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IBM CORPORATE

Commemorating an IBM and IT Industry Milestone - April 7, 1964

Mainframe at 40!

IBM at 90, Mickey Mouse at 75, Barbie Doll at 45… All Make Mainframe Look Like a Relative Youngster

PHOENIX, April 2 – Long regarded as a symbol of ageless American youth, Barbie Doll turned 45 last month (Mar 8). 

Long regarded as a timeless Walt Disney cartoon character, Mickey Mouse turned 75 last November (18).

Long regarded as a penultimate American corporate success story, IBM turned 90 this year. 

The three birthday celebrants make the mainframe look like a relative youngster by comparison.  On Wednesday, April 7, the mainframe will be turning "just" 40. 

It may be some consolation to IBM that its middle-aged youngster shares its birthday with such Hollywood notables as the Oscar-winning protagonist of the “Gladiator” with a “Beautiful Mind” who morphed into a “Master and Commander” last year (Russell Crowe, born April 7, 1964).

So young, yet so old… For, IBM’s industrial youngster has been compared to dinosaurs for the last 15 years.  It all started in May 1999…

Carl Conti, at the time the head of IBM's mainframe line of business (the Enterprise Systems – the “Battleship IBM”), stunned a business audience at an IBM conference in Phoenix in May 1989 by likening the mainframes to dinosaurs.  Then he explained why he hoped such a comparison would come true.

“The dinosaurs roamed the Earth for 200 million years,” Conti said.  “IBM is 75 years old.  The mainframe is 25 five years old...”  (Well, 40 now…).

Conti got his laughs 15 years ago.  But ever since, his product line has been saddled with an unenviable image – that of a dying species.

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Is the analogy fair? 

Yes and no.  Yes, it is fair if you look at the declining IBM mainframe revenues.  What’s now left of the once mighty “Battleship IBM” is a mere frigate (only $4 billion or 31% of its awesome $13 billion-frame in 1990, or just over 4% of IBM 2003 revenues). 

And no, the dinosaur analogy is not fair, because the mainframe did show some signs of life in 2003, however fleeting its “recovery” may be.  The zSeries (the new marketing name for the image-plagued mainframe) had a modest (7%) currency-related growth in 2003.  It was the first up-tick on the mainframe chart in 8 years!  Alas, without the 7% foreign exchange boost, even last year would be a flat year for the zSeries (see the chart). 

Sextuplets at Birth

Ironically, the mainframe was not even called that at birth.  It was announced on April 7, 1964 as just the System/360. 

(The term mainframe emerged in the 1970s, as IBM sought to differentiate itself from the “minicomputer” makers [DEC, HP] and later “microcomputers,” too, which morphed into PCs).

The S/360 wasn’t just a single computer, either, as had been the case with computer industry announcements prior to 1964.  It was a whole family, sextuplets at birth, with more S/360 babies to come later on.

But some of the six babies were stillborn, as we find out from the late IBM chairman and CEO, Tom Watson, Jr., in his 1990 book, “Father, Son & Co” (Bantam Books).

“Not all of the equipment on display was real,” Watson wrote.  “Some units were just mock-ups made of wood.  We explained this to our guests, so there was no deception.”

So besides being the day of “the most important product announcement in company history,” according to Watson, April 7, 1964 was memorable as the day on which “virtual machines” premiered in the computer industry - years before the term was to be used to describe “virtual machines” as separate domains within a mainframe operating system.  Alas, some were the plywood variety.  J

Not to be distracted with such small details as babies not being ready for birthing, Watson threw a gala birthday bash that is yet to be surpassed. 

On damp and windy morning of Tuesday, April 7, 1964, IBM chartered a train to take some 200 reporters from New York’s Grand Central Station to its Poughkeepsie site, where the main announcement was made.  The company also held press conferences in 63 U.S. cities, and 14 foreign countries. 

The New York Times embellished this in its April 8, 1964 edition.  Its story said that, “more than 100,000 businessmen (guess the S/360 was not meant for women? J) were introduced to the system at the same time in 165 cities.  It was also announced yesterday in more than 80 countries.”

Whatever the actual number, it was a grand birthday party.  Not even the funeral of Gen. Douglas MacArthur (84), which took place the same day, failed to take the wind out of the IBM marketing sails.

Ironically, the IBM stock dropped $8.75 to $588.25 in reaction to the S/360 announcement.  The Wall Street Journal attributed it to “profit taking” in its April 8, 1964 edition.  It noted that IBM had reached the 1964 high of $600.25 two days earlier.

By the time the dust had settled, however, thousands of customer orders poured in.  Which sent the top IBM executives into a state of panic.  Now they’ll have to deliver what they promised. 

