The future's rosy for Big Blue

The Internet will play an increasingly large role in Big Blue's future, according to Louis Gerstner -- even as he threw brickbats at highflying Internet-only companies.

The IBM chairman said a quarter of the company's revenue -- or about $20 bn (£1.2 bn) -- is related to "e-business," including sales over the Internet, computer consulting and installation and software products that manage data and transactions. The Internet has become the "ultimate medium of business," Gerstner said, adding that IBM is better positioned than any of its competitors to reap the benefits of the wired business world.

In his sixth annual session with analysts and investors in New York, an ebullient Gerstner painted a rosy picture of IBM's place in the technology world. He called soaring Internet companies "fireflies before the storm" that are "all stirred up" and "throwing up sparks." Gerstner suggested that "maybe one or two of them will be profitable."

Instead, he said the real explosion will occur when businesses move en masse to transform the way they run their businesses and communicate with their customers over the Internet. When this happens, he said, traditional large corporations such as Wal-Mart Stores, Banc One, First Union and Ford will be poised to reap the real rewards. And with its broad hardware, software and services portfolio, IBM will be the leading company helping customers move to the Internet, Gerstner said.

"Amazon.com is a very interesting retail concept, but wait till you see what Wal-Mart is gearing up to do," he said. Gerstner noted that last year IBM's Internet sales were five times greater than Amazon's.

Gerstner boasted that IBM "is already generating more revenue, and certainly more profit, than all of the top Internet companies combined." He said the real way to measure Internet growth isn't by how many eyeballs, or visitors, a site can attract, but how much money it can generate. "We believe in making money the old fashioned way -- generating earnings and cash," he said.

The IBM chief said in the first quarter Big Blue sold about $2.5 billion of products and services over the Internet and expects 1999 Internet sales to be between $10 billion and $15 billion. These Internet sales, he said, "drive customer retention and they reduce our cost."

Gerstner reaffirmed his belief that the company can deliver consistent double-digit revenue growth. After several sluggish quarters, IBM's revenue grew 15% in the first quarter. Analysts expect IBM's revenue will increase just over 10% this year to about $90 billion. This follows two years of sub-5% revenue growth.

Gerstner's talk came after the close of trading Wednesday. In New York Stock Exchange composite trading, IBM shares rose $4.50 to set a new 52-week high of $225.50.

Gerstner said the company plans to remain in the PC business. Although IBM's personal-systems unit, which includes PCs, had a pretax loss of almost $1 billion last year, it has shown signs of improving, and Gerstner said "we ought to be able to make money in that business." Analysts expect the unit could return to profitability as early as the current quarter. Three to five years from now, Gerstner said PCs will remain a big business for IBM.

As part of IBM's steady shift to more profitable business lines, Gerstner suggested that IBM might exit the market for DRAM memory chips sometime in the next few years. The market for DRAM, or dynamic random access memory, chips has been facing considerable pricing pressure in recent years.

When asked whether IBM might collaborate with AMD, Gerstner said IBM would pursue a deal with AMD if "we can make money on" it. He said IBM might look to produce some semiconductors for AMD, but said such a move doesn't presage a move by IBM to challenge Intel. "We're not going to fight that old war," he said.

IBM and AMD negotiated a deal in early 1998 under which IBM would have served as an alternative manufacturer of AMD's K6 microprocessors. As it turned out, AMD's own plants were able to produce enough of those chips to meet customer demand. An AMD spokesman yesterday wouldn't comment on any specific plans regarding IBM, but said "we've worked very closely with IBM in the past and will continue to do so."