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Last Updated: Wednesday, 8 December 2004, 14:28 GMT
PC pioneer leaves its history behind
BY Jeremy Scott-Joynt
BBC News business reporter

IBM PC in 1981
IBM made the desktop computer into a mass market product

No-one, it used to be said, ever got fired for buying IBM.

That's not strictly true any more - certainly not in the PC business, where buying Dell's or HP's computers has been a relatively safe passage to management happiness for some years.

Indeed, within a few years it may not be possible to buy IBM hardware at all.

IBM's personal computer business is taken over by Chinese electronics giant Lenovo, while IBM itself focuses more and more on selling its information technology expertise to corporations.

The company's shift from selling boxes to selling services has become more pronounced in recent years, but its deal with Lenovo marks a milestone, analysts believe.

"This is a seminal moment," says Brian Gammage, of research group Gartner.

"It's a public statement that innovation has given way to execution as the main driver of the PC industry."

For the most part, in other words, companies just want a cheap, reliable box - although they may be prepared to pay for clever ways to keep it performing at peak efficiency.

Trust

The position IBM is building for itself is a far cry from the US firm's pioneering role in creating the market for a PC on every desk, which began with the first IBM PC in August 1981.

Other computers predated it. Apple Computer, for instance, can fairly lay claim to creating one of the first truly usable desktop computers: the Apple II, first launched in 1977.

But IBM opened the door to mass sales.

GLOBAL PC SALES 2004
1: Dell, 16.4%
2: Hewlett-Packard, 13.9%
3: IBM, 5.2%
4: Fujitsu/Fujitsu Siemens, 3.8%
5: Acer, 3.2%
6: Toshiba, 3.2%
7: NEC, 2.6%
8: Gateway, 2.2%
9: Lenovo, 2%
10: Apple, 1.9%
Market share, Jan-Sept 2004
Source: Gartner

By 1981 the firm had been selling information processing machines under the International Business Machines brand for almost six decades.

From punch-cards, it had moved on to marketing the huge mainframes which powered large corporations and government departments.

The PC was its ticket to a whole new market: moving the computer out of the realm of the specialist and onto every desk.

And the brand's stolid, reliable, white-shirt-and-tie reputation sold the concept to companies in a way Apple and other competitors had never managed.

Linguistic shift

Soon competitors started to catch up, however.

"IBM-compatible" PCs, as they were known, poured forth from companies such as Compaq, Hewlett-Packard, Digital and a string of other firms.

The fat profits in the PC market were more and more reserved for the two components which couldn't easily be commodified: the processor chip, from Intel, and the operating system from an upstart called Microsoft.

One indicator of IBM's slide from dominance was linguistic.

By the 1990s, no-one talked about IBM-compatible computers anymore. Instead, manufacturers lived in a Wintel world, dominated by Intel chips and Microsoft's Windows graphical operating system.

As the "Wintel duopoly" took hold, IBM - while remaining a massive enterprise - hit financial hard times.

Up the value chain

Its answer over the past decade has been a wholesale revamp to focus on added value: the services and expertise on which companies can rely to keep their systems up, running and reliable.

Lenovo chairman Liu Chuanzhi and John Joyce, IBM senior vice president
IBM has long wanted to focus on higher-margin services

In a sense, it is returning its attention to its core strength: keeping big clients, with big systems, happy.

That, analysts say, is where the money is.

"IBM's corporate services had a 12% profit margin in 2003, and 11% in the first nine months of this year," says Brian Gammage.

"The personal systems group [the segment going to Lenovo] is barely breaking even."

In other words, the PC market just isn't worth it any more, he says - for IBM or for many of its competitors.

Other companies with a broad portfolio such as Fujitsu or HP "will either have to follow suit or explicitly justify a decision to keep their hardware divisions".

The companies which can cope with wafer-thin margins are, by and large, all good enough.

The result?

"No vendor can afford the luxury of designing special stuff into their PCs," Mr Gammage believes.

Getting it right

What the deal means, therefore, is that Lenovo's low-cost Chinese workforce is perfectly placed to cope with the way the world is now, and to capitalise on the enviable reputation IBM kit has acquired.

And IBM keeps affordable access to the brands and equipment it can build into its service packages, with a solid saving on its bottom line.

What it does not mean, Mr Gammage says, is sleepless nights for the company which now dominates the PC market.

Dell will sell more than 21 million PCs this year - 16% of the world market.

Having mastered the art of balancing low margins with adequate service, its position - for the moment - seems unassailable.

"If it's about how you look after your [hardware] customers, then Dell remains the benchmark," Mr Gammage says.




SEE ALSO:
Chinese firm buys IBM PC business
08 Dec 04 |  Business
Lenovo confirms acquisition talks
07 Dec 04 |  Business
IBM sees profits continue to rise
16 Jul 04 |  Business
Sport the key for China PLC
18 May 04 |  Asia-Pacific
IBM speeds up its recruiting
19 Jan 04 |  Business


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