TIME: Almanac 1993/TIME Almanac 1993.iso/time/052091/0520200.000

Text File | 1992-08-28 | 11KB | 213 lines

                                                                                BUSINESS, Page 42

The Humbling of a Computer Colossus


Under siege at every rampart of its empire as it fends off
competitors, IBM is still fearsome -- but it looks a bit less than
invincible

By THOMAS MCCARROLL


    Fighting back is a decidedly unaccustomed role for IBM.
Other companies have to do it all the time, of course, but the
Colossus of Armonk (N.Y.) is different. Overwhelmingly dominant
in its industry for decades, IBM is used to swatting aside small
rivals -- and they're all small by comparison -- with a brush
of its hand. Now things have changed.

    Last week was worse than most. With AT&T acquiring the
computer maker NCR (for $7.4 billion), what had been little more
than a bothersome competitor was suddenly part of a company as
big as IBM. A new survey of customer satisfaction among
business users of personal computers showed IBM out of the
running, somewhere below 10th place and below average, its exact
ranking not disclosed by the pollsters. Its stock is skidding
along near a nine-month low. And at week's end, to underscore
that the company is going through one of its toughest times in
memory, it informed more than 10,000 employees that they would
be taking a week's unpaid vacation in early July. Big Blue
remains fearsomely strong (1990 revenues: $69 billion), but the
days of Pax IBM may be over.

    How could it happen? After all, the millions of Americans
who have bought IBM stock or joined the company as employees
were betting on a leviathan, a creature so big it couldn't be
threatened. The answer is that while no killer shark is out
there attacking this whale, thousands of relentless barracuda
are taking bites out of it. Once the pre-eminent force in
closet-size mainframe computers, IBM has watched its share of
the world market dwindle from nearly 80% to 69%, as rivals like
Japan's Fujitsu and Ger many's Siemens score large gains with
more powerful and less expensive machines. Its once commanding
lead in personal computers has shriveled from 46% to 23%. Big
Blue has stumbled so badly in such markets as home computers,
portables and telecommunications that security analysts have
started to doubt the company's high-tech superiority.

    IBM has even lost favor with investors, who are still
reeling from the company's first quarterly loss ever. True, the
figure was mainly an accounting phenomenon, but its cause was
far from heartening: The company was taking a $2.3 billion
charge for the full estimated costs of paying 10,000 employees
to quit voluntarily in the coming year. At its annual meeting
last month, chairman John Akers told stockholders to brace for
more bad news: "While we'd like to believe economic recovery is
just around the corner, we have seen no evidence yet to
indicate any improvement, and consequently the year remains
uncertain." The IBM empire is striking back. In a marketing
effort unparalleled in its 80-year history, the company launched
an all-out offensive to retain current markets and recapture
lost turf. The past 11 months have brought virtually nonstop
announcements of new products, including a laptop computer, a
home computer and a line of mid range computers costing an
average of $500,000.

    The company has also kicked off a $40 million campaign to
rescue a struggling software system and beefed up its sagging
mainframe business by signing an unprecedented deal with Tokyo's
Mitsubishi Electric, marking the first time that IBM will sell
its large computers under another company's label. Last week IBM
upped the ante in a price war over workstations,
number-crunching desktop computers used by scientists and
engineers, by slashing prices as much as 60%. Analysts expect
the company to make a similar move in personal computers next
month.

    Cutting prices usually means cutting costs, and in a
six-year war on expenses IBM has reduced them by $1.8 billion
so far. Advertising spending is down 10%, to $90 million this
year. Known as a generous employer, IBM has scaled back benefits
and perks.

    Despite its famous no-layoff policy, IBM since 1986 has
reduced its work force by 47,000 employees (10%) through
attrition, early retirement and the sale of its typewriter and
printer business. Even after this year's 10,000 are gone, say
many security analysts, the company will still have 363,800
people on its payroll and will remain too fat to respond quickly
to smaller rivals. Ulric Weil, a Washington consultant, says the
company is likely to continue tolerating that disadvantage: "IBM
doesn't have the stomach to make the cuts necessary to make the
organization leaner and meaner."

    Maybe not, but IBM has in many ways reshaped its corporate
culture to fit the times. Gone is the imperious overlord that
dictated to customers. Today the company is more user-friendly,
with three fewer layers of bureaucracy so that managers can get
"closer to the ground," as they like to say, and with 65,000
corporate personnel reassigned to sales and marketing positions.
IBM has also dropped its hands-off policy on competing hardware.
In the past, the company refused to help customers install or
repair equipment (such as computers and printers) made by
competitors. IBM quietly changed the policy about a year ago,
after losing considerable business with FORTUNE 500 companies
to outfits like Digital Equipment, AT&T and General Motors'
Electronic Data Systems, all of which link machines of different
makes and models.

