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Echoes from IBM's Conference for Analysts

Different Strokes for Different Folks...

...But Same Old Storyline: "OnDemand" Is a New Name for an Old Concept

PHOENIX, Dec 5 - Big Blue executives made it seem as if they were offering new and different strokes for different folks when they hailed their "OnDemand" concept as a new era of computing at the fall conference for Wall Street analysts.  But the only thing that's really new about the OnDemand idea is its name.  And IBM's effort to turn it into an "era," analogous to the "mainframe era," or the "client/server era" (see the IBM chart).

The way we see it, OnDemand is the modern-day realization of usage-based computing, a term that we and IBM first used back in 1984 (yes, 19 years ago!), when we asked "Is IBM a Utility?", in an Annex Computer Report editorial.  Here's an excerpt:

Increasingly, companies are considering new ways of running their businesses such as business transformation (or process) outsourcing, and utility-based computing, IBM said.

As you will see... that's hardly "new."  We first envisaged computing as a utility 18 years ago ("Is IBM a Utility?" - Annex Computer Report, 1984)

(An excerpt from "IBM-PwCC Tie the Knot," Oct 2002, emphasis added)

And we also wrote and spoke about "usage-based charges" and "metered" software back in 1985, for example, in the context of possible new software pricing schemes:

In early 1985, we suggested that IBM will have to find new ways of pricing the software, e.g., usage-based charges, or "metered" software.

(An excerpt from an Annex Research workshop outline)

Finally, more than 13 years ago, we said that the new services-driven era will lead to "value-based" pricing.  Which means that a vendor would share in the benefits of the services and solutions it provides to the customer (see Industry Stratification Trend - Mar. 30, 1990):

... What's new is that IBM is now coming around to embracing those concepts in practice.

(An excerpt from "IBM-PwCC Tie the Knot," Oct 2002, emphasis added)

What's also new is the "OnDemand" marketing name, a term that appears to have been conceived in the IBM PR labs about a year ago, and given birth in early 2003.  Prior to that, even the Big Blue used to spell it hyphenated and in quotes (see IBM News - United States 2002-12-12 - IBM to help insurers benefit from "on-demand"..., for example).

So does that mean that there is something wrong with the OnDemand concept?  No.  On the contrary...  If anything, it's something that's been long overdue in the IT industry, as you can see from the above quotes.  It's great to see IBM finally doing it.  And with gusto, too.  Just as it is good to see that IBM has begun to stress the small and medium business market this year (see “Small Is Now Big at Big Blue”, Oct 16, and "Finally Heard, Part II," Nov 2003, and "Finally Heard!", Jan 2003).

But for IBM to have become a pioneer in a marketing concept that any other IT vendor has had a chance to embrace at any time in the last two decades, is yet another testimony of the reticence, if not fright or aversion, of the Big Blue competitors to take the point in the IT industry.  Most of them would rather follow.  It's safer that way.  "Wait for Big Blue to clear the brush and harvest the first crops before we plant our seeds," they reason.

So it is with the OnDemand business. It remains to be seen if the IBM  term will "take."  The company's awesome marketing power is certainly giving the idea a big boost in the marketplace.  If the customers buy into it, other vendors will have no choice but to follow.

Stressing Services, De-emphasizing Technology

Another marketing message that seems to have pervaded IBM executives' comments at yesterday's meeting is their emphasis on services, and an implied (by omission) de-emphasis of technology (hardware).  That's new compared to Gerstner's infatuation with technology (see "Mountain Shook, Mouse Was Born," Lou Gerstner's first 'vision statement,' March 1994).

Once again, both marketing messages have been long overdue.  We have been saying ever since early 1996 that services is IBM's "crown jewel," and that Big Blue needs to get rid of its unprofitable or low-margin hardware (see "Break Up IBM!", Mar 1996, “Louis XIX of Armonk,” Aug. 1996).  So it's refreshing to see that IBM is finally doing it.  And again, that it's doing it with gusto.

But as we've also pointed out many times in the past, the new IBM tack poses some new challenges.  The metrics of the services-dominated business are quite a bit different from those of a hardware or software company.  One of them is that the services margins are typically lower than the historic margins in profitable hardware businesses, such as mainframes (zSeries) or the AS/400 (iSeries):

In fact, with the IGS net margin of only 6% between 1994-2002, one can argue that the IBM services has been a drag on IBM profitability.  Even at a time of sharply eroding hardware margins, and including the lower services profitability, IBM’s aggregate net margin has been higher (9% w/o charges, such as related to the Hitachi deal).

(An excerpt from an Annex Research executive workshops slide and “Shrunk by the Marketplace”, Apr 17, 2003)

A Wall Street analyst also grilled the IBM CFO, John Joyce, about it at yesterday's meeting: 

...pressed Joyce at the meeting to explain why it's a positive that IBM's lowest margin business -- services -- is growing the fastest. Joyce effectively skirted the question, reiterating past forecasts that the PWC business will lose money in the first half of the year and then make money in the second half.

(An excerpt from, 12/04/03)

So how should have the IBM CFO answered the question?  Far be it that we would want to put words in John Joyce's mouth, but here's why we think IBM's strategy of emphasizing services and de-emphasizing hardware is on the right track.

