IBM Re-Engineers Its Vision to Fit the Changing Technology Landscape
Old dogs can teach new tricks, apparently.
International Business Machines Corp.’s stock has been a leader of the rally in technology stocks recently on Wall Street, rising more than 10% in the last month to a new 52-week high of $121.98 last week. It closed Friday at $120.40.
The venerable giant, now 90 years old and with close to $90 billion in annual revenue, is attracting investor attention because of its renewed competitiveness in key areas of computing and because of a big vision of where technology is heading. It is backing that vision with massive investment.
To IBM, the information industry--computing, electronics and communications--is evolving into a utility business, with vast grids on the Internet serving as information power plants as generating stations serve in the electric industry. Information users, whether big companies with networked computer systems or individuals with PCs, phones and other devices, will tap into information the way electricity users switch on a light.
“Customers love technology, but they’re concerned about cost. So sharing the technology to make its use efficient is a prime requirement,” Irving Wladawsky-Berger, an IBM vice president of technology and strategy, said in a recent speech.
Sharing is already leading companies to hire other firms--such as IBM--to handle their information departments. That’s why services, in which IBM takes over management of all or part of a customer’s information technology needs, have become the computer giant’s largest business, at some $35 billion in annual revenue.
But now the big company is moving to grid computing, in which IBM puts together Internet networks that serve as computing stations. An example is the grid for breast cancer research that IBM is building in collaboration with the University of Pennsylvania.
The cancer grid will store mammographic information from thousands of hospitals, allowing researchers to study disease clusters and medical personnel to compare a patient’s latest mammogram with previous ones. Earlier detection, accurate diagnosis and lower costs are the hoped-for benefits.
IBM is investing more than $11 billion a year in research and development, and plants and equipment to build up such information utilities, from which companies can lease computing resources.
Included in that total is $1 billion that IBM is investing to support the Linux operating system, which is open source--that is, available to all to tap into at no cost or restriction, unlike Microsoft Corp.’s proprietary Windows operating system, which imposes costs and restrictions.
“IBM wants to avoid the Microsoft ‘tax’,” says Andy Kessler, a San Francisco-based independent technology expert, and needs open systems to realize its vision of a wide-ranging information utility.
But IBM is no longer competing directly against Microsoft. Nor is it pushing its PowerPC micro-processor in direct competition with Intel Corp.’s Pentium. Rather, it collaborates on many products and projects with Intel and with Microsoft and departs from them on others.
IBM, for example, has just opened a $5-billion semiconductor plant in East Fishkill, N.Y., and announced a breakthrough in semiconductor technology that will allow even smaller, more intensely powerful microchips. The aim is to enable tiny cell phones to function more extensively on information networks.
“IBM’s vision is of millions of tiny devices hooked into the Internet computing grid,” says Ulric Weil, a Washington com-puter industry analyst who has followed IBM for decades. “IBM doesn’t want to make the tiny devices,” Weil adds, “but wants to provide their information network.”
It’s noteworthy that the company is investing heavily despite the slowdown in orders for computers and servers that led to a 17% decline in IBM’s third-quarter earnings compared with a year ago.
By such investing, IBM and other companies in high tech are saying that the slowdown is short term but growth of information industry is a basic trend. IBM’s chief executive, Louis V. Gerstner Jr., summed up the attitude in a recent statement: “The short-term cyclical problems of the industry are totally unrelated to the fundamental shift in customers’ buying behavior that foretells an industry driven by services.”
Gerstner, an engineer and management consultant who took IBM’s reins in 1993, is widely credited with saving the firm by moving it to a focus on technology services. Gerstner may retire next year, at age 60, analysts say, and be succeeded by Samuel J. Palmisano, IBM’s chief operating officer. In a 28-year career at IBM, Palmisano, 49, has acquired a reputation for making money--in both his own stock portfolio and by turning operating divisions, including personal computers, from loss makers to profit earners.
IBM’s stock price is up because analysts credit it with renewed competitiveness. “It is gaining market share in servers against Sun Microsystems and Hewlett Packard and Compaq, and in Internet services against many companies,” says analyst Gary Helmig of Soundview Technology, a Stamford, Conn., investment bank.
And for the first time in years, IBM is garnering respect for its technological prowess even from Silicon Valley, where many entrepreneurial firms dismissed IBM as a big bureaucracy. “It is one of the leaders in applied research,” concedes Roger McNamee, a partner in Integral Capital Partners, a Menlo Park venture capital firm. “And its patent portfolio is the envy of the industry.”
Finally, IBM carries a major lesson for all business.
A lot has been written recently about IBM having “transformed” itself from a peddler of hardware to a provider of services. But the firm’s new approach actually dates to its beginnings around 1914 under Thomas Watson Sr. It is legend that Watson, a salesman himself, told his salesmen, “Don’t talk machines, talk the prospect’s business”--not what you can buy from me but what I can do to help you, in other words.
Corny but shrewd advice for the information technology age of today as much as the business world of nearly a century ago.
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James Flanigan can be reached at jim.flanigan@latimes.com.
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International Business Services?
IBM is far more complex today than the simple large-computer maker of 10 years ago. Here is a breakdown of its business segments in the first six months of 2001.
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Segment Revenues* Pretax income* Global services $17.2 billion $2.4 billion Technology 4.4 bil 177 million (Semiconductors) Personal Computers 6.2 bil -66 million & Printers Enterprise systems 6.6 bil 917 million (Servers & mainframes) Software 5.6 bil 1.3 billion Financing 1.7 bil 564 million (of leases & customer e-systems) Total $41.7 bil $5.3 billion
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Source: Company report
