Can becoming an Apple Store for enterprises reverse IBM's decline?

Can becoming an Apple Store for enterprises reverse IBM's decline?

Summary: The deal between Apple and IBM is based on the idea that IBM can still make a significant impact on the IT market. However, IBM's power has been diminishing for decades, and it's far from certain that CEO Virginia Rometty can reverse the company's decline.

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TOPICS: IBM, Apple
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The deal between Apple and IBM will convert "IBM shops" — as most Fortune 500 IT departments are correctly known — into Apple shops, selling and maintaining iPhones, iPads, enterprise-specific apps and cloud services. This is an obvious benefit to Apple, which targets consumers rather than enterprises, and has a patchy record for cloud services. Whether or not it's a significant benefit depends on the quality of IBM's execution, which remains to be seen.

The problem is that Big Blue ain't what it used to be, and even its CEO, Virginia Rometty, admits that it is going through a "rocky time". In short, it's going nowhere fast. Its sales have been down, on a year-on-year basis, for nine quarters in a row. Its annual turnover of $99.75bn is lower than it was in 2009 ($103.63bn) and barely above what it was in 2004 ($96.5bn). For comparison, Apple's sales have exploded from $8.28bn in 2004 to $170.91bn in 2013, and Google's from $3.19bn to $55.52bn.

Even Microsoft under Steve Ballmer doubled its sales from $36.84bn in 2004 to $77.85bn in 2013. If IBM had done as well as Ballmer over the past decade, it would be a $200bn corporation, and still bigger than Apple.

The reasons for IBM's awful performance are well known. First, it has spent decades getting out of businesses where it used to be strong. For example, it spun off the Lexmark printer business, it sold off its PC, storage and other businesses, and now it looks as though x86 servers are following PCs to Lenovo. Second, its proprietary mainframe business is in long-term decline. IBM has been milking its locked-in user base for more than 30 years, but it's hard to see where new growth would come from. Third, it has missed almost every revolution since the PC, where it belatedly entered the market in 1981. And while the IBM PC certainly changed the PC business, it was Microsoft and Intel that benefited, not IBM.

Rometty justified the company's strategy to the New York Times by saying: "We don’t want empty calories. So when people keep pushing us for growth, that is not the No 1 priority on my list."

Graph from IBM's annual report showing EPS targets
IBM's business is driven by the need to increase its operating earnings per share: see below.

Indeed, IBM's strategy is focused on finance rather than technology. Its stated objective, in its 2012 annual report, is to deliver "at least $20 operating (non-GAAP) earnings per share in 2015", up from a low of $1.81 in 2002. But one of the main ways it's doing that is by buying back its own shares.

David Stockman, a former Reagan government economist, has poured scorn on this approach. Recently, he wrote at Seeking Alpha: "For more than a decade now, IBM has been eating its seed corn. Since the beginning of fiscal 2004, Big Blue has posted $131 billion in cumulative net income, but saw fit to reinvest fully $124 billion or 95 percent of its earnings in its own balance sheet, which is to say, in buying back its own stock. […] In short, IBM has become a stock price inflation machine."

Stockman notes that IBM has also taken on debt to do this: "In 2004 IBM had $13 billion of net debt. Today the figure stands at just under $37 billion." It still has the cash-flow to buy companies to fill holes where it has missed out, but it no longer has the deep pockets of Apple, Google and Microsoft.

Many industry observers know that IBM once controlled the IT business, and its turnover was twice as big as everybody else's put together. Apple followers will recall that IBM was the Big Brother that Steve Jobs attacked in striking TV commercials: only plucky little Apple could stop IBM from having it all. Some may even remember Apple's failed attempts to sell itself to IBM in the 1990s. (IBM didn't think Apple was worth $7.3bn.)

That company no longer exists. IBM used to be the world's most powerful corporation but today it's only the third largest tech company, behind Apple and HP. Unless there's a turnaround, IBM is on track to be overtaken by Google and Microsoft. Maybe it can flog millions of iDevices to its mainframe-based users, but then again, maybe it can't. (Sure, enterprises will buy iPhones and iPads, but they are already buying iPhones and iPads. From Apple.)

So the original question remains: Can IBM execute? Looking at IBM's track record in smartphones, tablets, apps or even cloud services, it's hard to see much evidence that it can. What it can do, of course, is buy the skills and the software it lacks. It's already done that with purchases such as SoftLayer's cloud service, for $2bn, and Fiberlink ($375m), which it bought for its well-regarded MaaS360 cloud-based device management service. Others include Aspera, Cloudant, Trusteer, Green Hat and many more.

As part of its BlueMix initiative, IBM is also investing $1.2bn in cloud datacenters, and another $1bn in developing cloud software. But you have to wonder why it wasn't doing this five years ago. It's already lost a ton of business, including a CIA deal that went to Amazon. IBM has always been the high cost supplier — we used to say "you can buy better but you can't pay more" — and cloud prices are tumbling at a rapid rate. Is IBM really going to come from behind and out-innovate Amazon, Microsoft and Google?

