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Technology Stocks : IBM -- Ignore unavailable to you. Want to Upgrade?

To: Charles Tutt who wrote (7462)	2/25/2002 11:41:54 AM
From: Arrow Hd.	Respond to of 8218

Charles, let me take this discussion as an opportunity to provide some pricing methodology observations as a way to back into this profitability issue. There are multiple phases to a product's life cycle from concept stage to manufacturing end of life to withdrawal from maintenance and engineering change support and everything in between. Each phase has to pass a profitability test called the "deep discount test" which basically says "what is the lowest selling price of the product or its offering that makes money on a FULLY apportioned basis which includes full development and manufacturing engineering, SG&A apportionment, tax, import/export, etc. If it doesn't pass then the price goes up until it either does or the product is pulled due non-competitiveness. This pricing is by individual country to take into account currencies and country cost/expense ratios. --Further, if the product has sub-product systems, such as memory on a mainframe or UNIX server, then that sub-product also has its own P&L and has to pass the same testing such that IBM can defend an anti-trust case that claims IBM "dumped" or "bundled" or is guilty of "predatory pricing" of the sub-system to preclude competition from altering the IBM machine product with the non-IBM sub-system. FWIW, this is the anti-trust law that MSFT screwed up on but that is another subject. Anyway, there needs to be enough revenue from the machine sale to be able to be spread around to cover every "piece" of the machine including any bundled maintenance or warranty. This deep discount test is generally per machine serial number, not on a machine type or model or program level and certainly not on a cross-machine type "server" basis. IBM does not want to lose money on even one transaction. Ever stop to wonder why IBM never, ever loses these anti-trust cases or any private litigation that is brought against them? It is because they analyze everything down to a gnat's eyelash and then take the conservative business model as their benchmark. --So what happened with PC's? What happened is that these decisions, early in the cycle, are based upon anticipated events and what-if qualitative analysis so sometimes products don't work out for any number of reasons primarily due to draconian price attrition in a product sector. Fact is, PCs could be very profitable if everyone sold only a fraction of what they want to sell, priced them profitably, and sold only to those who could afford them but the nature of competition does not allow that to happen so you end up with a product that does not carry its weight at the machine serial level even though the components and intellectual property make the investment profitable on a program basis due to cross-product use, OEM sales and the licensing revenue from intellectual property. So what does IBM do? They try to make the product profitable by eliminating the really bad lines, cut costs on others, and so on until the profitability issue is fixed or the product goes away. That is why IBM is no longer in the consumer PC space excepting profitable portables. Every quarter they change their overall business model by adding and deleting businesses that do or don't fit. That is why it isn't a "one time event" and if it wasn't for Enron the JDSU deal would be nothing but another transaction. Hope this helps the discussion.