Re: [OT]: IBM's view on how chips make 'valued-added' proposition
From: Michael Austin (maustin_at_firstdbasource.com)
Date: 06/09/04
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Date: Wed, 09 Jun 2004 13:09:28 GMT
John Smith wrote:
> IBM's Computer-Server Business
> Puts the Squeeze on Rivals
>
> By WILLIAM M. BULKELEY
> Staff Reporter of THE WALL STREET JOURNAL
> June 9, 2004; Page B1
>
> ARMONK, N.Y. -- Big Blue is back in Big Iron.
>
> International Business Machines Corp., once a doormat for rivals hawking
> cheaper and faster computers, is making strong gains in the $46 billion
> global market for heavy-duty "servers" that power most big businesses.
>
> IBM's server surge hasn't gained much notice, in part because it has been
> overshadowed by a slowdown in the company's giant services business, which
> accounts for about half of its total revenue. But it has put the squeeze on
> competitors. Servers -- essentially any computer bigger than a desktop
> model -- coordinate computer networks, crunch data, dish out Web pages,
> retrieve customer records and perform other tasks.
>
> After regaining the top spot in servers in 2002, IBM captured 32% of the
> world-wide market last year, widening its lead over Hewlett-Packard Co., at
> 27%, and a sinking Sun Microsystems Corp., with 12%, according to
> International Data Corp., a market-research firm in Framingham, Mass. Dell
> Inc., the only other major company that is growing in server-market share,
> stood at 9%.
>
> IBM's gains also defy widespread predictions that the computer landscape is
> moving toward domination by low-priced, low-profit "Wintel" machines based
> on Intel Corp. microchips running Microsoft Corp.'s Windows software. It
> also stands to be a long-term revenue builder for IBM, since servers drive
> add-on sales of software, peripheral equipment and some service business.
>
> Although IBM has had success selling Wintel boxes of its own, its most
> powerful, higher-priced models use IBM-made chips and a variety of other
> operating-system software. Some are smaller, modernized versions of its
> giant mainframes of yore, once the engine of IBM's profitability. Indeed,
> IBM says the key to its gains was its decision to continue designing and
> manufacturing a proprietary line of microprocessors, the miniature brains of
> computing, instead of standardizing on Intel chips as many competitors have
> done. IBM also has been selling more servers that run on the free Linux
> operating software, the bane of Microsoft.
>
> IBM's strategy is to capture the high-profit part of the server market by
> using its chips to design machines with unique advantages, and avoid
> competing with Dell for the low-margin commodity business. Innovation can
> "break monopolies," says IBM server chief Bill Zeitler.
>
>
> German computer-services giant Sparkassen InformatikGmbH earlier this year
> placed one of the largest server orders in history -- 20 new-style IBM
> mainframes for an estimated $200 million (Sparkassen wouldn't discuss
> prices). Among other recent wins: the American Society for the Prevention of
> Cruelty to Animals, which replaced an H-P server with an IBM, and Alpine
> Electronics, a unit of Alps Electric Co. that was a longtime H-P customer.
> Alpine switched to IBM servers last year after concluding Big Blue's
> technology made its computers cheaper to operate, says Vasile Giulea,
> information-technology manager at the car-audio maker,
>
> Steven Milunovich, an analyst with Merrill Lynch & Co., predicts that IBM
> and Dell should continue to gain share in servers "while H-P and Sun are
> caught in a squeeze."
>
> IBM's Mr. Zeitler says his boss, Chief Executive Sam Palmisano, sees 15 to
> 20 points of server market share "up for grabs," with IBM well-positioned to
> gain. Mr. Zeitler says the server industry should see four or five years of
> growth because of replacement of old machines and huge new demand from
> computing-intensive applications like high-tech security tags, digitization
> of movies and video, and the computerization of health care.
>
> IBM's rivals say they will hold their own. At Sun, Clark Masters, executive
> vice president for enterprise systems, says his company has plenty of
> resources to continue designing high-performance chips for its computers. He
> adds that Sun's recent decision to buy Intel-compatible chips from Advanced
> Micro Devices Inc. for use in low-end servers will make them
> price-competitive with IBM's and H-P's low-end models.
>
> H-P, meanwhile, has been touting a "high tech, low-cost" strategy that it
> says will eventually prevail over IBM's "high tech, high-cost" strategy.
> Mark Hudson, H-P's server marketing chief, says his company's long-term plan
> to phase out servers based on its proprietary chips in favor of Intel chips
> is good for customers, allowing it to provide "industry-standard components"
> at prices "that customers will like."
