IBM: Winning customers at any price

IBM knows how to cozy up to life science companies: Give them money and technology.

In 2000, IBM kicked off an aggressive campaign to lure life science companies into its fold. Armed with US$100 million, IBM took on the role of a venture capitalist, making investments in life science companies and giving some of them discounted servers and storage systems. In cases where IBM didn't take an equity stake, it formed tight partnerships with more than a dozen other companies that often included friendly hardware deals.

IBM's willingness to part with hardware profits in exchange for tight links with the life science community has helped it fend off competition from the likes of Sun Microsystems Inc. and Hewlett-Packard Co. In addition, IBM has tried to use the partnerships to push Oracle Corp. out of the way to create a place for its DB2 database and DiscoveryLink data integration software.

"As much as we like to think of them as the model, most companies can't afford to do business the way IBM does," says Mark Hall, research director of IDC's life sciences practice. "IBM has said, 'We will write off the hardware profit.' They want to put the hardware in place, hopefully to lock customers into different types of sales."

Executives at Dell, Sun, and SGI all say they selectively offer generous discounts to life science customers, but none say any deals approach the scope of an equity investment. "It's certainly a buyer's market, and it can be difficult to compete with big players that literally give things away," grumbles Sun's Director of Global Life Sciences Howard Asher.

While IBM's strategy is one that competitors cannot afford to match, there are questions about how effective it has been -- so much so that IBM is re-evaluating the strategy.

"Our thinking on that has changed a lot in the last two years," says General Manager of IBM Life Sciences Caroline Kovac, who has led the equity investments program. "It's been a while since we directly put equity in an individual partner. We can get more leverage and broader coverage in the industry if we work with the venture capitalists and investment community. While we don't like to lose money on these things, we don't expect a return on capital."

Even IBM's own partners say that DB2 and DiscoveryLink have failed to gain much ground in the life sciences despite IBM's giveaways. According to Hall, Oracle, the "de facto standard," still holds a commanding 75 percent to 80 percent market share in this vertical.

IBM's hardware bargains are usually the most pronounced among those companies where it has taken an equity stake. In some cases, IBM will match a company's hardware purchase with an investment of equal size, says Lloyd Segal, president and chief executive officer at drug discovery company Caprion Pharmaceuticals Inc. in Montreal.

"IBM has used ten-thousand-pound-gorilla tactics to try and own an industry," Segal says. "They are pretty good at it, and IBM is probably not the worst company to be tied to. But how much sense [does] it make if a company is willing to give you $10 million in equity if you buy $10 million in servers? It raises questions in a lot of people's minds about the quality and nature of the sale."

While Caprion turned to Sun on technical grounds instead of IBM for hardware, a number of companies have bought IBM's pitch. Structural Bioinformatics Inc. (SBI), GeneFormatics Inc., LabBook Inc., and MDS Proteomics Inc. have all received equity investments from IBM.

SBI, for example, has created protein structure databases to help other companies speed their drug discovery work. While this technology used to run on Oracle Corp.'s database, it has since been ported to DB2 as well, following IBM's investment for an undisclosed amount, says Kal Ramnarayan, vice president and chief scientific officer at SBI in San Diego. For porting its technology to DB2, SBI received several perks from IBM, including favorable hardware prices and access to other IBM software technology.

"We get a very good discount," Ramnarayan says. "IBM helps us in multiple ways."

Still, SBI hasn't yet seen much payoff from at least one IBM technology: DiscoveryLink, middleware that allows users to query heterogeneous databases. "It just hasn't been adopted as well as some people thought," Ramnarayan acknowledges. And not only money and technology changes hands.

On Oct. 1, TurboWorx Inc. (which changed its name from TurboGenomics five days earlier) announced that IBM Life Sciences director of strategy would be leaving his post there to become its president. This was preceded by two partnership deals struck between the two companies in April and September, the latter calling for inclusion of TurboWorx informatics tools in the IBM Life Sciences Framework of which DiscoveryLink is a big part.

Accelrys Inc. has also been blessed by IBM's server discounts. The two companies partnered earlier this year to create tighter bonds between DiscoveryLink and Accelrys' Discovery Studio platform for managing drug discovery applications and data, and to tune Discovery Studio for IBM's hardware. "IBM is investing a lot in their engineering side that is helpful to us," says Steven Levine, senior director of strategic partnerships at Accelrys. "They have helped improve the performance of our products."

Despite close ties, IBM has not been able to nudge Accelrys toward moving its applications onto DB2 instead of Oracle. "Right now DB2 is not a supported technology," Levine says. "It's a bit of a sticky point from IBM's perspective. [DB2] is not a good pull in the marketplace for us."

The Accelrys deal points to a larger problem with IBM's strategy, according to IDC's Hall. "The move to bring on Accelrys and a host of other partners was partly to try and bring interest to DiscoveryLink because IBM felt it would be a strong play for them," Hall says. "There would be a data integration platform and an IBM portal that would be your launch pad into all of your drug discovery [and] clinical trials."

"That hasn't played out, in part, because DB2 is a core component of that vision," Hall says. "You can't run DiscoveryLink without DB2, and IBM has been unwilling to put Oracle at the center of [DiscoveryLink]."

IBM faces internal pressure to keep DB2 at the center of its life science strategy, which has caused some tension within the company, Hall says. In addition, IBM partners have occasionally seen the company encroaching on their turf. These factors have hurt the adoption of DiscoveryLink and, in turn, IBM's place in the life science market.

"I don't think they have made a single dollar on DiscoveryLink sales," Hall says.

Still, the strategy has given IBM great entrance into the life sciences, according to Kovac, who credits IBM's partners with giving it insight into what kinds of technology may be important in the years ahead."Frankly, it has been a great strategy," Kovac says, adding that many partners use both IBM hardware and DiscoveryLink. "We have many dozens of alliances and hundreds of business partners in IBM's life sciences ecosystem."

Life science companies receive the same hardware discounts as other companies that make large hardware buys, she adds. "We don't give away hardware to get business," she says. "The answer is that we have a hell of a business in the life sciences."

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