Coop's Corner

Dell beat IBM to the PR punch, but does it really have the technology jobs to beat Big Blue in the server competition?

On Wednesday, Dell made a splash with a massive introduction of servers, workstations, storage arrays, and yes, even services. The message to corporate IT buyers was that yes, Dell understood their needs and could supply a variety of sophisticated hardware and software for the modern data center.

Has Michael Dell finally figured things out? Is this is the start of a dramatic assault on what has been the near-exclusive preserve of Hewlett-Packard and IBM? I wish him the best, but it's hard to get too excited. The company has been down this same road for the better part of the last two decades with limited results.

I remember listening to a couple of representatives from Dell expatiate on how their brand new enterprise services team would put a severe hurt on Big Blue. The pitch boiled down to one line: "we can offer service and support for so much less than IBM can charge." That was in the late 1990s.

Turns out that when it came to supporting multimillion dollar installations of sophisticated equipment, the calculations surrounding total cost of ownership were a lot more complicated. In the years since then, IBM's Global Services has enjoyed a remarkable run. Perhaps the recession will open more doors for Dell, which wants to appeal to a more cost-conscious subset of IT buyers. But this isn't going to be a cake walk.

In fact, next week IBM will debut its own server redesign based on Intel's Xeon 5500 Series. The new line is being touted by IBM for its ability to help reduce management costs and overall energy use. Take it with a requisite grain of salt, but IBM is positioning the announcement as its most comprehensive x86 upgrade in years. The highlights:

•  Systems with 92 percent energy efficiency

•  Blades that offer twice as many transactions per minute at 1,333 GHz

• Yearly energy savings up to $100 per server

On the software side, the announcement will include tweaks to the company's Director management suite for helping customers deal with virtualized environments.

In coming weeks, the analysts and test labs will sort out fact from fiction in the claims made by Dell, IBM, and the other computer makers lining up to make announcements surrounding Intel's next big chip proclamation. But I was intrigued by a comment by Tom Bradicich. He's an IBM fellow and distinguished engineer at the company who often winds up doing face time on customer calls.

"I met with a customer recently who had a 5 percent utilization rate," he told me over the phone, adding that this phenomenon was widespread in IT and had contributed to data center sprawl. At the same time, he noted that it's also a reason for the concomitant increase in costs and energy use.

"Price performance is appealing, but the idea that you need more servers, and so then you go out and buy more servers, is a failing concept," according to Bradicich. "If we can up the utilization rate, which is a high end concept (from the mainframe era), then we can lower the number of parts you buy. We want to sell you less."

Counter-intuitive, but it fits with an increasingly common theme at IBM, which wants to accentuate the myriad parts of its company as a way of "out-geeking" the competition in customers' eyes. That's what it's done with HP. And that's what it will play up in its competition with Dell. Who can fault CEO Sam Palmisano for flaunting what he has at his disposal? By playing up its size and tech chops, IBM figures it has a convincing story to help fend off forays by rivals eager to sell into the data center market.

To be continued...

The fun thing about looking over the shoulders of computer scientists doing product demos isn't necessarily the technology they're pointing to on their computer screens. So many beta programs wind up on the cutting-room floor that it's impossible to predict with much confidence which ones ultimately will transmogrify into hit products. But more often than not, you can find clues about the direction a company wants to head.

So it was that while getting a look Thursday in San Francisco at what IBM Research's been working on, I heard the phrase "social networking" mentioned so often that it sometimes sounded like a Web 2.0 revival meeting. No worries. I have it on good authority that IBM is not planning to hatch a microblogging competitor to Twitter. (Imagine the ensuing bloviation-fest if the TechMeme posse got its hands on that tidbit. Happily, we'll be spared that spectacle.) Instead, IBM is putting serious effort into finding ways to use aspects of social computing for more collaboration among enterprise users. The big idea here being to make it easier for businesses to share corporate data in more useful fashion.

"Our perspective comes from business," said Rod Smith, a computer scientist who is in charge of emerging Internet technologies at IBM. "There are many ecosystems inside the enterprise and we're seeing how they want to expand those connections. So, we're looking at how to do that."

Thus, it was show-and-tell time at what IBM dubbed its "Smarter Web Open House." The labs folks were offering a peek at a cross-section of collaborative Web technologies--mostly in early beta stages and likely to need a lot more fine-tuning in the months ahead. Here are my notes of the highlights:

•  Play-by-Play: Collaborative Web browsing via instant messaging. You can connect your Internet browser to someone else's browser and you're co-browsing with somebody else. What's particularly nice is a re-sync feature that lets the person on the other end of the connection replay the sequence of Web pages you visited. That's an idea which many a help desk would find handy.