The remainder of 1964 and early 1965 reads like the epitome of a corporate nightmare in Watson’s book.  Not just were some hardware products behind schedule, but new software was giving everyone fits.  “That autumn (1964) everything looked black, black, black,” Watson recalled.  “Everybody was pessimistic about the S/360 program.”

Some of IBM factories and labs were working 60-hour weeks for six months, and everybody was worn out.  On one occasion, Watson visited Poughkeepsie, figuring on chewing out the software manager over the delays.  He went to the man’s office and found him at his desk.  A rumpled cot where he slept was next to the desk.

“Why can’t you get this programming out faster?” Watson demanded.

“Well, if you get the hell out of here and leave us alone, we would!” the software managed snapped.

Startled that the stressed out man didn’t give a damn how he was addressing the chairman, Watson beat a hasty retreat. 

Success at Last

Eventually, gloom yielded to glee.  The first S/360 machines were delivered in the spring of 1965.  Eventually, the product line on which Watson bet the company became an overwhelming success.  By the end of 1966, the S/360 had earned IBM over $4 billion in revenues and a $1 billion in pretax profits.  And that’s in 1966 dollars!

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After adjusting for the CPI (consumer price index) changes, that $4 billion would be worth about $19 billion in 2003 dollars.  Now compare IBM’s $4 billion mainframe revenues in 2003 to the $19 billion from 1966, and you will see by how much the mainframe has shrunk, even relative to its size as a toddler, let alone compared to its fully-grown dimensions during the “Battleship IBM” era, when it grew to truly giant proportions. 

There is one thing, however, no one will ever take away from theText Box:  
A sketch of Jules Verne’s “Moon Gun”
mainframe.  It made a 19th century Jules Verne dream come true.  A pair of S/360-65s put the man on the moon!  Oddly enough, that’s a feat that Watson doesn’t even mention in his book.  His focus in 1969 must have been squarely on bank accounts, not the moon.  A dreamer, he was not.

Maybe the mainframe isn’t a dinosaur just yet.  But arthritis has set in, and old age shrinkage is already evident.  Still, the old man mainframe’s pride is intact.  He is not drawing on social security, or depending on any charities.  He is still paying his way, and even covering for IBM mistakes, as he has done so often in the last four decades.

Happy birthday, Mr. Mainframe!  At 40, you’re a relative youngster compared to Mickey or Barbie.  But in Internet years, this would be your 120th birthday.  Sorry.  Tempus fugit… (“time flies”).  And never has it flown faster than in the Internet era.

Business Segment Analysis

And now, returning from a trip back in time, let’s fast forward to 2003 and the IBM business segments.  First, a general observation that applies to all business segments.  In 2003, IBM revenues were boosted by foreign currency translations to the tune of about 7%.  So rather than repeat that for each product line, we suggest you mentally subtract that percentage from the growth rates in each case.

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Systems.  Last year was a good year for IBM servers.  Relatively speaking.  Revenues were up 11% to $14 billion.  Real growth was mostly due to the RS/6000 (pSeries) and Netfinity (xSeries) product lines, whose revenues increased at an estimated 16% and 17% respectively.  Storage products also sold fairly well (up 10%).  

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The rest of IBM servers (mainframe-S/390-zSeries and AS/400-iSeries), actually stayed flat in constant currency, even though the revenues were nominally up about 7%, boosted by a surge in new model shipments.  As you saw earlier, even after a brief growth spurt, the once mighty “Battleship IBM” (the mainframe) now accounts for just over 4% of Big Blue’s revenues.

Furthermore, the IBM server’s group 2003 revenue increase does not even get it back to the 2000 level ($14.2 billion), despite the currency push.  So last year was a solid performance under adverse circumstances for the IBM Systems Group.  But talk of its long-term survival is grossly exaggerated, to paraphrase Mark Twain.

Technology. There is not much to be said about IBM’s Technology Group except to wonder why it is still around?  The unit was formed in 1992 by a desperate CEO (John Akers) who was trying to dig himself out of a huge hole in which he buried tens of billions of dollars of investments in plants and equipment that were sitting idle, or working under capacity.

Well, Lou Gerstner and Jerry York made short work of that problem with their massive (nearly $10 billion) write-off in the second quarter of 1993.  Ever since, the IBM technology product line has been mostly a solution looking for a problem.  It would have been second on the chopping block back in 1996, when we recommended the IBM break up (see “Break Up IBM!,” Mar 20, 1996).

In 2003, the Technology Group’s revenues shrank another 27% to $2.9 billion, despite the boost that it also received from the weak dollar.  The OEM segment’s revenues dropped by 30% to $2.5 billion.  

