December 8, 2004 10:54 AM PST

Palmisano memo outlines reason for IBM sale

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IBM passes PC torch to Lenovo

December 9, 2004
IBM and the PC had simply grown apart, CEO Sam Palmisano told the kids.

In a memo distributed to IBM employees and reviewed by CNET News.com, Palmisano explained that Big Blue's strategy to concentrate on so-called on-demand computing had become incompatible with running a PC business. Under the on-demand strategy, IBM is trying to create (and sell) complex computing infrastructures and applications--such as search engines for video. These projects typically rely on in-house research and development projects that can take years to get up to speed.

"IBM is an innovation company," he wrote. "It's why we have invested billions of dollars in recent years to strengthen our capabilities in hardware, software, services and core technologies focused on transforming the enterprise."

By contrast, the PC business revolves more around squeezing out efficiencies in manufacturing.

"The PC business is rapidly taking on characteristics of the home and consumer-electronics industry, which favors economies of scale, pricing power and a focus on individual users and buyers.

"These are very different business and economic models, and they will diverge even further in the years ahead," Palmisano said. "Lenovo will be much better positioned to capture the opportunities in the PC industry. Lenovo is committed to investing in, growing and winning in PCs."

Palmisano, of course, isn't the first IBM executive to say this. Former CEO Lou Gerstner often said that IBM needed to concentrate on high-end services and computing technology. Getting out of the PC business, however, has always been fraught with difficulty because large corporate customers who invest in complex back-end systems also buy notebooks.

The deal will also help IBM in China, the fastest growing large tech market in the world, he added. In a separate PowerPoint slide show it sent to employees, Big Blue said that IBM-Lenovo will have 34 percent market share. The company will be the largest PC maker in Asia and the largest IT provider in China.

Palmisano did not mention if job cuts would occur. In the PowerPoint, Peter Haddad, vice president of human resources for the Personal Systems Group--the unit being sold to Lenovo--said compensation and vacation would be similar to what employees had at IBM. The deal would also give the group an opportunity to "run our own show," the slides said.

These issues are already on the minds of IBM employees, especially those in North Carolina, where the Personal Systems Group is located.

"Everyone in North Carolina is freaked out," said one source close to the situation.

5 comments

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More jobs lost
What else is new? Although I would have to agree there is not alot of money to be made in personal computers.
Posted by kieranmullen (1070 comments )
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Yep. The unstated reason...
This allows IBM to sidestep the outsourcing issue. Let the Chinese build PCs on the cheap with cheap labor and supply IBM at cost.
Posted by ordaj (338 comments )
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Bye PCs, Hello Services
Not much money in hardware does not mean more money in services. But if you can make hardware cheaper for everyone, then imagine how much services are needed...
Posted by Mendz (519 comments )
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Lemme see...
I have a monthly cable bill, electric bill, mortgage, water, sewer, and gas bill, ISP bill, credit card bill, food bill, phone bill, etc. Yeah, what I need is a monthly subscription for my computing bill. All these companies getting into the "Subscription services" are going to be sorely disappointed. Consumers can barely afford things now.
Posted by ordaj (338 comments )
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