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IBM lost its dominance of the computer hardware market when it allowed other companies to clone its PCs. Instead, although it remains a major force in servers and other storage devices, the group has reinvented itself very successfully as the world's foremost IT consulting and services business. As a result it was one of the few IT companies to survive the dotcom downturn virtually unscathed, arguably in better shape in the ten years after 2000 than it was at any time in the two decades before. As a result, it began to gradually offload what were once its core hardware businesses. In 2004, in a major symbolic break with its past, IBM agreed to sell its entire desktop and notebook computer division to Chinese manufacturer Lenovo. That divestment made barely a scratch on revenues which continued to soar to record levels in the latter half of the 2000s, bolstered by a series of acquisitions for its substantial software division, now its most profitable business. Its extensive global services division also houses IBM Interactive, a unit which offers digital development and marketing services to clients. The group celebrated its centenary in 2011, but significant challenges have begun to appear since then in several of its remaining traditional divisions as a result of competition from a new generation of technology services providers led by Amazon and Google. IBM has compensated by pushing into new areas, not least cloud computing, artifical intelligence and digital marketing. Its IBM iX division is now the world's second biggest digital agency.
Who handles IBM's advertising? Click here for Agency Account Assignments for IBM from Adbrands. Including unmeasured media, the company declared total advertising and promotional expenditure of $1.47bn in 2018.
Interbrand's Best Global Brands survey ranked IBM as the world's #6 brand in 2016, with an estimated brand value of $52.5bn. Millward Brown's Brandz survey ranked it as the world's #10, with an estimated value of $86.2bn. Both surveys use different measurement criteria.
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IBM set the pace for strategic development in the IT sector in the last few years of the 1990s and the early 2000s. The move into outsourcing and services, in particular, was a masterstroke which maintained IBM's dominance of the IT consulting sector. Since then the company has pursued a focused and generally fearless strategy, showing no qualms about ditching heritage sectors such as PCs, low-end servers, disk-drives and components in favour of higher margin non-manufacturing operations. There seems little doubt that IT outsourcing and consulting will continue to be a growth industry in the near and medium term, and IBM is also taking steps to transfer operations to low-cost regions such as India to maintain its margins. It has also pushed even more aggressively into software, especially the middleware that provides the infrastructure for corporate management systems. However, significant new challenges have emerged, notably competition in IT services from more aggressively entrepreurial technology giants such as Google and Amazon.
IBM has described its mission as "helping customers become more efficient and competitive through the use of information technology solutions". However increasingly this has become a case of forming partnerships with customers rather than simply providing them with the tools with which to do the job. IBM's biggest business by revenues is its IBM Global Services division, which among other initiatives takes over client companies' outsourced IT departments, and completely remodels all business processes from payroll to through to procurement. The company originally coined the terms Business Transformation Outsourcing (BTO) and Business Performance Transformation Services (BPTS) for different versions of this process. Innovation is a key selling point for the company's range of services. The key underlying concept connecting all IBM's services is that of "Smarter Computing", in which it aims to help its customers interpret and structure the vast amounts of data available to them to improve performance.
IBM is far and away the world's #1 IT services provider, with around $120bn of long-term ongoing business in this sector. Its operations are grouped into two areas. The biggest of these is what the group calls technology services, effectively different degrees of outsourcing ranging from a full service in which it takes over clients' entire IT departments through to contracted support and maintenance.
IBM has been one of the few Western companies to crack the massive but sensitive Japanese market. Rather than take over a company's IT department, a policy which has proved unacceptable to most Japanese businesses, IBM creates joint venture operations with the company, allowing it to retain its own staff. In 2002 the group greatly enhanced the Global Services division by acquiring the consulting arm spun off from accountancy firm PWC for $3.5bn. In 2004 the company agreed to acquire Daksh e-Services, the third biggest call centre in India, for around $170m. Daksh employs 6,000 people at call centres across India to manage outsourced services such as customer care, telemarketing and transaction processing.
Another increasingly important unit within the Services division is IBM Watson, its supercomputer technology. This "cognitive computing" project first became widely known within the US when a Watson supercomputer beat two human contestants in a special episode of TV game show Jeopardy in 2011. IBM is marketing the system as a form of advanced data analytics that can "learn" from its mistakes. A key focus is on healthcare, where IBM believes Watson can improve patient care and reduce costs by identifying the most effective treatment options from thousands of academic studies and millions of patient records. In 2015, the group acquired the weather forecasting data division of The Weather Company, also parent of broadcaster The Weather Channel, for around $2bn. These form the core of what is now IBM's Cognitive Solutions division using analytics to identify best-practice business systems.