>
> It has been a slow but steady climb for IBM, which saw its near-monopoly in
> business computing destroyed by competitors starting in the late 1980s. It
> hit a low of 23% of the server market in the IDC survey of 2000.
>
> Even before that, when things were looking their grimmest, then-CEO Louis V.
> Gerstner Jr. asked the company's technologists why IBM shouldn't simply buy
> microprocessors from outsiders, as other computer vendors were starting to
> do. Ravi Arimilli, who heads the engineering team that designs chips for
> IBM's servers, says Mr. Gerstner's question forced the chip designers "to do
> something dramatic."
>
HP Are you Listening!!!!! Differentiate, don't capitulate!!! When you
are at the mercy of chip manufacturers, you are just another one of the
same things, different page (most times the same page)... IBM took that
big step and changed books instead of being another page in the same
book. Hmmmmm. where have we heard this advice before??? Right here in
COV. From everything I have ever known about Big Blue is they never did
what Wall Street wanted -- and always came out bigger and stronger and
usually on top!
Michael.
> Their solution: the first chip to include two processors on a single piece
> of silicon, called the Power4. The design cut costs and boosted performance.
> Intel recently announced it will introduce chips with more than one
> processor next year.
>
> The Power4 chip became the heart of both IBM's family of servers running the
> Unix operating system that is popular in business computing, and of a line
> of midrange proprietary computers called the iSeries. Versions are also
> being used in IBM supercomputers, including one called Blue Gene being built
> for the U.S. Energy Department's Lawrence Livermore Labs that is supposed to
> be the world's fastest computer. This year, the new Power5 chip started
> rolling out of IBM's $3 billion semiconductor fabrication plant in East
> Fishkill, N.Y.
>
> Fossil Inc., a maker of watches and wallets based outside Dallas, considered
> IBM and several other vendors when it needed to create a world-wide computer
> system to unify units in 13 countries. Ed Jurica, Fossil's chief information
> officer, says he was persuaded by the IBM machines' ability to run many
> different software programs simultaneously.
>
> That capability, known as "virtualization," stems in part from the
> two-in-one processor design of the Power4. Mr. Jurica says Fossil is running
> 27 software applications on four IBM servers, minimizing the number of
> computers he needs in his computer room. "We saved space and we can change
> the system in a day" without having to buy a new computer, Mr. Jurica says.
>
> Some critics question whether IBM's bet on chips will pay off long term,
> given the continuing industrywide trend of growth in Intel-based servers.
> Indeed, IBM's Intel-based server product line was its fastest growing last
> year. Laura Conigliaro, analyst at Goldman Sachs Group Inc., calls IBM's
> chip operation an expensive "albatross" that the company "has chosen to
> stand by because of its strategic importance to the [server] systems group."
>
> Another vital reason that IBM makes its own chips is to preserve its
> near-monopoly in mainframe, the most expensive servers. These computers use
> an operating-system software that runs only on IBM's chips. Japan's Fujitsu
> Ltd. and Hitachi Ltd. dropped out of the mainframe business in 2002 because
> they couldn't afford the cost of continuing to develop new chips to match
> IBM's, though Unisys Corp. remains a niche competitor. IBM's mainframe sales
> rose 34% in its first quarter, after a 7% rise in 2003, and its mainframe
> plant in Poughkeepsie, N.Y., is running three shifts a day to meet demand.
>
> IBM's chip business is supposed to stand on its own, and market to other
> customers. In recent years IBM won the microprocessor business of all the
> major video-game makers, and also sells the microprocessors used in Apple
> Computer Inc.'s Macintoshes.
>
> But IBM engineers haven't been able to scale up the production of a number
> of types of chips ordered by other companies, so it isn't using the new
> plant's full capacity. IBM's chip business reported a loss of $154 million
> in this year's first quarter, on top of a $252 million deficit last year.
> IBM executives vow it will break even by year end.
>
> Earlier this year, IBM merged the chip business into the larger server
> business -- and made chip executives' bonuses dependent on server profits
> rather than just chip sales -- to reflect the fact that "the reason we have
> chips plants is because we're in the systems business," says Mr. Zeitler. In
> the first quarter, IBM's combined systems and technology group had a pretax
> profit of $170 million on $3.78 billion in sales. That compares with
> Hewlett-Packard's $120 million profit on $4 billion in server and
> data-storage sales.
>
>
>
> URL for this article:
> http://online.wsj.com/article/0,,SB108674389886532377,00.html
>
>
>
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