Hi Kemble! Why IBM Should Scrap Desktop PCs
"There is a PC business model out there that's profitable," Chief Financial Officer John Joyce told analysts. "We're working very hard to get to that [more direct] model."
But IBM has been chasing that business model for years; it continues to be an albatross around its neck. Some have even suggested that the company should get out of the corporate PC business and instead rely on partners like Dell (nasdaq: DELL) to produce and sell systems for them.
forbes.com
April 19, 2000
By Lisa DiCarlo
NEW YORK. 6:10 PM EST-IBM is running out of excuses for its failure to grow revenue in its hardware businesses.
IBM (nyse: IBM) yesterday reported first quarter earnings per share of 83 cents, beating expectations by a nickel. But overall revenue of $19.5 billion was down 5% compared to the same period in 1999. Hardware revenue for the quarter was down 12%, to $7.7 billion. Within the hardware segment, personal systems--which include desktops, portables and PC servers--took the biggest hit.
PC profitability has eluded IBM for years. In 1998, IBM lost almost $1 billion on PCs, and over half a billion dollars in 1999. In fact, since IBM started to break down operating earnings in 1998, the company hasn't once reported profits in the personal systems segment.
For the past three quarters, IBM has blamed a Y2K lockdown for the decline in mainframe and large server sales, and inefficient distribution channels and harsh retail environment for continuing losses in PCs.
Now those excuses are beginning to sound a little worn, and the pressure is on chief executive Louis Gerstner to prove that the company that invented the personal computer can still make money off its brainchild.
On April 18, the company's executives urged analysts not to change their second-half estimates, claiming that IBM had fixed much of what ailed its hardware business by exiting unprofitable or non-strategic businesses. At the same time, IBM said that unfavorable market conditions have passed.
So with the problems "fixed" and no excuses left, will Gerstner be able to turn his ailing hardware division around?
In mainframes and large servers, yes. In PCs, not likely.
IBM stands a far better chance of reviving its enterprise server business for several reasons. First, it's now run by IBM veteran Sam Palmisano, who oversaw huge growth in IBM Global Services. Second, IBM's unparalleled intellectual property portfolio gives it the ability to develop systems with unique technology. Third, servers will become even more important to corporations running e-businesses and data centers, giving IBM and others an almost limitless market opportunity.
In PCs, however, the picture is much dimmer.
IBM has no recent track record of selling large volumes of PCs profitably. For years, the company has tried with little avail to cut costs by streamlining distribution. Late last year, as companies like Hewlett-Packard (nyse: HWP) and Compaq (nyse: CPQ) were going gangbusters with retail sales, IBM couldn't find a winning formula and pulled out of retail entirely. While chain stores no longer sell the Aptiva line of computers, IBM is still hawking its PCs on the Internet.
IBM has had better success lately with ThinkPad portables and Netfinity PC servers, which, unlike desktop boxes, have not yet been reduced to commodities.
"There is a PC business model out there that's profitable," Chief Financial Officer John Joyce told analysts. "We're working very hard to get to that [more direct] model."
But IBM has been chasing that business model for years; it continues to be an albatross around its neck. Some have even suggested that the company should get out of the corporate PC business and instead rely on partners like Dell (nasdaq: DELL) to produce and sell systems for them.
Still, Jay Stevens of New York-based Buckingham Research expects IBM's PC business to break even by year's end. Last fall's retreat from retail should help some, but the company has an enormously long climb up just to break even--in an increasingly unrewarding business.
It should probably just get out. |