In overall terms, IBM is the world #2 in software by revenues (after Microsoft), marketing a range of sophisticated programs, mostly for use by medium and large corporate or institutional customers. Most fall into the category of "middleware", such as process management or information flow software. The company is global market leader in this sector too with around 18% share (Oracle is #2 with around 14%). The group is the #2 (behind Microsoft) in operating systems and #3 behind SAP and Oracle in enterprise applications. Products include e-business platform WebSphere, database and data management program DB2, communications brand Lotus and business infrastructure software Tivoli. IBM closed the gap with Microsoft during 2002, agreeing to acquire Rational software development tools, for $2.1bn.
More recently the group has mounted a series of further acquisitions. In 2005 it agreed to pay $1bn for Ascential, a leading provider of data integration software for corporations, now marketed under the InfoSphere banner. This was followed by three large purchases in August 2006. MRO Software, which made programs to track and manage largescale business assets, was purchased for $740m; FileNet, a content management software developer which developed systems to capture and manage digital documents, was acquired for $1.6bn; and the group spent another $1.3bn on Internet Security Systems, a supplier to government and industrial clients. In 2007, IBM made its biggest purchase to-date with a $5bn deal to acquire Cognos, Canada's largest software company. IBM is a major sponsor of Linux, the free-to-use operating system software being promoted by several companies as an alternative to Microsoft systems. In 2009, the group bolted on a further unit with the purchase for $1.2bn of SPSS, which develops software to analyse statistical data, mainly for scientific research. Sterling Commerce, acquired from AT&T for $1.4bn in 2010, designs automated B2B payment systems.
In 2016, IBM pushed through a major overhaul of its operating structure, breaking up traditional business groups into separate units. Software, for example, previously a distinct reporting entity, was broken up and reconfigured within several other business units. Most of it was absorbed into Cognitive Solutions, but operating systems software is now part of the Systems division, and integration software is included in the Technology Services division. The group declared total revenues from software across its various divisions at just under $24.5bn, more or less flat on the year before.
Cognitive Solutions is now a separate division in its own right, and the strongest within IBM as a whole by growth. For 2017, it reported revenues of $18.45bn. Most of that income was derived from solutions or transactions software.
More traditional business services such as IT consultancy and outsourcing are housed in two separate reporting groups of Global Business Services and Technology Services & Cloud Platforms. Cloud computing has become fastest area of growth in the industry generally - and also the area of greatest competition from the likes of Amazon and Google. IBM has invested heavily in SoftLayer, a network of cloud storage centres around the globe, and also in the launch of IBM Bluemix, a package of cloud storage services for software developers. IBM also provides business services such as consulting, system design and application management. Included within this is a range of marketing-oriented services such as CRM consulting, web hosting and design.
The group's "customer experience, branding and usability design consulting practice" was restructured in 2007 under the somewhat snappier name IBM iX, and given a stronger profile as a marketing services provider. Among the agency's major clients are Coca-Cola worldwide, leading sporting tournaments including The Masters, Wimbledon and the US and Australia Open. There are now practice centres in the US and Canada, Japan, the UK, Germany and Australia. As a result, IBM Interactive is included by Advertising Age in their ranking of the world's leading marketing services organisations. Ad Age estimated revenues of $2.95bn in 2016, including $1.1bn in the US. In Jan 2016, IBM Interactive made its first two acquisitions of creative agencies, snapping up US agency Resource/Ammirati and Germany's Aperto for an undisclosed sum.
Revenues from Global Business Services slipped again in 2017 to $16.35bn. Technology Services & Cloud Platforms were also down, to $34.28bn.
Systems & Hardware: Since 2005, IBM's hardware operations comprise two instead of three businesses. In late 2004, IBM agreed to sell its IBM Personal Systems unit to Chinese manufacturer Lenovo for around $1.75bn in cash and shares. At that point, IBM was the overall #3 worldwide in PCs, but its estimated sales of around 9m units fell far short of the market leaders Dell and HP, who each shifted more than 25m computers. Lenovo took ownership of IBM's ThinkCentre desktop brand, IntelliCentre workstations and Thinkpad notebooks, as well as the iconic "Think" slogan. It agreed a deal to license the IBM brand until 2008, although it stopped using that name earlier than planned in 2006.
