It is worth remembering that IBM had become a leading developer of the PC by the early 1980s, but its primacy in the mainframe/server space may have bred complacency.
It approached a teenage Bill Gates to provide an operating system for its range of PCs, but, crucially, it failed to secure the source code within its intellectual property portfolio, enabling the young entrepreneur to also licence his Microsoft Disk Operating System (MS-DOS) to other computing companies. The rest, as they say, is history, though it is hard to imagine that the likes of Google or, indeed, Microsoft (US:MSFT) itself, would not have neutralised or simply acquired a potential rival technology application right from the get-go.
A decade on from that initial interaction, and matters had deteriorated badly. IBM was booking an $8.1bn (£6.37bn) loss with prices for mainframe computers falling through the floor.
MS-DOS had well and truly bolted, but the group’s most compelling commercial advantage – its ability to provide integrated solutions for customers – was still intact.
Plans had been in place to break up the group’s business units into separate companies, but Lou Gerstner, the group’s newly appointed chief executive, duly put the kibosh on the plans and, instead, concentrated on a model that variously incorporated a consultancy/supply/after-sales/integration approach. The thinking was that a prospective customer would be far more inclined to establish a long-term commercial relationship if all their IT requirements (hardware, data storage, software issues, maintenance, etc) were available from a single source.
IBM’s early supremacy in the mainframe market is partly explicable in terms of capital and intellectual property – it had the money and the minds. But the advent of personal computing, made possible by ever shrinking microprocessors, changed the industry dynamic. ‘Big Blue’ was left floundering like a beached whale as a new generation of coders and IT analysts made their way out of the campuses of Berkeley and Stanford.
It is conceivable that even if IBM’s management had the foresight to tie-up the MS-DOS software, another alternate operating system may have become the default setting for the industry anyway.
Nearly 30 years down the track and IBM is now faced by a proliferation of challenges across its existing business segments. That was perhaps inevitable, as it does operate in what is sometimes referred to as a ‘white-water’ industry – endless churn.
So, what really matters is how well it continues to adapt to technological change, together with its readiness to rationalise its business segments accordingly. Broadly speaking, the signs are positive. Market research from International Data Corp shows that IBM holds pole position in the worldwide artificial intelligence (AI) market, with a 9.2 per cent share in 2018, a year in which global AI revenues grew by 35.6 per cent.
The group has gradually jettisoned some of its hardware and software capabilities in favour of its service offering, establishing strong market positions in hybrid cloud technology and cognitive solutions.
This transition away from crowded, mature corners of the IT market in favour of rapidly growing segments stands in contrast with its earlier failure to adapt to the evolution of the PC market, although it has come at a cost. Group revenue has fallen by 23 per cent since 2010, partly because of the effects of discontinued assets, although there has been a significant increase in the proportion of net income to gross profits since 2017. However, the income margin trails the sub-sector average and the group’s debt-to-equity ratio also suffers by comparison.
Has the transition been worth it? Well, as with so much else, the pandemic has muddied the waters. IBM’s cyclical global business services unit suffered through the second quarter as clients put discretionary spending on hold due to Covid-19. And although reported figures were down year on year, they still came in ahead of the consensus. More importantly, second-quarter revenue at the group’s cloud business was up 30 per cent, a probable sign that corporations are already accelerating their digital shift in response to the disruption brought about by the virus. A 109-year-old tech corporation could well be one for the future.