•  CoScripter: Using some of the same back-end technologies as Play-by-Play, CoScripter puts an encrypted chronological history of your computing day on your hard drive. Again, it's a feature you can deploy to share information--in this case, they call it a script--with someone else inside the organization in need of a quick answer to a question. You'll also be able to publish the scripts on Facebook or on a blog. It's obviously still rough but I could see where it might also have possibilities in the development of a corporate-wide knowledge base.

•  Privacy-aware MarketPlace: The syllables don't easily roll off the tongue, but hey, it is IBM, after all. This is a download to which privacy purists will cotton. Say you're on Facebook and receive an invitation to join a group. Privacy-aware MarketPlace basically acts as a security index. The analogy IBM uses is your credit score. Before connecting with someone, you get a glimpse at other peoples' so-called privacy scores and it recommends settings. This may be of particular utility to any of you out there fond of dissing your boss to others on Facebook.

•  SaND (Social Networks and Discovery): This project comes out of IBM's Haifa, Israel group and hails back to an earlier information retrieval project called Sonar. The idea here being to bring together documents, tags, and other relevant identifying bits of information to find relationships between people. The idea is to be able to find disparate information--ranging from blogs to what people post on their social-networking apps--through keyword search. IBM's handout is cute: It plugs SaND as a way to show "six degrees of separation." John Guare may have something to say about that. Self-serving hype notwithstanding, it represents a start about how to think about building a framework for applications such as recommendation and personalization systems.

•  Blue Spruce: IBM's been going down this path for the last several years. The goal is to turn the Web browser into more of a collaborative platform and let people do something more important to mankind than recording what they just ate for lunch. Part of this is what IBM describes as its "massive mashup" technology, which would offer ways to allow several users to huddle over Web pages and interact in real time as participants mark up the page. The example offered by IBM was the obvious one: a virtual medical room where physicians can review and comment on test data. Doctors have been notoriously slow to embrace Web 2.0 technology but this idea merits more discussion from the medical establishment.

In recent conversations with IBMers, one theme nearly always came up: this is a big company with deeper pockets than any other company in the tech business. The blunt message: recession or no recession, it's only a matter of time before less well endowed rivals buckle.

Marketing spin, to be sure--but also a reflection of the constellation of forces in an increasingly weakened tech industry. And now, CEO Sam Palmisano has made it official.

In a letter to shareholders released in conjunction with IBM's annual report, Palmisano says that the company is "positioned to lead in the era that lies on the other side of the present crisis."

"We will not simply ride out the storm," he said. "Rather we will take a long-term view, and go on offense."

What this means in practice is that the company will attempt to leverage its diversification into areas such as cloud computing and services as a competitive weapon against rivals with weaker benches. IBM also is betting that its big presence overseas will help it better ride out a recession that has led to a slump in IT demand in the United States. About 65 percent of its revenues came from outside the U.S. last year.

Perhaps the most interesting part of Palmisano's letter is his declaration that IBM isn't planning to retrench until the global economy recovers:

Many companies are reacting to the current global downturn by drastically curtailing spending and investment, even in areas that are important to their future. We are taking a different approach. Of course, we must continue to improve our competitiveness. But while we maintain discipline and prudence in the near term, we also maintain the discipline to plan for the future. We're not looking back, we're looking ahead. We're continuing to invest in R&D, in strategic acquisitions, in growth initiatives--and most importantly, during these difficult times, in our people.

In other words, we will not simply ride out the storm. Rather, we will take a long-term view, and go on offense.

Separately, IBM disclosed in a filing that it awarded Palmisano $21 million in salary, bonus, perks, and stock-based awards last year.

"Today, HP announced first quarter results amid one of most difficult economic downturns that any of us has ever faced. I am proud to say that we continue to execute well in this very challenging environment."

So began Mark Hurd's recent letter to Hewlett-Packard's employees. Hurd, who has earned a justifiable reputation for straight talk, did not mince words. Like every other tech company these days, he explained, HP is feeling the impact of slowing global demand for IT products.

In black and white, here's what happened in HP's first fiscal quarter:

•  Personal System Group revenue down 19%
•  Imaging and Printing group revenue down 19%.
•  Enterprise Storage and Server revenue down 18%.

That's why Hurd ordered up an across-the-board pay cut, starting with the boss--he's taking a 20 percent salary reduction. Other execs are taking a 10 percent haircut, while the base pay for all other exempt employees will be reduced 5 percent. HP also announced changes to its U.S. 401(k) plan as well as its share ownership plan.