IBM's two remaining hardware units were combined to form the IBM Systems & Technology Group. IBM Servers was the overall worldwide market leader in 2012 with around 31% global share. Since then, though, its position has slipped. In early 2014, the group announced plans to slim down this business too, divesting its lower-spec x86 server range to Lenovo for $2.3bn. It retains Power Systems servers and new top-of-the-range System z mainframes, introduced in 2012. A new version of the "Big Blue" mainframe computer was introduced in 2015 as Big Iron. PureSystems is the banner of a range of integrated systems which combined server, storage and software elements. In 2009, IBM agreed terms to acquire smaller competitor Sun Microsystems, the #4 in servers with around 11% share, and a major force in internet services. However, that deal later unravelled as a result of a disagreement over employment terms, and Sun was subsequently snapped up by Oracle instead. By 2Q 2017, IBM had slipped to the #3 in global servers, with 6.6% global share, behind HPE and Dell. It ranks #4 in storage systems behind HPE, Dell and NetApp.
After a series of declines, revenues from hardware systems actually rose in 2017 to $8.19bn. Servers accounted for just under half of that total, storage for a little over a quarter, and software and services for the remainder.
Until recently, separate sub-group IBM Microelectronics made semiconductors and other components. It has a substantial presence in the games console market. Nintendo has been a core client for several years, and IBM has more recently negotiated alliances with both Microsoft, for its latest generation Xbox, and with Sony. A key development was IBM's Cell "supercomputer" chip, produced in a joint venture with Sony and Toshiba. The first products containing a Cell chip launch in 2006, including Sony's PlayStation 3 games console, HDTVs from Sony and Toshiba and a Sony home entertainment server. However the business has struggled in recent years to hold its own against Samsung, Intel and other manufacturers. In 2014, IBM announced plans to offload the division to competitor GlobalFoundries for nothing, and paid the buyer an additional $1.5bn dowry to cover restructuring and necessary capital investments. IBM claims the deal will save it billions of additional dollars in necessary investment to keep the business competitive. IBM's disk drives manufacturing business was sold during 2002 to Hitachi.
IBM also houses two smaller divisions: Global Financing, the world's largest provider of financing services for IT; and an investment arm which acquires minority holdings in developing technology businesses.
In 2011, the group set a new record for revenues, which rose 7% to $106.9bn, helped along by positive currency fluctuations; while net income rose by the same percentage to $15.9bn. Since then, though, performance has steadily declined as a result of the rapidly evolving cloud environment and competition in IT services from the likes of Amazon and Google among others, as well as divestures. Revenues have declined consistently - 3Q 2015 was the 14th consecutive quarterly fall - and profits have tended to drift in the same direction.
Full year revenues for 2014 slipped 6% (and by 12% in the final quarter) to $92.79bn, the lowest level for at least six years. Revenues for all four of the group's main divisions declined. Combined net income plunged 27% to $12.02bn. That figure included a $4.7bn impairment charge against the Microelectronics components business.
There was another difficult year in 2015, with revenues sliding by almost another 12% to $81.74bn. Once again all four main divisions suffered declines of between 9% and 25%. However, net income recovered 10% to $13.19bn, helped by the absence of the previous year's large impairment. Gross profit was down 12% year-on-year nevertheless.
Revenues slipped by another 2% in 2016 to $79.92bn, and net income slumped to $11.87bn, its lowest level for a decade. The US contributed 38% of revenues, and Japan 10%. Another 31% came from the EMEA region. The steady decline has continued into 2017, with the fall in 3Q of that year representing the 22nd consecutive quarterly decline.
There were finally some signs of a turnaround in the final quarter, with a modest improvement in topline for the first time since 2012. However, revenues for the year slipped 1% to $79.14bn. Weakness in profit margins in the services business combined with a mammoth $5.5bn write-off in deferred tax assets in the wake of Trump's reform bill to generate a net loss for the final quarter. For the year, net income more than halved to $5.75bn.
