost servers and that Dell, the lowest-cost producer thanks to its direct sales model, would come to dominate.
But, again, IBM has bucked conventional wisdom. By borrowing technology from its mainframe and other high-end servers, the company has added features that it claims make its industry-standard servers more reliable and easier to manage.
"I have been able to borrow, to steal technology from across IBM," says Susan Whitney, general manager of industry-standard servers.
Competitors dispute IBM's claims about the technological superiority of its machines. But corporate buyers seem to be convinced: IBM has grown its Intel-based server business faster than Dell in recent quarters.
In server "blades", the young but fastest-growing category in which HP took the early lead, IBM is now number one.
To be sure, not all provinces of Mr Zeitler's empire are as prosperous. In data storage IBM has been soundly beaten in the market by EMC, a specialist storage company. In semiconductors Big Blue will not earn the return it hoped on $2.5bn invested in its chip-making facility at East Fishkill, New York State.
Far from getting out of these businesses, however, IBM's engineers are fighting back. Again, they are borrowing technology from elsewhere withing the group.
Last month saw the launch of a new family of storage systems based on the Power5 microprocessor, a product of the much maligned semiconductor business that is already found in IBM servers.
Says Mr Zeitler: "We've achieved a lot over the past three years. It is pretty clear to me that we can now turn our attention to accelerating growth."
Source: Financial Times
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