March 25, 1999 6:30 AM PST

IBM: The PC is dead

Chief executive Lou Gerstner labeled e-business an important component of IBM's future while repeating a mantra often heard among CEOs: "The PC era is over." But some observers think this is sour grapes.

In the company's recently posted annual report for 1998, Gerstner had a new, very strong reason to exclaim the demise of the PC. Last year Big Blue's personal systems division, which makes desktops and servers, suffered a $992 million loss largely due to price competition.

The loss grew a whopping 516 percent from 1997's shortfall, according to an IBM financial statement.

This year's report, which came with a letter from Gerstner, outlined the company's future, and it will increasingly deemphasize the PC.

IBM will attempt

IBM's Personal Systems Group
  1998 revenue 1997 revenue Percent change
Revenue $12.8 billion $14.4 billion -10.8%
Income -$992 million -$161 million -516%
Source: IBM
to capture a big part of e-business, according to Gerstner, which "represents an enormous opportunity? By 2002?the e-business segment [overall] will grow to $600 billion, and it will grow twice as fast as the industry overall."

Gerstner also mentioned some of Big Blue's related difficulties. These include "soft memory chip prices and a PC price war," he said.

"Some were of our own making, wrestling with important product transitions in our server line, for example," Gerstner said. He also cited the usual geographical problem spots: Asia and Latin America.

But there's no getting over a subsection entitled "The PC era is over," a statement that carries a lot of weight coming from the company that helped invent the business PC. Although such CEOs as Hewlett-Packard's Lew Platt have also been stating this sentiment, along with major PC antagonists such as Sun Microsystems' Scott McNealy and Oracle's Larry Ellison, the viewpoint takes on extra meaning coming from Gerstner.

"This is not to say that PCs are going to die off, any more than mainframes vanished when the IBM PC debuted in 1981?But the PC's reign as the driver of customer buying decisions and the primary platform for application development is over. In all those respects, it has been supplanted by the network," he said.

But some observers think this statement is too self serving. "How much of this is sour grapes because IBM can't make money moving [PC] boxes unlike Dell that does make a decent margin in the business?" wondered Danny Lam, a principal with Fisher-Holstein, a consulting firm.

"I am not convinced that the PC as the primary engine for [software] application development is over. Domestic growth is exhausted, but international growth is far from over," he said.

Lam thinks the Web is overrated too. "The Web is greatly exaggerated in terms of its capabilities. For all practical purposes, the most commonly available pipe worldwide barely manages to eke out 28.8 kilobits per second and it is not big enough to drive large apps that replace the PC," he added.

But the bulk of Gerstner comments look beyond the PC. "As the Net takes over much of the work previously performed by PCs, we're seeing another interesting development: a proliferation of new personal computing devices, personal digital assistants, Web-enabled TVs, screenphones, smart cards, and a host of products we have yet to imagine. One market research firm predicts that sales of non-PC Internet devices will surpass PCs within five years."

Gerstner crowed plenty about IBM's upside. "Our market value--probably the most important measure of progress to investors--grew $69 billion. Last year, IBM's share price rose 76 percent. For the fourth straight year, we reported record revenue--$81.7 billion. Our earnings rose to $6.3 billion," he said.

Software jumped about 27 percent from the year before to almost $2.59 billion, but all was not quite sunny. Along with the decline in PC revenue, the server group posted a pretax profit of $2.84 billion, off a slight 1.6 percent from 1997.

Other highlights from Gerstner's letter:

 "The basic components of computing--processors, memory, storage, networking--are becoming so small, powerful, and inexpensive that soon computing will be embedded in all kinds of everyday things that don't look at all like computing devices: cars, roads, machine tools, vending machines, houses."

 "When all these are connected to the Net, they will make possible a new class of applications, invisible to end users but vitally important to businesses and institutions." IBM calls this "pervasive computing."

 "[Another] major development looks like the polar opposite of pervasive computing, but it's really just the flip side. A new class of heavyweight computing systems is emerging that will make possible new ways to gain insight and foresight from both the enormous, underutilized stores of data that organizations already possess, and the sea of information that pervasive computing devices will generate. We call this capability deep computing."

 "The Year 2000 problem is important, and it's being addressed. But a lot of work remains to be done fast. While no one knows for sure what will happen, we believe the largest companies, institutions, and government agencies will be ready, particularly those in technologically advanced nations. They got an early start fixing their systems, and they are using this year to test extensively. Less certain is how smaller businesses and emerging nations will fare. They've got to pick up the pace." IBM plans to spend $575 million to fix Year 2000 problems on its own computer systems.

 

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