IBM's networking retreat is paying off

IBM's networking retreat is paying off

IBM chairman and CEO Louis Gerstner addressed analysts last week and praised the company's decision to exit the switching and routing business. Gerstner tempered that statement with the frank admission that IBM's business screeched to a halt late last year because of customers' Y2K-related purchasing delays, but he promised IBM is ready to roar back this year with an e-business focus.

Gerstner said that selling off the firm's networking hardware business last year to Cisco Systems is "paying off big time". He claims the deal means a lot of money to IBM in terms of OEM sales, and services provided to Cisco customers.

Gerstner also praised two other strategic retreats that affected short-term revenue but will make IBM's portfolio a profitable one in the long term. One is the sale of the IBM Global Network to AT&T; the other is the move to ease out of the dynamic random access memory (DRAM) chip market in favour of selling more complex and profitable semiconductors.

While the $US30 billion IBM Global Services division saw a growth slowdown last quarter (a flat $7.6 billion in revenue), that is just a "blip" in a strong seven-year track record, noted Gerstner. "Services is the best part of the IT industry," he said. He closed by telling analysts he still felt "very good about this year . . . we are now ready to exploit this e-business opportunity that we have been investing very heavily in over the last few years."

Gerstner acknowledged that IBM was late with its 10,000-rpm hard-disk drive and that the company has seen a decline in its PC business, though the latter development was expected.

However, Y2k proved to be the biggest blow to IBM over the past two quarters. "We should have seen it," said Gerstner, whose remarks were posted on IBM's Web site last week. "We predicted it, everybody predicted it, but nobody expected it to be so concentrated."

He touted e-business as the engine that would fuel future growth for the company. "e-business is shifting the workload from PCs into the computing and communications infrastructure," he said. "The demands and requirements already being placed on the infrastructure are enormous, and they're only beginning. They will increase exponentially."

He continued by stating that IBM's e-business infrastructure will be open, not proprietary, and that "generic" Web servers won't be able to handle the information load or complexity of such an infrastructure.

"In the world of e-business, more than anything else, the integration process is moving to an area called middleware," Gerstner said. "The once prosaic, unpopular middleware layer of software - databases, messaging, groupware, transactions and systems management - for all intents and purposes is the layer software developers are writing today - not the machine-level code, not the operating system - it's middleware."

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