IBM's $1b PC group loss not that bad, analysts say

IBM's $1b PC group loss not that bad, analysts say

The near $US1 billion loss of IBM's PC group in 1998 is eye-catching, but PCs are not IBM's main focus at the moment and big is what one expects from Big Blue, analysts are now saying.

IBM last week released its 1998 annual report, which recorded revenue of more than $US81 billion and profit of more than $6 billion for the company overall but also noted a loss of $992 million for the company's PC business, the IBM Personal Systems Group.

"Part of the issue, of course, is that IBM is a large-scale company, so it's not completely unusual if they have a loss for it to be a big loss," said Roger Kay, an analyst with International Data Corp. "Still, this is a big hole."

It may be a hole that IBM intends to abandon rather than fill. IBM could be - and should be - getting ready to get out of the finished PC business, analysts said. IBM's strengths have long been services and technology, and it should place its efforts there, they said.

"The real momentum for IBM is as a technology and components supplier, not a finished product supplier," said David Stremba, PC analyst with Dataquest in California.

In fact, IBM's current structure undermines its PC business, according to IDC's Kay. IBM could combine its offerings into one big fist and pound the market, but instead each division is admonished to do business in the way that is best for it, irrespective of the rest of the company, according to Kay. "Exactly the synergies that you would expect IBM to provide to its different divisions doesn't happen, because of the profit imperative of each division," Kay added.

While a billion-dollar loss can't be welcome news, some signs suggest IBM may not be devastated by the performance of its PC business. In the 1998 annual report, Lou Gerstner, IBM chairman and chief executive officer, states that "the PC era is over" in his letter to shareholders, and elsewhere the report notes that IBM's future focus will not be on PCs.

"The PC is going to be joined, aug-mented (and ultimately outnumbered) by a vast array of information appliances," the annual report states. "IBM will build some of these devices, but our presence will be most evident under the covers - in the leading-edge chips and disk drives . . . that will power all these new personal computing devices."

These statements, and IBM's characterisation of its 1998 financial results as "strong", despite the PC business's billion-dollar loss, suggest an IBM contentment with the level of its PC focus.

"The tone set from the top with Lou Gerstner is that the PC is dead. He declared that first in October last year," said Stremba of Dataquest. "That's a pretty clear indication of where the company's moving."

Other indications came earlier in March with deals IBM struck separately with Dell Computer and EMC Software. IBM announced a $US16 billion technology pact whereby Dell will purchase storage, microelectronics, networking and display technology from IBM and receive some access to IBM's research and development laboratories (see story above). With EMC, IBM signed a $3 billion deal to supply them with advanced disk storage products.

But an IBM spokesman said IBM remains committed to the PC business, even as the company outsources some of its PC aspects. For example, Taiwan's Acer has made much of IBM's Aptiva PCs for the last several years, according to IBM's Rob Wilson. IBM's current strategy is based on services, software and technology, and while PCs are not an explicit strategic category, they are interwoven with the others, Wilson maintained.

Some analysts were unconvinced and said that IBM is likely to significantly alter its PC business, though its products will not disappear. IBM will probably sell off its brands or, more likely, license them, sometime this year or early in 2000, Stremba said. "They have a lot of brand equity, particularly in the mobile market with the ThinkPad," he said. "Certainly we're not going to see those brands fade off into zero."

But another observer said IBM's PC business serves the rest of the company as a "loss leader" - a product which brings customers into the IBM fold, where they buy additional goods and services from the company.

"IBM looks at the PC as the great enabler," said Jay Moore, an analyst with the Aberdeen Group in Boston. "The fact that they lost money (last year) on their PC business - they can probably afford to do that indefinitely and let those losses ride on the profits of global services and other divisions."

IBM spokesman Wilson attributed much of the billion-dollar loss to dismal performance in the first two quarters due to a massive inventory glut. "It took half of that year to work that inventory off, which was accomplished by price cuts," Wilson said. The third quarter improved and the fourth quarter was actually profitable for the PC group, he said.

