IBM hits software pay dirt

IBM hits software pay dirt

Three years ago IBM stopped trying to make its own business applications and turned its attention to building infrastructure software, including application servers, databases, collaboration tools, and network and security management products. Today it's reaping the rewards.

While IBM's software group isn't the company's largest revenue producer - in the first nine months of last year, Global Services took in 45 per cent of IBM's total revenue, the hardware division 34 per cent, and software group 16 per cent - it's a major profit engine. In the same period, the software group contributed more to IBM's total profit (37 per cent) than Global Services (32 per cent) and the company's hardware division (23 per cent).

With software profits on the rise, IBM is gunning for a variety of markets. It's pitching money, consulting and sales resources at its software suite and battling Microsoft for corporate customers; the two vendors, arguably, are alone in offering a full complement of development tools, messaging and collaboration servers, databases, and management and security products.

In many of the software markets in which it competes, IBM has been steadfastly increasing its share of new business, at the expense of a slew of other vendors. But 2003 will still prove a challenging year for the vendor’s software business. After an acquisition-active 2002 in which it shelled out billions of dollars for software companies, including Access360, Holosofx, MetaMerge, TrelliSoft and Rational Software, IBM needs to digest its infrastructure additions and work to integrate its newly acquired technologies.

In addition, IBM's $US13 billion software group has a new territorial focus: midsize customers. While IBM is a natural fit with large corporations buying IT wares, it is trying to extend its customer range to include midsize companies with 100 to 999 employees.

IBM's mid-market plans centre on a growing number of independent software vendors and partners that will embed, install and resell IBM software products. To help these channel partners reach customers, IBM was investing $US1 billion in partnering and alliance strategies, the company said. In addition, the software group has unveiled scaled-down versions of its application server, database, portal and integration software designed and priced for midsize consumption.

Despite IBM's efforts, not everyone is convinced IBM's mid-market tack will work. Some analysts said that with its history of solving the most complex technology challenges, IBM won't find it easy to move downstream.

IBM is a large-customer company with a services bent, whereas midsize customers are looking for turnkey solutions, said Joshua Greenbaum, principal at Enterprise Applications Consulting.

Research director at AMR Research, Eric Austvold, agreed: "If I'm a CIO at the highest-level organisation and I've got 5000 people working for me, I use IBM. If I'm a CIO at a mid-market organisation and I've got five people working for me, it's a whole different ballgame.”

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