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IBM Chairman’s Opening Talk: The Low Point of Toronto Conference

Louis XIX of Armonk

Gerstner Brought Back Memories of Another "L’état, c’est moi!"-Louis

(Louis XIV; 1638-1715)

The low point of IBM Toronto '96 Consultants Conference was the Big Blue chairman's opening speech. As a result, Louis V. Gerstner's top lieutenants spent much of the following two days - on stage and in the corridors - trying to put a positive spin on their boss's less than awe-inspiring remarks.

Some of Gerstner's faux pas were trivial. Others were shocking. We'd put his arrogance among the trivial. We'd rate his ignorance as shocking. In the end, Gerstner demonstrated that he may be on a personal power trip at the expense of the IBM shareholders.

For instance, (the) "PC revolution was driven by individuals," Gerstner asserted. "Network computing is about... enterprises. It's about transformation of the way institutions do business."

Pardon moi? That's like saying MTV is about senior citizens!

The Internet alone has over 15 million users, only a small fraction of whom are large enterprises. As we've pointed out on numerous occasions in the past (see ANNEX BULLETIN 94-52, 11/12/94, for example), the PC and the Internet have empowered individuals and small companies to compete with giant enterprises on a level playing field. They've become equalizers. Kind of like the invention of handguns. The latter enabled even the little old ladies to overpower the giant sumo wrestlers if accosted by them.

No wonder corporate America has been forced into downsizing and restructuring in a desperate effort to catch up with the Internet-aided masses. It won't succeed, of course, any more than dinosaurs could have prevented their own extinction. At best, corporate America will prolong its mortal agony.

Meanwhile, the "customer centric" IBM CEO, who is getting his strategy advice from fellow-dinosaurs, even seems proud of it! No wonder the "piranha CEOs" who run businesses based on "Web years" (90 days) are probably dying of laughter and sharpening their teeth when listening to the dinosaurs talk about shortening cycles and recentralization. In small companies, people don't talk about change; they just change. Within a "Web year." Or faster...

No Dissenting Opinions?

Since Gerstner left the IBM Toronto meeting right after his talk, we posed the above dilemma as a challenge to a panel of executives who discussed the Internet and the related issues. "Are there any dissenting opinions (from that of the IBM chairman - that network computing is about enterprises)?" we asked. "I realize that voicing them may be career-threatening," this writer added. "But not to, may be IBM-threatening."

You guessed it. Just as during (what we erroneously thought was) the "Last Emperor's" era (Akers'), no Big Blue executives at first disagreed with the chairman.

"So are we to conclude that there are no dissenting opinions?" we insisted. The audience laughed.

At this point, Mike Zisman, Lotus' president, spoke up. "This is really not a dissenting opinion..." he said, but then proceeded to dissent. He agreed that the Internet is the doomsday of corporate America.

"Take Johnson & Johnson (a pharmaceutical company)" Zisman said. "I've told them that the Internet is very bad for them. Because it enables anyone with a PC and an 800-number to become a worldwide distributor."

Of course, examples like that abound in other industries, too. But it was refreshing to hear such candor and vision from an "IBM executive." Except that he was also a small company "CEO" (Lotus had only about $1 billion in revenue before it was acquired by IBM in mid-1995). Now if only Lotus could run IBM... Maybe then we would not have to "reevaluate" our stock portfolio?

Meanwhile, there is an obvious mismatch between the 1996 IT opportunities and the IBM revenue plan. Bruce Harreld, IBM's chief strategist, whose talk followed Gerstner's, said that more than 50% of the 1996 IT revenue opportunity lies in the small and medium companies market, which is growing at 14% to 15% per year, i.e., almost double the growth rates of the industry. "Technology is allowing these guys to compete with the big boys in their industries," Harreld explained. He should know. That's exactly what Harreld did himself at Boston Chicken when competing with McDonald's, KFC and other food industry giants.

wpe2.jpg (31149 bytes) But despite this and other subsequent rhetoric about how important the small and medium companies are for IBM, the Big Blue is still heavily dependent on the "giants," it turns out. In 1996, for example, about 70% of IBM revenues will come from some 4,000 top customers, according to Bill Etherington, who heads up the company's industry units. "That's about a billion a week," he said.