Analysts agreed that IBM's PC Group results reflected a PC inventory glut. "IBM was one of the vendors caught in the channel being stuffed," Stremba said.

In separate news, IBM's Wilson said the company will ask shareholder permission to issue up to 59 million shares in the form of employee stock options. Currently, around 6 per cent of IBM employees participate in the company's stock option plan, and IBM wants to drive that figure up to between 8 and 10 per cent by the end of this year, Wilson said. Most participation comes from workers at the executive level, he said.

"We're trying to expand that to non-executive employees in critical roles around the company," Wilson said. "To accomplish our goal we need to issue more stock."

IBM's annual report can be accessed at 1998/letter/ibm98arlsen01.html or downloaded at annualreport/1998/downloads/pdf/ibm98arcledfi.pdf/.

PC boss denies claims

by Philip Sim

The Australian boss of IBM's personal systems group last week scoffed at suggestions that Big Blue would ever abandon the PC market in favour of simply being a services and components supplier.

"IBM should be viewed as a portfolio of businesses," said Phil Bullock, general manager of IBM's PSG group, Australia and New Zealand. "One of those businesses is the components business; another is the PC business.

"IBM gets enormous leverage from its various businesses. For example, we're in the top four PC suppliers in most countries around the world and it's very nice if you're in the components business to ensure that you have a supplier like that as one of your customers."

Bullock said that the PC group's last quarter was in the black, signifying that Big Blue has already turned around its profitability. He blamed the loss on "stocking levels, and the subsequent pricing reaction".

Bullock dismissed suggestions that Gerstner's comments about "the end of the PC era" indicated he was looking to get out of that business.

"There has been a lot of misquoting," Bullock said. "Saying it's the 'The end of the PC era' is not the same as saying 'The PC is dead'. We're in a cyclic industry where the network today is more critical than it has ever been before. That does mean that the PC is not going to be as pervasive as it has been in the past."

Analysts have a field day

Analysis abounded the morning after the Dell/IBM deal, in which IBM will license $US16 billion worth of PC parts to assembler and one-time PC manufacturing competitor Dell. For many, the deal was possibly the first step in Big Blue getting out of the computer-manufacturing business entirely in favour of the higher-margin parts business. As the New York Times' Saul Hansell noted, IBM actually earns more than Apple on each PowerBook sold, due to the components inside.

There was also nice inside info from the Wall Street Journal team of Jon Auerbach and Gary McWilliam. The reporters noted that the move to become a parts provider has rankled "hardware units inside IBM, which feel that the strategy undercuts their ability to sell products by helping rivals build better ones. Mr Gerstner sees this as a way to motivate the company's hardware units to remain competitive, analysts say."

The flurry of analysis included Matt Sargent, an analyst with Ziff-Davis, saying the deal is definitely a step in the direction of IBM abandoning the PC manufacture business.

But outlets also saw the advantages for Dell too, which will gain access to IBM's prized patents and thus get an indirect R&D shot in the process.

Real technology

"This deal helps legitimise IBM's claim that they are a real technology company," the Times' Hansell said. "Their R&D spending is starting to pay off." But the Times scribe was quick to say that the $US16 billion number was only an optimistic estimate - and neither side was bound to it. In fact, Dell only spent a few hundred million on IBM disk drives in 1998, and IBM wasn't expecting a revenue boost for a few years, according to Hansell.

Still, the Washington Post's Shannon Henry said the huge deal was being called "the largest agreement of its kind in the technology industry", giving the Dow a huge boost as well as lifting IBM and Dell stocks. She said the contract had symbolic importance for Big Blue, showing it can quickly deliver top-notch technology. Ironically, Henry noted that IBM's high prices and slow delivery in the box business helped Dell get off the ground in the mid '80s. Now Dell will be able to wean itself off the Wintel cartel for its technology, according to IDC's Amir Ahari, quoted by CBS MarketWatch. It was one of those rare times when the cliched "win-win" situation seemed to ring true for everyone.

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