IBM's $1B PC group loss not that dad, analysts say

The near $US1 billion loss of IBM's PC group in 1998 is eye-catching, but PCs are not IBM's focus and big is what one expects from Big Blue, analysts said yesterday.

IBM this week released its 1998 annual report, which recorded revenue of more than $81 billion and profit of more than $6 billion for the company overall but also noted a loss of $992 million for the company's PC business, the IBM Personal Systems Group.

"Part of the issue, of course, is that IBM is a large-scale company, so it's not completely unusual that if they have a loss, it's a big loss," said Roger Kay, an analyst with International Data Corp. in Framingham, Massachusetts. "Still, this is a big hole."

It may be a hole that IBM intends to abandon rather than fill. IBM could be -- and should be -- getting ready to get out of the finished PC business, analysts said today. IBM's strengths have long been services and technology, and it should place its efforts there, they said.

"The real momentum going forward (for IBM) is as technology and components supplier, not finished product supplier," said David Stremba, PC analyst with Dataquest in San Jose, California.

In fact, IBM's current structure undermines its PC business, according to IDC's Kay. IBM could combine its offerings into one big fist and pound the market, but instead each division is admonished to do business in the way that is best for it, irrespective of the rest of the company, according to Kay.

"Exactly the synergies that you would expect IBM to provide to its different divisions doesn't happen, because of the profit imperative of each division," Kay said.

While a billion-dollar loss can't be welcome news, some signs suggest IBM may not be devastated by the performance of its PC business. In the 1998 annual report out this week, Lou Gerstner, IBM chairman and chief executive officer, states that "the PC era is over" in his letter to shareholders, and elsewhere the report notes that IBM's future focus will not be on PCs.

"The PC is going to be joined, augmented (and ultimately outnumbered) by a vast array of information appliances," the annual report states. "IBM will build some of these devices, but our presence will be most evident under the covers -- in the leading-edge chips and disk drives ... that will power all these new personal computing devices."

These statements, and IBM's characterisation of its 1998 financial results as "strong," despite the PC business' billion-dollar loss, suggest an IBM contentment with the level of its PC focus.

"The tone set from the top with Lou Gerstner is that the PC is dead. He declared that today and declared that in October," said Stremba of Dataquest. "That's a pretty clear indication of where the company's moving."

Other indications came earlier this month with deals IBM struck separately with Dell Computer and EMC Software. IBM announced a $16 billion technology pact whereby Dell will purchase storage, microelectronics, networking and display technology from IBM and receive some access to IBM's research and development laboratories. With EMC, IBM signed a $3 billion deal to supply them with advanced disk storage products.

But an IBM spokesman said IBM remains committed to the PC business, even as the company outsources some of its PC aspects. For example, Taiwan's Acer has made much of IBM's Aptiva PCs for the last several years, according to IBM's Rob Wilson. IBM's current strategy is based on services, software and technology, and while PCs are not an explicit strategic category, they are interwoven with the others, Wilson maintained.

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