Sounds impressive, except when contrasted by the fact that IBM is only getting 25% of its business from the small and medium companies, which its executives admit represent more than 50% of the IT opportunities. Maybe that's why the company recently put Robin Sternbergh in charge of the "general business" segment.

Irresponsibility

"We are not in the business of disintermediating our customers," declared IBM's Louis XIX in Toronto.

"Disintermediating" customers?

Our SpellChecker just choked on the word! For, disintermediating is not English. And it sure doesn't sound like French, either. So it must be the New World Order-speak? Ironically, several other senior IBM executives parroted their boss's nonsense word.

Anyway, more importantly, this "Louis the Irresponsible's" proclamation revealed that he evidently cares more about the feelings of his Dinosaurs' Club pals (other FORTUNE 500 CEOs), than about creating wealth for IBM shareholders.

Later on, we pointed out to some senior IBM executives how ludicrous this Gerstner statement was. First, because it ignores his obligation to act in the best interest of IBM stockholders. Second, because many Big Blue customers have no compunction about competing with IBM (e.g., AT&T, EDS, GE, CSC, etc.). And why would they? Unlike Gerstner, their CEOs do act in their shareholders' best interests. Which means entering new businesses, such as IT, as a way of transforming their organizations. Which is what we said in March 1990 would happen as a part of the industry "stratification" trend (see ANNEX BULLETIN 90-13, 3/30/90).

In a subsequent private conversation, Harreld defended his boss's stance by saying that "financial institutions (e.g., banks) are terrified of Microsoft." Thus IBM's assurance of non-competition is supposedly giving Gerstner an edge over Bill Gates.

That's another short-sighted view - seeking the lowest common denominator, instead of trying to excel and lead. Gerstner seems to be betting that his Dino-pals will survive.

But what will be his "Plan B" if most of them get "disintermediated" by the "IT Comers," as IBM itself was in the OS software game? Kneel and beg for mercy?

After all, that was also the "Plan B" of some French royals. But in the end, they lost their heads to a technological invention of their time - the guillotine. By the way, so did its inventor - Monsieur Guillotine. Remember who "invented" the PC? IBM!

No Content in IBM's Future

"And now let me tell you something else we won't do," Gerstner said mid-way through his talk. "I know it is glamorous to go into the content business. We're not going to do it. We don't think it is a good business."

Strange. That's like a telecom company saying it would prefer the low-margin ditch digging and cable laying business to the more lucrative long distance service.

Even the traditional and conservative IT companies, like EDS, are getting into the content business. "We're very interested in the entertainment industry," said Gregory Granello, president of EDS Digital Studios, in an interview with the Dallas Morning News (8/21/96). This unit is a result of EDS's acquisition of Varitel Video, a hip, youthful company with offices in San Francisco and Los Angeles, whose clients are the film, TV studios and ad agencies.

Does Gerstner know something EDS doesn't? Or is his vision also "content free?"

Louis XIX of Armonk:

Le Big Bleu, c'est mois!

lvglouis.jpg (19334 bytes) But Gerstner was not done yet demonstrating how one's vision can get clouded when one's head swells. Later on, even one of his most devoted lieutenants described him in a private conversation as a man "on the cusp" - meaning one step from being out of it. And another one of his disciples admitted, when confronted with irrefutable arguments that "Louis XIX" was not acting in IBM shareholders' interests, that this person "couldn't figure out what makes him (Gerstner) tick." 

What's this about? Well, Gerstner said that some people on Wall Street (actually some people on "Main Street," too - like yours truly, for example - see ANNEX BULLETIN 96-19, 3/20/96) have suggested that IBM should spin off services (and not just services). "It is really a dumb idea," he opined. "It shows a lack of understanding of why we have been so successful in the services business." He said that it was due to the supposedly close ties between IBM's hardware businesses and its global services operations. "Hm..." is how one IBM services executive reacted to this Gerstner's assertion.

Gerstner undermined his own argument when he admitted, during the question and answer period, that IBM is NOT a leader in all IT technologies. (Of course, that's been a truism for everyone else in the industry; the significance of the statement is that now the IBM chairman has said it, too). If IBM is not a leader in all technologies, its services unit is actually disadvantaged (versus the independent competitors) by a close tie with less-than-leading-edge product providers.

"But that's now, when we all have roughly the same market share," Harreld later defended his chairman's statement. "Wait till we get to a 60% market share" (i.e., increase its buying power and control the prices).