Tough news to deliver, but no CEO has yet been able to repeal the business cycle. The one upbeat tale to tell was in the services group, which accounted for more operating profit than any other segment of HP's business. In his note to employees, Hurd even likened HP to two different companies. Hyperbole? To be sure, but it's not that much of a stretch, really. There's a lot of experimentation going on in the IT world as companies struggle with how to make do with less. One increasingly pronounced trend: more IT departments are shifting their computing functions to the cloud. That means money in the bank for the services that can speed the transition.

Good enough. But if HP's going to weather this "econo-lypse," then services will have to grow even faster--and that's going to test even Hurd's formidable managerial talents.

After Carly Fiorina flamed out as CEO, Hurd stepped in and effectively refocused a company that was foundering. The timing of his arrival was propitious as it also coincided with a global IT boom. With the Dow heading for new records seemingly each month, what did it matter that HP still relied on a low-margin, commodity hardware business?

That seems like an eternity ago. The good times are over for now and the latest IDC report does not offer encouragement about near-term prospects for companies in the hardware business. Of course, Hurd still can count on services, but that's where HP squares off against IBM, which competes with a much deeper (and larger) bench. (Also, it appears that Big Blue is not feeling the same pain as HP. In an 8K filing on Thursday, the company confirmed its guidance for the year.)

Both HP and IBM have their strengths in services, but as Roger Kay writes, "for too long observers have been treating them like peas in a pod when, in fact, in many ways they are night and day."

Under Lou Gerstner and now Sam Palmisano, IBM moved away from commodity businesses like personal computers and recast itself as a heavy-duty supplier of myriad services to IT customers. In its conversations with prospective customers, IBM never fails to draw the (invidious) comparison with HP, which it depicts as the relative newbie.

OK, all's fair in love, war, and marketing, but there's more than a grain of truth in a PR pitch. Charles King, of Pund-IT Inc., who writes an insightful newsletter on IT trends, puts a magnifying glass on the recent earnings reports turned in by IBM and HP. And he finds that the usual apples-to-apples comparisons between the two companies' services businesses is a flawed one.

There was a point a decade or so ago when side-by-side comparisons of the pair was reasonable. In the 1990s, system vendors including IBM and HP pursued "desktop to datacenter" strategies that included everything from PCs and workstations to enterprise-class servers and storage products. But since 2000, system vendors including IBM and HP have pursued highly individualistic paths that diverged significantly from that tradition.

By the numbers, IBM has become a company focused on the computing needs of businesses of every size, with the majority of revenues coming from enterprise services engagements bolstered by deep software and hardware portfolios. By contrast, the majority of HP's revenues come, as they have for years, from highly commoditized printer, PC and notebook products.

That was a prime reason behind HP's acquisition of EDS, which King correctly notes now accounts for a big part of HP's profits.The challenge is that "the size of HP's software revenues (less than 1/7 of IBM's) punctuates the stark differences existing between the pair."

Hurd obviously doesn't need me or any other outsider to remind him how his company's services arm stacks up against the competition. He knows his company has got to step up its game.

But in the absence of a U-shaped economic recovery--and few economists predict that--the pressure is on to give IBM a run for the money (literally) in an area where profit margins are still great. If Hurd is the superstar executive that his press clippings suggest, he'll do whatever is necessary to make sure HP gets its fair share. At this point, he doesn't have much choice.

News.com Poll

Microsoft's retail foray
Should Microsoft go into retail?

Yes. It worked for Apple, it will work for them.
Yes. They need a place to show their wide range of products.
No. It's a terrible time to be going into retail.
Who cares? I still won't buy anything from them.

View results

Did Microsoft just serve up more fodder for the wits who direct Apple's lacerating series of Mac versus PC commercials?

On the surface, the decision to open a Microsoft chain of retail outlets sounds like a reasonable idea. With consumer spending plummeting, the competition for shoppers' attention is keener than ever. Why not hang out a shingle and give your wares top billing?

But this route has been fraught for technology companies who lost fortunes paying for under-used real estate compounded by bloated employee payrolls.

In the 1980s, IBM operated a network of retail stores. You could walk in and find out everything you wanted to know about IBM's products and services and do a deal on the spot. On paper, IBM believed it was a fine idea. In practice, however, it was an albatross. The stores were stuffy and had all the charm of hospital waiting rooms. What's more, you were limited to IBM products when snazzier stuff was sold by competing clone makers like Compaq or AST Research.