IBM was first incorporated in 1911 in New York with the ungainly name of The Computing Tabulating Recording Company. It was created by the merger of three separate companies involved in different forms of automated processes. In its early days, CTR made everything from card-punch counting and time recording machines to industrial weighing scales and cheese slicers. In 1914, salesman Thomas Watson joined CTR from The National Cash Register Co (NCR) as general manager, and quickly began to introduce a more cohesive structure to the sprawling business. He also introduced what came to be the IBM mantra: his favourite slogan was "THINK", and this was quickly adopted by his staff, along with an evangelical sense of company pride. Watson became president of the company in 1915 and focused its approach towards large-scale business tabulating solutions, and away from more mundane applications (such as cheese slicing). As a result the company expanded fast, tripling revenues within five years, and opening offices in Europe, South America, Asia and Australia. In 1924, its name was changed to International Business Machines to reflect its new profile.
The Great Depression of the 1930s ruined many businesses, but it brought IBM one of its most lucrative contracts. Following the Social Security Act of 1935, which introduced welfare, IBM was commissioned to create a system which would allow the US government to maintain employment records on more than 26 million people. Other government contracts followed, including the manufacture of military equipment after war broke out in 1941. The company also began to develop its first computers. The Automatic Sequence Controlled Calculator, built in 1944, was 50 feet long by 8 feet tall and weighed 5 tons. It could add two numbers together in just under one second. Multiplication took six seconds; division took twelve. It was slow, but it was a start.
By the end of the 1950s, vacuum tubes and then transistors had allowed computers to get faster and faster. The IBM 7090 was able to handle not one, but 229,000 calculations a second, and was used to run the US government's Ballistic Missile Early Warning System. Computers were made more versatile by IBM's invention of disk-based storage from 1957, and of the programming language Fortran in 1958. Commercial uses became widespread and IBM set up a separate company, World Trade Corporation, to handle non-US business. By the start of the 1960s, WTC was responsible for installing 90% of all computers used in Europe.
Thomas Watson was succeeded by his son, Tom Jr, as president in 1956, and the new boss aggressively set about developing the company's computer business. During the course of the 1960s, IBM introduced upgradeable hardware, interchangeable software and storage media that could be used on different machines, and fast Solid Logic Technology circuit boards. Later it invented the floppy disk (in 1971) and the first laser printer (1975). In the first 14 years of Tom Watson's presidency, revenues grew from $900m to $8bn, and the number of employees almost quadrupled to 270,000. The office environment was dominated by IBM's products, not just computers but also the popular Selectric electric typewriter with its replaceable font 'golfball'. The "Big Blue"? IBM got this famous nickname during the 1960s because its towering mainframe computers were housed in bright blue cases.
During the 1970s IBM led the way in introducing computers into everyday transactions. The first computerized supermarket checkout was launched in 1973, as well as an early version of an automated cash dispenser for banks. By mid-decade, IBM virtually dominated the market with around 80% share. The next leap forward came in 1981, with the arrival of the IBM Personal Computer or PC. For the first time, IBM contracted out some of the technology. The processor was supplied by Intel; the disk operating system, or DOS, was developed under contract by a small Seattle-based company called Microsoft.
Suddenly the company faced serious competition for the first time. IBM had become the epitome of monolithic big business, a faceless, impersonal giant that was skilled at selling its ideas to customers, but was too big to react if those customers had different ideas of their own. During the 1980s, IBM put its energy into developing token-ring networks, designed to connect PCs as equal links in a chain. But instead, the market gradually shifted towards client/server networks, where one host computer (or server) linked several subservient workstations. For the first time, developments in technology were being driven by end-users rather than by IBM, and the company struggled to stay abreast of the changing environment.
At the same time, by contracting out the technology on a non-exclusive basis to Intel and Microsoft, IBM had opened up the market to other manufacturers. These other companies quickly learned how to make "IBM-compatible" PCs which were cheaper and arguably better than the inventors of the format. Certainly, IBM's mistake made a lot of other manufacturers wealthy. Ironically in the long term it worked to everyone's advantage. PCs proliferated, and instead it is the format that didn't allow cloning - Macintosh - that came to be gradually marginalized.
