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

To: Lex Kroes who wrote (2941)	4/24/1998 12:24:00 PM
From: Arrow Hd.	Respond to of 8220

Lex, sorry for jumping to conclusions so quickly. To answer the question, if IBM had 45% growth in mainframe MIPs in the 70s the stock would have exploded. The reason is that there was no price attrition then other than what JR Kary pointed out which is when a new technology is introduced which provides for higher MIPs it was not unusual to reduce the dollars per MIP we charge. So, though the new replacement machine was more powerful than the older replaced machine and the replacement machine had a higher selling price, the price per MIP (measured in K dollars per MIP) actually went down a bit. That is why each year it took more selling and higher quotas to keep the growth going forward. So there were rarely any true price decreases but there was "pricing productivity" in the sense that the linear pricing slope of "K per MIP" was reduced somewhat with each new technology turn. But computers were enormously expensive in those days and programming was more difficult than today so the drivers which created MIP expansion did not exist as they do today especially when you introduce information drivers like the Internet. That is why you see 45% growth in mainframe MIPs quarter over quarter today and not in the 70s or 80s. In 1989 and 90 IBM was still selling mainframe MIPs at 100,000 dollars a MIP. According to independant consulting companies a mainframe MIP is priced somewhat below 10K a MIP today and probably falling. Obviously competition (Amdahl, Hitachi) and alternate platforms drive that equation. But what makes this truly difficult is the fact that as IBM entered the 80s the rental income was not enough to drive growth. As JR pointed out, no one bought their machines but rented them from IBM and the IBM sales rep had to take a debit on anything that came out so there was always this liability (until the inventory was written off). In the early 80s IBM switched strategies to incent true purchase either directly by the end-user company or via assignment of sale to a leasing company. This shot of revenue from new sales and converting the rent/lease base did give a double dose of quick revenue which made IBM look pretty good through the 80s but late in the decade the golden goose (rent/lease base) was sold off and now the business relied almost entirely on new purchases. That is why the IBM Credit Corporation was formed to create a lease revenue stream to somewhat offset the economic vagaries of relying on straight purchase. But a leasing company pays full up front and then relies on the lease stream which means the deal is not really profitable until late in the lease cycle and may not be profitable at all if the residual value assumptions are wrong. So in this troubled period of the early 90s IBM had to reinvent itself to just survive. That is why Gerstner is here. But in this reinventing certain fundemental strategies were changed and others modified which is too long for this thread but it resulted in major changes in mainframe architecture and pricing strategies to protect market share, platform usage, and so on which also protects a very profitable software and maintenance business. But it requires sometimes radical price attrition which is why it happens that 45% more MIPs are shipped but sector revenues stay flat and margins erode. I said that I thought this would abate over the next few years and thats another story but there is tremendous effort and emphasis being put on product leadership. When you are truly superior then the discussion is not totally on price. You will see some of that happen this year.