The stores lost hundreds of millions of dollars and IBM cut its losses in 1986 when it sold its leases to Nynex, which was one of the seven regional Bell operating companies. (Nynex also lost a fortune with the stores and wound up selling the entire kit and caboodle to ComputerLand five years later.)

CompuAdd, which started off selling its computers direct to customers, had a nice business going in the late 1980s and part of the 1990s. But its ambitions widened, and management decided to open a string of CompuAdd-only stores. By 1996, the company was bankrupt.

Another direct seller, Gateway, also stumbled badly after opening retail outlets in 1996. At one point, the company's coast-to-coast retail presence numbered 326 stores. But this, too, ended in failure and Gateway shut all of its outlets in 2004.

So far, the exception to all this has been Apple. In 2001, the company opened its first stores in high-rent locations like New York, Chicago, and Palo Alto, Calif., and they did it right in the middle of the dot-com meltdown. Anybody who knew anything about retail was skeptical, not the least because Apple was wading into an entirely new market that had a rightful reputation for being a snake pit.

The gambit has worked beyond most expectations. In fact, roughly half of Apple's 32,000 person workforce is employed in the company's 251 retail operations around the world. The stores have served as a terrifically effective venue for attracting new customers. Management is fond of repeating in various forums that more people visit an Apple outlet in a given week then attended the Macworld conference.

But not even Apple is immune to the economy. During the company's fiscal first quarter, average revenue per store declined 18 percent, from $8.5 million last year to $7 million this year. Still, the company's outlets are operating comfortably in the black.

Watching all this from the sidelines, Microsoft finally decided to try its hand, despite this being what is arguably the worst economy since the Great Depression. Maybe this is the right time. They say there is always opportunity in periods of distress, and Microsoft has deeper pockets than most. The company has hired a Wal-Mart veteran named David Porter to direct its retail strategy and that's an encouraging harbinger. After all, when you're talking about retail, few match the success enjoyed by Wal-Mart.

Microsoft will need his expertise to smooth over the channel conflict that inevitably will crop up. Porter will also face another challenge he did not encounter at Wal-Mart. This is not the same as selling toothpaste or deodorant. Smart merchandising only goes so far when it comes to selling technology products. If you don't have the goods, all the advertising in the world won't be enough to compensate.

Maybe Microsoft's future retail network will get a boost from the debut of Windows 7 along with new and improved Zunes. But retail is about buzz, and if Microsoft can't burnish a reputation as an inventor of cool technology, Justin Long and John Hodgman, the actors in Apple's tongue-in-cheek Mac versus PC spots, may wind up with lifelong employment.

With so much buzz in the corporate computing world around the (sometimes ambiguous) concept of "cloud computing," it was only a matter of time before one large company or another appointed a cyber computing czar.

On Tuesday, IBM put Erich Clementi in charge of all its cloud-computing work. His appointment was part of a multitime zone announcement that also featured the company's latest cloud-computing clients--Elizabeth Arden, Nexxera, and the United States Golf Association--who intend to test Big Blue's cloud applications in their own businesses.

Clementi's official title is general manager of Enterprise Initiatives. But GM or czar, he is being catapulted into a high-profile position where he'll be making the case to customers why they should sign with IBM instead of one of its rivals. In the last 18 months, IBM has built more than a dozen cloud centers around the world. But Clementi's job now is to speed that effort with an eye toward "making cloud technology work for and with corporations and governments."

With IT budgets under pressure because of the economy, cloud computing has emerged as a favorite concept among the digerati because of the potential savings it offers clients. (It doesn't hurt that IDC is projecting that cloud computing will evolve into a $42 billion market within the next three years.)

Clementi will take his official bow at IBM's annual CIO conference, which this year is being held this week in China. Among the other announcements at the conference to note, IBM will announce Tivoli Storage as a Service. The idea here will be to allow customers to pay for metered use of the product's data protection technologies via a cloud.

News.com Poll

Meeting IBMs match
How should we best understand Project Match?

Another sign of the times
IBM's barely veiled attempt to get employees to offshore themselves
A big mistake in the making

View results

CNN has obtained an internal IBM document detailing how employees who face losing their jobs in North America will be given the opportunity to reclaim them by working overseas.

"Project Match," as the program is dubbed, will let employees from the United States and Canada take posts at IBM branches in India, Nigeria, Russia, Argentina, Brazil, China, Czech Republic, Hungary, Mexico, Poland, Romania, Slovakia, Slovenia, South Africa, Turkey, and United Arab Emirates, according to the document.