IBM has had grandiose projects before, some of them with Apple. The two companies once planned to take the PC market from Intel and Microsoft by moving the industry to their PowerPC Reference Platform (PReP/CHRP), and they had joint ventures — Kaleida and Taligent — to change the software market. Apple failed to deliver and eventually dumped PowerPC chips to switch to Intel. Both Kaleida and Taligent were miserable failures.

It also remains to be seen whether the Apple deal will create conflict inside IBM. That happened before when IBM fell out with Microsoft over the OS/2 operating system, and decided to kill the Redmond upstart. But IBM's own PC division turned out to be one of Windows' keenest supporters, and IBM's incoming CEO, Lou Gerstner (corrected), abandoned OS/2 as soon as he could.

In this case, IBM has been trumpeting its support for open source, but the Apple deal is based on closed, proprietary technology. Of course, IBM's mainframes are also closed, proprietary systems, so perhaps IBM salesmen are already adept at talking open while selling closed. There's no doubt that there is an enterprise demand for iOS devices and apps, but there is also enterprise demand for Android and Windows Phone devices and apps, especially in companies that support users under BYOD schemes.

For IBM, the Apple deal is an opportunity. It may also be several opportunities foregone, because Android has by far the largest market share, and by far the largest range of devices. (See When it comes to Android vs. iOS in the enterprise, Android is the Borg.)

Does this mean a $100bn company with roughly 400,000 staff believes it can't compete with numerous small Chinese start-ups or even with Amazon in developing its own Android phone — and perhaps more customised devices, that Apple will never provide — for the enterprise market?

The old IBM would have wanted to own everything: cloud, software, apps, devices, maintenance and financing. The current one doesn't have the foresight, ambition or sheer guts of Jeff Bezos' web-based retailer. It's certainly possible that Rometty will be able to reverse IBM's decades of relative and sometimes absolute decline, but I wouldn't bet on it.

IBM-decline_pies
In 1990 (left), IBM's $69bn annual turnover made it much larger than HP+Compaq ($16.11bn), Apple ($5.56bn), Microsoft ($0.8bn - green) and Dell ($0.5bn). By 2013 (right), IBM had been overtaken by Apple and HP, with both Microsoft ($77.85bn) and Google ($55.52bn - yellow) still gaining. Taken together, Microsoft and Dell ($134.79bn) now outsell both HP ($112.30bn) and IBM ($99.75bn).

 

Graph from IBM's annual report showing EPS targets
IBM's operations, and its growing share price, are driven by the aim of increasing its earnings per share to $20 by 2015. High-margin software (light green) will contribute most, with hardware/financing (dark green) flatlined at best. From IBM's own projections, that goal looks hard to reach without adding a substantial new business, which presumably the Apple deal is meant to provide. Of course, the simplest way to increase EPS is to reduce the number of shares by buying them back. But in doing this, IBM has already gone into debt. What happens when the music stops? Image credit: screen grab from IBM's 2012 annual report.

 

Topics: IBM, Apple

Jack Schofield

About Jack Schofield

Jack Schofield spent the 1970s editing photography magazines before becoming editor of an early UK computer magazine, Practical Computing. In 1983, he started writing a weekly computer column for the Guardian, and joined the staff to launch the newspaper's weekly computer supplement in 1985. This section launched the Guardian’s first website and, in 2001, its first real blog. When the printed section was dropped after 25 years and a couple of reincarnations, he felt it was a time for a change....

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15 comments
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  • What are we up to now?

    Is this like the 10th hype article over a couple phone apps? No, it's not going to make any difference to either company. Relax.
    Buster Friendly
    • I'm sure AKH has done 10 himself

      Maybe they will still be continuing in 2 years, still waiting for the "Game to change"
      Boothy_p
    • I know you hate anything remotely pro-Apple...but...

      This article is hardly "hype". For goodness sakes, it starts by posing a question "Can becoming an Apple Store for enterprises reverse IBM's decline?" and talks about matters 'remaining to be seen' int he first paragraph. Did you even read the article?
      UGottaBKidding
      • Good Question.

        Answer: No.
        iPads and iPhones are tools that a business can use. Niche tools. There are exceptions.
        You still need servers, desktops, notebooks, etc... to run a business.
        Apple is a controlling silo'd partner that is the oppose of the IBM model.
        This is just another business deal and gas potential. If, and that's a monumental if, they can come up with something big business needs on a global scale, maybe they can drive change.
        Right now, iDevices aren't it.
        rhonin
  • Lou Gerstner, not "George"

    Maybe a bit of proof reading would help?
    Master668
    • Gerstner

      No doubt confused with that great American Composer.
      tufis05zd
    • Thanks!

