albert's analysis: Reports of PC Unit's Demise Greatly Exaggerated

Here's a "secret" to almost no one. IBM's Personal Systems Group (PSG) sustained a difficult first half of 1998. The company lost several hundred million dollars as a result of excess inventory, cut-throat price wars and the creation of a new, transitional sales strategy. The losses were widely publicized and spawned erroneous rumors of an IBM PC unit sell-off.

Although IBM moved quickly to stop the losses, damage had already been done; and as it's usually the bad news that sticks, (and that keeps analysts buzzing and customers wary), some segments of the public are still seeking reassurance that the PC is here to stay.

So just how is that business unit doing? The accounting aside, it remains critical to IBM's ability to market its "total solutions," including e-business solutions. So it's not an "if" the PC unit will survive; I see it as a why and how.

At a May 6 analyst meeting, CEO Louis Gerstner explained how profits are routinely "driven off" the PC business and are applied to other segments' financial reports¾profits that total hundreds of millions, profits which in other PC companies would be reported on their bottom lines. Yet despite the losses on paper, the IBM PC unit's success remains vitally linked to those other segments' performance.

Gerstner also attributes much of the financial loss to "an extraordinarily painful transition" ¾the creation of a new, hybrid strategy that includes selling PCs both through third party channels and directly to the consumer. The strategy shift cost millions in inventory write-downs and dealer payments last year. New direct system payoffs didn't show up until 1998's third and fourth quarters.

But Gerstner still faces perhaps his greatest challenge in swaying public perception. Investors, analysts and journalists have fresh memories of his statement that "the PC era is over." (That phrase, often distorted, has followed him this past year.)

In this world of sound bites and booming headlines, his statement was changed by some to read "the PC is dead." Yet the point, as I understand it, was that the focus of tomorrow's growth rests not with the full-function PC; but with its network-enabled applications (like SAP, Baan, PeopleSoft, etc., and other Enterprise Resource Planning and Customer Relationship Management packages), network software and network infrastructure. Yet, as he aptly put it, "That doesn't mean that we're not going to sell lots and lots of PCs."

In fact, the global PC industry continues to grow at between eight and nine percent yearly. That's attractive growth. And if it's true that PCs continue to play a core role in the exploding e-business phenomenon¾and there's plenty of evidence to support that¾their future rests secure.

Perhaps more reassurance is needed. IBM needs a concrete, solid (and well-promoted) plan going forward. Now Big Blue is talking about dividing, or segmenting the market. It plans to focus its products and delivery systems to serve particular segments. The PC Industry has evolved past the technology as being the only driving force. It is how you deliver it and what you package with it that counts.

IBM isn't immune to the vagaries of the ever-changing PC business. Far from it. Price wars have forced unit prices down dramatically. Increased competition continues to blur the brands. It's no surprise that IBM was once known almost exclusively as a hardware manufacturer; and that even today, companies like Microsoft and Apple are still often given top billing as "the PC makers." Survival remains a fierce challenge in that particular industry, and top management concedes that profitability is lower than preferred. Clearly, more hard work lies ahead.

I see IBM putting talent and resources into turning its struggling division around. I'm encouraged to see increases this year in the IBM Personal Systems Group's revenue, profit, and market share. Big Blue isn't fretting about the future of its Personal Systems Group, and I have yet to hear any substantiated reports of a planned PC unit sell-off.

Clearly you've got a difficult road ahead, IBM. From this analyst's perspective, you're making excellent progress. The entire information-age landscape keeps changing. Keep up your current focus. We're watching along with your customers, business partners, suppliers and shareholders!

Sam Albert is president of Sam Albert Associates (Scarsdale, N.Y.), a consulting firm that specializes in developing strategic corporate relationships. samalbert@samalbert.com.

Must Read Articles