IBM Plugs Away in PCs

Rolling out seven new models across its NetVista and ThinkPad lines, IBM this week tried to squelch rumors that it will vacate the PC business.

Rolling out seven new models across its NetVista and ThinkPad lines, IBM this week tried to squelch rumors that it will vacate the PC business. Perhaps more demonstrative of IBMs allegiance was the release of a service that helps IT manage PC software images.

Together, the announcements suggest a PC strategy that remains laser-focused on business and one that draws from IBMs historical strength – innovation. IBMs quarterly earnings report this Tuesday will reflect just how well that strategy is holding up amid economic tough times.

But before I let IBM off the hook, we should review the tumble its PC market share has taken in the past two years. Still feeling the impact of exiting the retail PC business two years ago, IBM has slipped to the number five supplier in the U.S., garnering a measly 6.1% market share in the second quarter, according to market researcher IDC. Worse, shipments slide 10.6% from a year earlier (Gateway, H-P and Compaq fared far worse, with unit sales plunging 17.2%, 18.8% and 21.3%, respectively, during the same timeframe, IDC says).

On a worldwide basis, the picture is slightly better with IBM claiming 7.2% share and clinging to a slim third place lead over H-P.

By its own reckoning, IBM clouds the picture by giving out piecemeal information and playing musical chairs organizationally. In February, IBM pulled Netfinity servers out its PC division and threw in printers, creating the Personal and Printing Systems Group. The combination renders 2000-2001 comparisons useless. Whats more, IBM wont tell you how much revenue is from printers and from PCs.

It will say is that the group lost $58 million in the first quarter and $8 million in the second – the right direction anyway.

Of course, all bets are off now as the tragic events of Sept. 11 take an economic toll. Thats why the third quarter earnings are so important. If the losses widened in line with the worsening economy, optimists can claim the quarter was an anomaly. I suspect, however, the events of Sept. 11 will have a lasting effect economically.

Numbers aside, IBM seems very much on track with its PC strategy. It has squeezed cost out of the fabrication and farmed out half of all NetVista manufacturing to overseas firms. ThinkPads are still manufactured by IBM, but its not hard to conclude that outsourced manufacturing could eventually be the rule rather than the exception. The company has also embraced a direct selling model for between 35-40% of U.S. sales made on the Web or through telecenters, according to IBM PC Division general manager Jon Judge.

"A large number want a direct option, but thats more prevalent in the U.S. as opposed to Europe and Asia," he says. Overseas, IBM relies more on distribution channel partners.

Despite heavier emphasis on the direct model, IBM isnt playing Dells volume and price game. It comes close to matching some of Dells lowball $500 and $600 rock bottom prices for desktops, but thats not where IBM places strategic emphasis.

"Price is no longer the driving force behind corporate PC purchases. So what is important? [They are] issues like the related costs associated with supporting PCs as part of the overall IT infrastructure and new technology requirements that enable PCs to be easily deployed and linked seamlessly with back-end systems and software," he says.

This has been true for years. The difference now is IBM has aligned execution with its market revelations. IBM spokeswoman Tara Sexton puts it succinctly: "You could say our strategy is to fit the PC business into the strategy of the larger IBM." In a nutshell, thats providing cost competitive IT solutions.

Even with the right strategy, the immediate future for IBM PC sales and its rivals can best be described as bleak. Consider the following IDC forecast. The PC market in the U.S. will decline 15.3% in unit sales by the end of this year, and 5.9% by the end of 2002. A rebound wont come until 2003, when IDC forecasts growth of 7.3% and 13.6% the following year.

Regardless, if only two companies were left standing, it would be IBM and Dell, according to IDC analyst Rodger Kay.

"The companies with the most potential are Dell and IBM. The rest are not very well positioned," he says. "Businesses seem to be expressing real interest in ImageUltra and ThinkPads are the design-envy of the industry."

ImageUltra is the name of the image maintenance service, which addresses one of the most costly and nettlesome problems for PC maintainers. IBM spokeswoman Kelli Gail says the cost for a customer will typically range between $10,000 and $35,000 annually. IBM says customers are beta testing ImageUltra, but would not release their names.

If ImageUltra cuts an average of $100 from the annual PC cost of ownership as IBM so boldly claims, the technology should go over well with IT. Without verification and feedback from customers, its too early to tell. And IBMs rivals offer similar technologies.

Another concern is that for now, you have to buy IBM hardware to get ImageUltra, smacking of the old days when IBM dictated to customers instead of giving them options. But some day, ImageUltra could run on non-IBM PCs. "We havent decided yet," says IBMs Sexton.

Is IBM finally destined for fame and riches in the PC business? Write me at [email protected] John Dodge is editor at large at eWEEK and heads the Ziff Davis News Service.