Reason #1: IBM had no choice.  

Reason #2: See Reason #1.  Period.

The trend toward services is customer-driven.  Customers want solutions, not boxes.  So IT vendors can either go with the flow, or go against it, in which case they'll exhaust themselves swimming upstream, and get washed up ashore - dead or barely alive.

As we predicted over 13 years ago, there has been a massive value shift from hardware to services and software (see Industry Stratification Trend - Mar. 30, 1990).  One consequence has been the inevitable lowering of profit margins relative to mainframe's heydays.  IBM has responded by trimming down.  It has adjusted and adapted.  It is still very profitable.  It is still growing.  It is still the leader of the IT industry.  

By contrast, some other formerly highly profitable vendors did not make the cut as the rules changed from hardware to services eras (e.g., DEC, Amdahl/Fujitsu, Hitachi...).  So IBM is still thriving and leading the industry, while some of the former greats are now mere "has been's" in the dustbin of history.  The secret to IBM's success and growth throughout the last 89 years of its existence has been Big Blue's ability to change.  The shift from hardware to services is just the latest episode.

That's how we would have answered that analyst's question.  There was no reason for the IBM CFO to duck it, or sound defensive.  IBM is making the most of the "new world" led by IT services.  And if it supplements its internal growth with savvy acquisitions (also see “Save, Spend and Split”, May 8, our five-year forecast for IBM), Big Blue just may return to double-digit growth, if not next year, then the year after that.  

And that's nothing to be ashamed of.  In fact, that's something to boast about.

 Happy bargain hunting!

Bob Djurdjevic

For additional Annex Research reports, check out... 

2003 IBM:  "IBM OnDemand: Different Strokes for Different Folks" (Dec 2003); "IBM vs. HP: Spinning Global Server Market Shares" (Nov 2003);  "Finally Heard, Part II," (Nov 2003), “Small Is Now Big at Big Blue” (Oct 16),  “On the Nose But No Cigar” (July 16), “A Paler Shade of Blue” (June 2), “Save, Spend and Split” (May 8), “Shrunk by the Marketplace” (Apr 17), “Turnaround Continues...” (Apr 15), "Finally Heard!" (Jan 29), “Start of a Real Turnaround?” (Jan 17).

2003 HP: "An HP Hat Trick (March 2003);   EXCERPTS - Analysis of Hewlett Packard Services FY02 results (May 2003);  2003 Global IT Services Heptathlon (May 23, 2003)Analysis of “Top 10” IT Leaders’ Market and Business (June 2003)

2002 IBM: “Gerstner: The Untold Story”  (Dec 27), "Gerstner Spills the Beans" (Dec 13), "On a Wing and a Prayer" (Oct 21), "IBM-PwC Tie the Knot" (Oct 2), "Half or Double Trouble?" (Aug 12), Wall Street/Main Street Chasm (June 25), “Wall Street Casino,” (June 21), Big Blue Salami (June 19), "Looming IBM Layoffs" (May 14), "IBM 5-Yr Forecast: From Here to Eternity?" (Apr 2002),  “Tough Times, Soft Deals,” (Apr 25, 2002), “Gerstner’s Legacy: Good Manager, Poor Entrepreneur” (Jan 2002), IBM Pension Plan Vapors: Where Did $17 Billion Go? (Mar 2002), "Sir Lou OutLayed Lay!" (Apr 1, 2002).

A selection from prior years: Is IBM Cheating on Taxes, Annex Bulletin 99-17 (May 1999),  IBM 5-year Forecast 2001: An Unenviable Legacy (June 2001) "Break Up IBM!" (Mar. 1996), Fortune on IBM (June 15, 2000), “Smoke and Mirrors Galore,” July 2000), "Slam Dunk of Bunk" (Jan 2000), Annex Bulletin 98-14 ("Wag the Big Blue Dog"), Armonk's Fudge Factory (Apr. 9, 1999)Where Armonk Meets Wall Street, Greed Breeds Incest (November 1998)Stock Buybacks Questioned: Is IBM Mortgaging Its Future Again?, 97-18 (4/29/97),  "Some Insiders Cashed In On IBM Stock's Rise, Buybacks" 97-22, 7/27/97,  Djurdjevic’s Forbes column, "Is Big Blue Back?," 6/10/97;  “Executive Suite: How Sweet!,” (July 1997), "Gerstner: Best Years Are Behind", Aug. 10, 1999), "IBM's Best Years Are 3-4 Decades Behind Us" (July 1999), "Lou's Lair vs. Bill's Loft" (June 1999),  "Corporate Cabbage Patch Dolls," 98-39, 10/31/98; Djurdjevic’s Chronicles magazine October 1998 column, "Wall Street Boom; Main Street Doom", “Louis XIX of Armonk,” (Aug. 1996), "Mountain Shook, Mouse Was Born" (Mar. 25, 1994), “A Nice Guy Who Lost His Compass” (Jan 26, 1993), “Akers: The Last Emperor?” June 1991), Industry Stratification Trend (Mar. 30, 1990) etc.]

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Volume XIX, Annex Newsflash No. 2003-12
December 5, 2003

Editor: Bob Djurdjevic
Published by Annex Research, Inc.

P.O. Box 97100, Phoenix, Arizona 85060-7100
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