    But the greatest challenge facing IBM is apparent in a
pair of simple facts: the technology in which it leads the
world, mainframes, is fading in importance, while the technology
in which it is falling back, personal computers, is exploding.
Mainframe sales have slowed dramatically in recent years, as Big
Business customers have increasingly shifted data processing to
less expensive but powerful workstations and PCs. That is
especially painful to IBM and other manufacturers like Unisys
and NCR because profit margins on desktop systems are as thin as
a silicon wafer compared with those offered by mainframes.

    While IBM is a force in workstations -- it sold $1 billion
worth last year -- the company has resisted pushing them as a
low-cost solution for fear of cannibalizing its bread-and-butter
mainframe business, which accounts for 60% of sales. "Downsizing
poses a worldwide threat to IBM," says Rick Martin, an
investment analyst at Prudential Securities. Although IBM is
expected to maintain its leadership in the market, the strategic
importance of large systems will continue to diminish.

    Which leaves PCs, IBM's most important and competitive
business after mainframes. Personal computers accounted for 5%
of IBM's total revenues in 1985, 20% last year, and they should
reach 40% by 2000. Yet because the market is growing so much
faster the company's influence is shrinking. IBM is using every
weapon in its well-stocked arsenal to restore its lost
supremacy. In March it introduced a state-of-the-art laptop
computer (price: $3,800). Trouble was, the machine was a very
tardy entrant in computing's fastest-growing segment. James
Cannavino, head of IBM's personal-computer division, concedes
that lack of a laptop was a major reason for the company's 17%
drop in hardware sales in the first quarter. Says he: "We
couldn't catch the demand because we didn't have a horse in the
race."



    When IBM entered the market in 1981 with much fanfare and
a $2,600 machine called the PC, the personal computer was still
struggling for legitimacy. Arcane operating commands made IBM's
bulky box difficult to use, but because the company could open
doors in the all-important FORTUNE 500 market, the PC and its
operating software became a technological standard. An entire
industry grew up around the machine, supplying everything from
add-on memory boards to printers to game programs. IBM sold 15
million PCs, capturing more than 45% of the market at its peak
in 1983. But low-cost copycats, such as Tandy and Leading Edge,
and more innovative machines, such as Compaq's (which are
IBM-compatible) and Apple's (which aren't), soon began to chip
away at Big Blue's overwhelming share.

    IBM fought back with a new line of computers, called
Personal System/2, and new control software, called Operating
System/2. The system is commanded by graphics rather than text
and is easier to use. But because it is not completely
compatible with the old PC, customers have been slow to accept
it.

    Their underwhelming response has left the industry without
a standard-bearer. As a result, analysts see the market
splitting into several competing camps: IBM, Apple and loose
federations of smaller manufacturers. Is that good or bad? One
school of thought holds that fragmentation could hurt everyone
by blocking innovation and growth as manufacturers worry about
choosing the winning camp (and covering their bets) instead of
advancing an agreed-upon technology. "The market is up for
grabs," says Cannavino, who believes buyers and sellers are
begging for leadership. "The industry wants to be led out of the
confusion. It would be happy for someone to point the
direction." That beacon, Cannavino insists, will be IBM.



    Others refuse to worry about IBM's decline from dominance,
at least in PCs. IBM's basic standard has already been so
widely adopted, says Compaq president Joseph ("Rod") Canion,
that "it's not IBM's standard -- it's the industry's standard."
The remaining question is how it should be applied, and Canion
favors letting a thousand start-ups bloom to create myriad
programs that would all work in IBM-compatible machines, if not
necessarily with one another. "Customers want freedom of
choice," he says, "and don't want any one company to dominate
the standard again."

    Utter dominion over an industry, which IBM enjoyed from
the 1960s to the 1980s, rarely lasts so long. Now that it is
waning, perhaps the company should be congratulated for
maintaining its role as long as it did rather than criticized
for letting it finally diminish. And before anyone organizes a
benefit dinner, remember that IBM was America's most profitable
industrial company last year, earning more than $6 billion. Its
profit will likely decline this year, but the company remains
huge, powerful and full of talent. In the realm of computers,
it is not what it was. But underestimating Big Blue always
proved a mistake in years past and probably still would be.