As an incentive, IBM reportedly will assist with moving costs, according to CNN. So far this year, IBM has laid off several thousand people.

What do you make of Project Match? (Vote in our poll to the right.)

What with a deepening recession and concern about the health of financial system, the best-case expectations for technology spending ranged between the bleak and the desperate.

So what do we get? A counter-intuitive start to the earnings season.

The sub-text to IBM's post-earnings conference call on Monday easily could have been: "We're in a recession and ain't life grand?" (We'll have to wait until next month for Hewlett Packard to report its December quarter, but barring a shocker, HP may sing a similar tune.)

Not because these are salad days for the hardware businesses-just the opposite. That's why it's so interesting. In fact, the tech spending slowdown is hurting demand for computers and servers. IBM's computer hardware revenue (the Systems and Technology business) felt the pain as much as anyone, declining by 20 percent in the fourth quarter of last year.

But consider this: IBM's two global services branches notched a record pre-tax profit with a 14.5 percent margin, up four points from the prior year while the company's software revenue grew 3 percent. So what if IBM's sales team floundered in the quarter. Big Blue's higher margin mix compensated for any decline as gross profits rose to 47.9 percent from 44.9 percent.

Sam Palmisano, who has capably run the company since 2003, is winning plaudits from investors nervous about where things may be heading. But the major thanks goes to Palmisano's predecessor. Don't forget it was Lou Gerstner, who steered IBM into the very high-margin businesses that are now acting as bulwarks against the recession.

IBM had lost millions selling personal computers and PC operating systems. But between 1993 and 2002, Gerstner reshaped the company. He pointed IBM in a different direction, directing the company to invest billions building up its services and high-end software offerings.

By late 2004, the CEO baton had been passed to Palmisano, who was in a position to sell the PC business to Lenovo. Gerstner's emphasis on high-margin businesses was a shrewd choice that looks even better in light of subsequent history. These days the PC business is imploding. The lousy numbers recently turned in by bellwethers Intel and Seagate, only hint at how grim it has become in PC land.

Watching Mark Hurd operate at HP, I'm reminded a lot of Gerstner. NCR's former No.1 has a similar sensibility and he understands that commodity companies don't have a bright future. Paying nearly $14 billion last year to buy Electronic Data Systems was his master stroke. But it was part of the same strategy that included paying big bucks to buy application management software, Mercury Interactive, as well as Marc Andreessen's a data center automation software maker, Opsware.

The odd man out these days? It might be Michael Dell.

As earnings reports roll in, it's clear that 2008 will go down in the record books as a miserable year for most companies. But IBM bucked the trend, putting a coda on the year with a strong fourth quarter.

The question now is whether the company can manage itself successfully past what the wags now commonly refer to as the "econolypse." For the time being, at least, IBM's response is a measured yes.

The slump in corporate technology spending has pressured companies throughout the IT world, and IBM is no exception. The company anticipates hardware revenue will be down through the first three quarters of the year, but with 90 percent of IBM's profit deriving from software, services and financing, Chief Financial Officer Mark Loughridge said, "we do think we can manage through that quite successfully."

IBM posted fourth-quarter net income of $4.4 billion, up 12 percent from the same period one year earlier. Revenue fell 6 percent to $27 billion. After adjusting for currency, IBM said that revenue decreased 1 percent.

Gross profit margins rose to 47.9 percent from 44.9 percent, a reflection both of IBM's cost cutting focus as well as the mix of revenues, which featured more higher margin services and software contracts.

Wall Street's initial reaction was positive. After selling off during Tuesday's regular session, shares of IBM rallied about 4 percent in after-hours trading.

With the Obama administration planning a major stimulus package, many companies are banking on increased demand in the second half of the year. Similarly, Loughridge said that IBM expected greater levels of investment to result in an improved second half of 2009.

IBM is projecting full-year earnings of at least $9.20 a share. That should please investors as Wall Street was looking for $8.75 a share. But the company does not expect accelerating revenue growth from its traditional bread-and-butter businesses. Rather, IBM is counting on reaching its goal through margin expansion and better cost containment.

Starting in the Lou Gerstner era, IBM reshaped its business to feature software, services, and financing. That's been a good bet as those are the businesses that are holding up better than Big Blue's computer hardware business, which fell 20 percent in the fourth quarter of last year.

During the course of a conference call with analysts on Tuesday afternoon, Loughridge said IBM planned on taking "cost initiatives" throughout the course of the next 12 months, but did not get more detailed.

Still, he added that IBM had "a very good hand to play in 2009."