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As a result, the Technology Group’s revenues have now lost about $7.4 billion per year since the time we recommended to IBM that it get rid of it (in 1996).  In 2002, IBM finally did something about it, albeit under a new leader.  It sold some of its storage operations to Hitachi.  

As for the rest of the $7.4 billion annuity that has vanished in seven years, the market place was evidently doing to IBM what its leader didn’t have the courage or foresight to do.  But that comes at a price.  In 2003, IBM Technology Group lost a quarter of a billion dollars ($252 million) on a pretax basis.

PCs. If the Technology Group was the second IBM unit that we would have put on the chopping block in 1996, what was the first?  It was the company’s perennial money-loser, its PC business.  Rarely has one had a chance to witness a more stubborn determination to lose money and keep a loser than what IBM has exhibited with its PC unit in the last 12-14 years.

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In 2003, the IBM PCs lost about $118 million pretax on revenues of $11.4 billion, up 3% from the year before (down 4% in constant currency).  IBM has now lost about $4 billion per year of PC revenues since 1999.  That’s like losing a mainframe division every year, and still keeping the sucker around.

But we do empathize with IBM’s problem.  How do you find a sucker who would buy a loser THAT BIG?

Software. Software saved the day for IBM in 1964-1965, when the S/360 premiered.  Software is still saving the day for IBM today.  In 2003, this unit’s revenues rose by 10% to $14.3 billion, making it now larger than all IBM systems hardware.  

More importantly, software is much more profitable than hardware.  In 2003, it contributed about $3.8 billion to IBM’s pretax profit – a 24% margin.  Only IBM Global Services (IGS) generated more profit ($4.5 billion), but on a much lower pretax margin (10%).

Within IBM software operations, we estimate that the operating systems’ revenues rose 6% to $3.2 billion.  IBM’s “middleware” increased by 10% to $6.9 billion.  The “distributed” software jumped 16% to $4.4 billion.

IBM Global Services. There is not much to be said about IGS that we haven’t done already.  For those of you who have not had a chance as yet to peruse our latest Annex Bulletin on IGS, check out “Crown Jewel” Restored? (Mar 22, 2004).

The Rest... What’s left among the IBM business segments are Enterprise Investments and Global Financing.  They account for 1% and 3% respectively of the company’s total revenues.  But Enterprise Investments lost $252 million in 2003, while Global Financing made $1.2 billion in pretax profit for IBM shareholders. 

Unfortunately, the money losing operation grew by 4%, while the money making one declined by 12%. 

So it goes… at IBM these days.

Summary

Last year was a relatively good year for IBM.  Strip away the currency-related gains, however, and what’s left is just modest growth (3% in constant currency).  If IBM is to accelerate that, it will need to follow our “Save, Spend and Split” advice from a year ago.  Otherwise, the company will look and feel as old as it is.  Happy 90th birthday, IBM!

Happy bargain hunting!

Bob Djurdjevic

For additional Annex Research reports, check out... 

2004: Mainframe at 40! (Apr 2004);  Accenture: Burning the Track (Mar 2004); "Crown Jewel" Restored? (Mar 2004); "Cap Gemini: Another, Smaller Loss" (Feb 2004);  "CSC: Good Quarter Gets Boos" (Feb 2004); "Hot Air Jordan" Flaunts Flop as Feat (Feb 2004); "Hype Exceeds Results," (Jan 2004);  "Cronyism Is Alive and Well at EDS" (Jan 2004);  "Five Most and Least Likely Forecasts for 2004" (Jan 2004)

2003 IGS:  "IBM OnDemand: Different Strokes for Different Folks" (Dec 2003); "Investing in Growth" (Apr 2003)

2003 IBM: "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).

2002 IGS: "Half or Double Trouble?" (Aug. 12, 2002), "IBM to Take $500M Charge" (Sep 3, 2002), IBM-PwCC Update (Oct 2, 2002), Analysis of IBM Second Quarter Results (July 17, 2002), IBM Layoffs Confirmed! (Aug 14, 2002), Analysis of IBM Third Quarter Results (Oct 16, 2002), Boom Amid Gloom and Doom (Oct 10, 2002)

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), 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.]

Or just click on and use appropriate  keywords.

Volume XX, Annex Bulletin 2004-09
April 2, 2004

Bob Djurdjevic, Editor
(c) Copyright 2004 by Annex Research, Inc. All rights reserved.
e-mail: annex@djurdjevic.com

P.O. Box 97100, Phoenix, Arizona 85060-7100
TEL/FAX: (602) 824-8111

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