What's Behind IBM's Contortion Act

What on earth is happening with IBM? Something epochal--more than a mere case of bureaucracy or the difference between big and small computers.

The computer as we know it is fading into history as the technology of computing, communications and digital electronics changes. And what IBM is going through, here and abroad, speaks volumes about the U.S. corporation in the contemporary world. It's no picnic out there.

"The whole post-World War II concentration on stand-alone computing machines--mainframes or personal computers--is ending," says Sheridan Tatsuno, head of NeoConcepts, a consulting firm near Santa Cruz. Therefore, the world is changing for IBM and every other computer maker, including the big Japanese companies.

The new form will be a telephone-computing hybrid. "The microchip was the product of the 1970s and '80s, but for the '90s it will be the communications laser," says Paul Saffo, research fellow at Menlo Park's Institute for the Future. The laser is the technical force behind compact discs, optical fibers, the future of telecommunications and computerized video.

Technology experts see the computer business traveling on two tracks, one exemplified by computing appliances to be carried in pocket or car--a combination hand-held computer, TV set and telephone.

On the other track will be sophisticated workstations, much more powerful than today's machines. In effect, they will be desktop supercomputers capable of billions of calculations per second, capable of directing the flight of a NASA space shuttle.

Yes, it will be a few years before such science fiction becomes business fact, but understand the trend and its implications.

It means power for pennies. The cost of computing has come down 90% in the last five years and will practically vanish in the future when a three-inch piece of vinyl contains the history of the world or the complete engineering plans for a power plant. The value is in the information, the machine carrying it hardly matters.

Already, complex microchips contain so much information and yet cost so little that a company of 1,900 employees--such as Dell Computer--can turn out a machine and sell it cheaper than IBM, which has $69 billion in annual sales, more than 350,000 employees and is the world's largest maker of personal computers.

And as chips get more powerful, computers get smaller. In the old days, more power meant bigger machines--eight-cylinder cars, big iron presses. Now electronics puts more punch in a tiny package.

That means companies must adapt. "We have millions of square feet of floor space for manufacturing and inventory that no longer exists because microchips have become so powerful," a top IBM official says. Staffing that was necessary for such floor space now lingers on. Sales forces that sold million-dollar computers are hard to support when computers cost thousands.

So IBM has announced a restructuring. Headquarters at Armonk, N.Y., will become a holding company, freeing up separate divisions so they may set prices and policies, form ventures with other companies and be flexible.

But that may not be the end of restructuring. "IBM has been watching the Japanese," Silicon Valley consultant Regis McKenna says. Don't be surprised if IBM enters into a massive joint venture with Matsushita, the Japanese maker of Panasonic televisions and VCRs. Matsushita already manufactures some of IBM's personal computers. In a joint venture, say knowledgeable observers, the Japanese company would handle appliance-type video computers and IBM would contribute the technologically advanced workstations.

Such a venture no doubt would cause dismay, but it would be little different from the arrangement Fujitsu, Japan's largest computer maker, has with Sun Microsystems. Fujitsu, IBM's archrival, backed Sun's development of its workstation computers, giving the U.S. company the wherewithal to succeed while the Japanese company benefited from Sun's technology. It also served to put IBM, which trails Sun in that particular computer market, in the shade.

Also, Fujitsu last year bought control of ailing British computer maker ICL and has turned it into the most wide-awake computer maker in Europe, after IBM.

As IBM announced its restructuring during the past week, the air has been blue with lamentations for the passing of the old company, which was renowned for paternalism, lifetime employment and generous benefits. But less was said of the reason IBM is changing--because computer customers, who would just as soon buy a cheap Dell computer as an expensive IBM, refuse to finance paternalism and benefits.

IBM stock has tumbled to its lowest point in 10 years; it sank to $83.50 at one point Tuesday before recovering to close at $86.25. Is the stock, with a $4.84 annual dividend, a buy? It may well be, say analysts, but keep a watchful eye. IBM has been the world's most powerful company in the first era of the information age. And it's hard to change when you're on top. What happens to IBM as it tries to do so may well show whether other companies--and indeed the nation--can successfully adapt.

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