      Now corrected....
      Jack Schofield
  • Can becoming an Apple Store for enterprises reverse IBM's decline?

    No.

    They got their decline the hard way... they earned it. This will last.
    greywolf7
  • Misses the point

    I'm sort of puzzled by the notion that this deal is about IBM finding new toys to sell, with the emphasis on the devices being supplied by Apple. There's even a question raised as to whether IBM is too timid to compete with the likes of Amazon and Huawei in making cellphones.

    Screw cellphones. In five years they'll be giveaways. The cheaper ones are giveaways now. The operating systems are giveaways too. There's no money in making cellphones.

    What IBM has acquired here is a line of well-accepted, high quality, general purpose GUI platforms. That's all the devices have to do: show stuff to the human and transmit the human's responses back to Cloud Central. The cost of them is going to be a negligible part of what IBM will be selling, which will be a big cloud brain that manages your supply chain better than the human you have doing it now. Or maybe it plans the global rollout of new movies, country by country, factoring in the tiniest details to maximize revenue. Wringing another 0.02% return on assets out of inventory is worth billions to outfits like WalMart. It could save the Pentagon billions more. It could probably save Levi Strauss ten times what it costs. Pumping up the gross on a new movie by even 5% could be the difference between a winner and a flop. That's what this deal is about, not whether IBM salesmen can sell more iPads than Apple salesmen.

    Will Apple do anything with IBM's technology? Probably not at first, but they'll get dragged into it by Google. You just know that somewhere in the bowels of Google, there's a "Sherlock" to compete with IBM's Watson, and it is squarely targeted at consumer use. The befits of being wired into it will be so high that resistance will be futile. Anyone seeking to keep their job will need to get assimilated, because everyone around them will know everything, including what's around the corner before they get there.
    Robert Hahn
  • Horrible Article

    Schofield what are you doing? You keep trying to talk about why IBM's sales are down and then you just drift off onto a complete tangent on what happened decades ago when IBM was still making PC's and hard drives. None of the reasons you've cited are legit reasons why IBM's business is currently down.

    IBM competes with Oracle and HP in their core business. IBM focuses on high end computing solutions and services, complete with their 'analytics' software which allows businesses small and large to look at sales trends to figure out where they are going.

    IBM does not compete with Google or Amazon, not at the core level anyways. Amazon's core revolves around consumers, IBM's core revolves around enterprise.
    Maha888
    • Amazon...

      makes a lot more revenue than IBM from business cloud services, and that's true even if you include private "clouds". Amazon is also beating IBM in winning some clients including, as I mentioned, the CIA.

      Meanwhile, Google is roughly level with IBM in cloud services and getting some traction with Google Apps and Docs. That's probably taking revenues from inferior IBM offerings including Lotus Notes.

      Otherwise, my point is that much of IBM's power came from the fact that it dominated the industry. Since it is no longer dominant, it has less market power, even among its small number of enterprise customers. If IBM actually has to sell on merit, it's probably doomed.
      Jack Schofield
  • Really?

    "The deal between Apple and IBM will convert "IBM shops" — as most Fortune 500 IT departments are correctly known — into Apple shops, selling and maintaining iPhones, iPads, enterprise-specific apps and cloud services."

    IBM is hosting BlackBerry Enterprise Service 10. BES 10, of course, can manage all the top mobile devices, including Android, iOS, and BlackBerry 10. IBM is a BES10 hosting company also.
    bb_apptix
    • IBM has been a big BlackBerry user....

      but I guess most of them will be replaced with iPhones.
      Jack Schofield
  • Who knows...

    ... whether this will 'save' IBM or not, but there are some interesting undercurrents in the whole story other than the IBM flogging iPads tagline.

    IBM was out of x86 and is sticking with Power8 - maybe Apple see Power8 as a way to re-enter the server market and potentially dump Intel?

    The biggest mistake I think IBM are making currently is not capitalising in the z/Series and hitting the likes of VMware where it hurts. The hardware costs of the z-line are OK-ish, but its the licensing of z/OS and z/VM that kills it dead unless you are a legacy client.

    IBM should be looking to reduce mainfram entry costs and sell it as a mega-virtualisation platofrm - in shops with dozens of VMware Farms running Linux images converting to z/VM could slash costs massively, with no need for armies of server monkeys and massively reduced floorspace and environmental costs.

    Better still IBM should look at creating its own 'Vblock' based on Power8 servers and z/VM.
    Lord Minty
    • Don't think Apple will go back to PowerPC....

      or even hop to ARM, though that seems more likely. Apple is clearly not interested in catering to the enterprise market, which is why there's an opportunity for IBM to do that.

      Since IBM is planning to increase profits from high-margin software and is generally not doing well in hardware, your hope of changes to z/OS and z/VM also seem a bit unlikely...
      Jack Schofield