In the meantime, IBM's profits began to slump, and in 1990 the company recorded the first of three years of steadily escalating losses, peaking at a record $8bn in 1993. The typewriter and printer business was sold off to become Lexmark, and IBM concentrated on its computers. With the business on the verge of collapse, Lou Gerstner was recruited as CEO in 1993 from Nabisco and he began the restructuring process that would put IBM back on its feet. Instead of splitting the company up to make it more flexible, Gerstner concentrated on redeveloping IBM's approach. From his experience at other companies, Gerstner knew that the holy grail for all large corporations was to sort out their internal IT departments. He set about making IBM the company they hired to carry out the task. The business was back in the black in 1994. In 1995, IBM acquired software developer Lotus, followed by Tivoli Systems the following year. In 1997, the newly rejuvenated company repositioned itself to put the internet at the heart of every aspect of its marketing and product mix, and placing a special emphasis on e-business. Also that year it resurrected discussions about artificial intelligence when its Deep Blue supercomputer beat world champion Gary Kasparov at chess.
To reinforce its new financial health and further boost market share, IBM began a series of aggressive acquisitions from 1995 onwards. Software businesses were the principal target. In addition to Lotus, more than 45 businesses were acquired including NetObjects, Object Technology International, Footprint Software, Early, Cloud and Company, Cimad Consultants, CommQuest Technologies, Edmark, Software Artistry, Transarc, Catapult, and Unison Software. (Several, such as Edmark and NetObjects, were later sold on again as the company focused on its core businesses). In 1999 IBM acquired business computer manufacturer Sequent for $810m, with a view to using that company's specialised technology to manufacture an inexpensive substitute to traditional mainframe machines. Later the same year the group launched an attack on rivals Sun and Hewlett-Packard with the launch of a new range of more powerful S80 Unix computers, designed for web service providers. In 2000, reacting to an unexpected revival in Macintosh's fortunes following the introduction of the stylish iMac, IBM introduced its own style-conscious PC range, NetVista.
But the group's main focus increasingly became IT services. From 1999 onwards IBM's Global Services division won a string of billion-dollar outsourcing contracts, from the likes of Dell, BP, Nissan, Aventis, Bank of Scotland and many others. In 2000 the group formed a strategic alliance with Ariba and i2 Technologies to pool their respective ranges of software products which allow companies to build and operate online B2B exchanges. In addition, the group agreed an alliance with US telecoms business Qwest to build and run internet data centres to house online operations of US businesses.
IBM also announced it would put its full weight behind the freely available Linux operating system, in a bid to end the potential domination of the server market by Microsoft. IBM has committed more than $1bn to support the software companies which program and distribute Linux in attempt to establish it the free-to-use common language for e-business applications. The group also spent over $1bn acquiring or investing in a string of computer chip companies developing specialised communications chips. In 2001, IBM doubled the size of its database division, spending another $1bn in cash to acquire database developers Informix. This made IBM the new main rival to Oracle, the database market leader. A month later the Global Services division announced its biggest ever outsourcing deal, a $6bn contract to handle back office systems for Fiat.
As expected, Lou Gerstner relinquished the role of CEO in 2002 to Sam Palmisano, formerly president & COO, and was able to step down on a high note as the company reported record profits. Almost immediately Palmisano was obliged to deal with falling expenditure in the technology and IT services sectors, which forced IBM to issue its first profit warning in ten years in early 2002. Tasked with the rather uncomfortable job of sorting out the group's less profitable operations, he licensed contract manufacturer Sanmina-SCI to produce the bulk of its desktop computer range in a deal worth $5bn over four years, and agreed to sell the group's loss-making disk drive manufacturing operations to Hitachi for just over $2bn.
At the beginning of 2004 the group took a tentative step into the online entertainment sector, agreeing an alliance with media software company Real Networks to establish online stores to sell video content to consumers over the internet. However an unexpected blow was dealt to the group's Global Services unit later in the year when leading customer JP Morgan Chase decided to scrap a $5bn outsourcing deal after concluding that the work would be better handled in-house. Also during 2004, IBM said it would make a $320m charge against profits to cover costs of a settlement of a long-running class action lawsuit brought by employees over changes made during the 1990s to IBM's pension scheme.
The group's most significant deal came in 2005 when it broke with its heritage in personal computers, announcing a plan to sell that division to China's Lenovo. The deal was suspended temporarily on concerns that the sale could lead to the transfer of national security technology to China. A full investigation was launched, but the sale was cleared after IBM made changes to security procedures at one of its main research facilities in the US to avoid direct contact between the PC unit and continuing IBM divisions. In another break with the past, Apple, for whom IBM had produced the PowerPC processors which for many years formed the basis of desktop Macintosh computers, said it was switching this business to IBM's traditional rival Intel.
Last full revision 27th October 2017
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