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IBM has succeeded in remaking itself as a modern technology company

IBM Takes its Place in Silicon Valley

For years, IBM got no respect from the younger firms sprouting up in the productive corridor between San Francisco Bay and the Santa Cruz Mountains. Bill Gates famously spoke of “riding the bear,” referring to Microsoft’s rise to power on the back of its relationship with IBM, which belatedly got into the PC business after Cupertino’s Apple showed that selling small computers to people was big business.

Aside from Microsoft, IBM helped launch Intel into a position of sustained leadership in Santa Clara. IBM made Intel’s processor architecture the standard for the PC industry. But IBM, which celebrated its 100th anniversary in 2011, was much less nimble than more youthful competitors like Compaq and Dell. Eventually, IBM dropped Intel altogether, selling that business in two big slices to Lenovo, the PC clients in 2005 and the PC servers 2014.

Thus, the story of IBM since the turn of the millennium has been one of declining revenues, as it stepped away from businesses in which it could no longer compete. In addition to dropping PCs, the company sold its hard drive business to Hitachi, its printer organization to Ricoh, and its chip factories to GlobalFoundries (if you can call that last one “selling” when IBM had to wrap $2 billion around the deal to get GlobalFoundries to take the loss-making fabs away).

Each deal made IBM a smaller company. But Ginni Rometty, CEO since 2011, had a plan. The idea was to get rid of any business in which the company had little or no competitive advantage, and double down on areas where the company could bring some special sauce to the game. Intel and Microsoft controlled most of the important intellectual property in the PC business, and companies like TSMC and Samsung were champions at making chips.

Of course, IBM wanted in on the burgeoning cloud business but it was at a distinct disadvantage to earlier movers Amazon, Microsoft, and Google. Where it had an undeniable advantage, though, was among enterprise customers, whose computing needs are complex and stringent. By focusing its cloud efforts on these customers, IBM was able to enjoy a much better position.

Enterprise customers are notoriously squeamish about letting sensitive data out of their control. They are also wary of vendor-lock-in. So, IBM embraced a hybrid cloud strategy and open source software. It let customers run their computing either in the cloud, on premise, or some combination of both. Eventually, it settled on a flexible system that would let customers move individual services back and forth between the two environments. Among other results of this strategy was the company’s purchase, for more than $33 billion, of Red Hat, the largest supplier of open source Linux and other enterprise software.

This, then, is the signature of IBM’s new businesses: they are incubating in sectors with growth ahead of them and in which IBM has a technological advantage. So, for example, while it got rid of the silicon fabs, it continues to design chips (Power and Z) that go in its enterprise systems. And while it got out of PCs, it has a nice relationship with Apple to make sure that IBM customers can use iPhones to access IBM services.

At IBM Think 2019, the company’s rolled-up trade show (which replaces myriad smaller conferences) in San Francisco last week, the atmosphere was more like a event than anything traditionally IBM. The same block on Howard Street that Salesforce uses was blocked off and carpeted, while rock and roll blasted from speakers on the street, and a crowd of tens of thousands flocked to Moscone to hear Rometty and her team speak.

The new areas — cloud services, artificial intelligence, blockchain, security, Internet of Things, cognitive computing, Watson, quantum computing — were all on display. Until a quarter ago, these new businesses were not contributing enough to IBM’s top and bottom lines to offset the declines in the old businesses. But as of last quarter, these “strategic imperatives,” as the company calls them, represented nearly half the company’s revenue, which was finally at least flat.

There’s more work to be done, but IBM is nearly out of the woods. Because of their unique positioning, the new businesses are more profitable than the old ones. As they grow to assume an ever larger share of IBM’s total revenue, profitability should rise as well. And the best news is that the company’s position will be sustainable, given its leadership in these new technology markets.

Written by

Technology Analyst

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