Hm...

Wonder what the Justice Dept.'s antitrust lawyers would say about this if IBM were one day to corner the services market? But fear not. For, Gerstner's theory about the supposedly close ties is just that - theory. There is not much chance of that 60% share happening as long as IBM stays integrated. Given its unwieldy and often competitive industry-product-geography management grid(lock), no natural affinity exists between the product and services lines. Everything has to be negotiated, sometimes even more than once. No wonder many IBM executives privately also say that the only way out of this logjam is to break up the company.

Finally, IBM services units are among the world's biggest "distributors" of competitive hardware (e.g., HP, Sun, etc.). Staying hardware-neutral is a requirement for a successful services vendor. IBM services unit succeeds when it proves it isn't "all blue!"

The OS/2 Warp Saga

So why is Gerstner behaving irrationally?

He is not. Not if "what makes him tick" is a personal power trip, rather than enhancing the IBM shareholders' value.

Take the OS/2 story, for example. Having insisted on tackling Microsoft head on, across a wide front, Gerstner linked himself directly and inextricably to the fortunes of the OS/2 Warp. It was he who insisted on the name "Warp." It was he who pitched it to his "dino-pals" at every chance he got.

But despite its modest successes in the corporate world, and more than a billion dollars which IBM pumped into its failed rescue mission, the OS/2 seems dead in the water. No wonder some consultants grilled the IBM executives about why the company was throwing its good money after the bad. Unfazed, John M. Thomson, the top software executive, replied that IBM is continuing to invest in and market the OS/2.

But why?

Here's why: Because Gerstner said so! According to some usually reliable sources, when the head of the OS/2 unit, John W. Thompson (unrelated to John M.), recently proposed to Gerstner that IBM pull the plug on the product, the IBM chairman reportedly replied that spending $400 to $500 million per year on the OS/2 was a small price to pay compared to the blemish which such a public failure would put on his (Gerstner's) reputation.

What's $400 million here, $500 million there... if one is a Louis XIX of Armonk?

But J.W. Thompson denied today (8/21/96) that he recommended to Gerstner that IBM kill the OS/2 project. He said that "putting the OS/2 into the maintenance mode" was indeed one of the options which he and his team presented to the IBM chairman. "But we did not recommend it," he added.

Yet this denial did not sway our original source, who was contacted by some OS/2 division people who were looking for a job in anticipation of the plug being pulled on the OS/2. "Why would he (J.W. Thompson) be presenting to the IBM chairman except that a momentous decision had to be made?" our source wondered. "For routine presentations, he would have gone to (Rick) Thoman (IBM's CFO) or J.M. Thompson."

Whatever actually happened, one wonders if the IBM shareholders would put the same price tag ($400 to $500 million per year) on their chairman's reputation. Especially considering that they could get a new, blemish-free CEO for a fraction of the cost.

Gerstner: A Summary

Perhaps the key, and yet the unspoken, reason, why IBM's CEO is so vehemently opposed to a break-up of the company is that such an IBM would not need an Armonk! It would not need a hands-on "CEO-king," just a good bookkeeper. That's because it would have several competent "CEO-kings" running the spun-off units. But such an IBM would need a leader with a vision, who would put the shareholders' pocketbooks ahead of his ego. Evidently, Gerstner is not it. On the contrary. Just as Louis XIV, for example, was not satisfied with only a Louvre, and had to built a Versailles, so has IBM's Louis XIX already announced plans to build Armonk II.

Students of history may recall what eventually happened to the former residents of the Louvre and Versailles. "Those who don't learn from history are doomed to repeat it," goes the old saw. The IBM chairman would do well to heed it.

Happy bargain hunting!

Bob Djurdjevic

Armonk I: "The Louvre"   Armonk II: "The Versailles"

armonk1.jpg (7370 bytes)armonk2.jpg (9871 bytes)

 

 

 

 

Additional Charts/Graphs

  • A mismatch: IBM revenues vs. IT market opportunities
  • A vertically integrated IBM undervalued?
  • IBM telemarketing sales (1993-1996)
  • IBM now No. 1 in IT services
  • IBM services: A five-year forecast
  • World's top IT services companies in '96






 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


Volume XII, No. 96-42
August 22, 1996

Editor: Bob Djurdjevic
Published by Annex Research
e-mail: annex@djurdjevic.com

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