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PC Sector Sale By IBM Would Signal Change

Firm Has Lost Grip on Competitive Industry

By Mike Musgrove
Washington Post Staff Writer
Saturday, December 4, 2004; Page E01

Among corporate technology managers, it's one of the oldest adages: "Nobody ever got fired for buying IBM."

That is because many regarded it to be a safe bet to do business with the established tech giant, one that helped lead the computer revolution by pushing personal computers onto the desktops of homes and offices around the world. Customers largely had two choices, an IBM PC or what used to be known as an "IBM clone" made by another company.

International Business Machines Corp., however, has steadily lost its hold on the PC market, buffeted by made-to-order rivals such as Dell Inc. and low-cost competition from overseas. In recent years, IBM has gradually moved away from PC sales to focus on more profitable businesses in consulting and services. A newspaper report Friday suggested the company may be ready to exit the personal computer business altogether.

The New York Times, citing unidentified sources, said IBM is in discussions to sell its PC business to China's top computer maker, Lenovo Group Ltd., a company formerly known as Legend Group Ltd. A spokesman for IBM, Clint Roswell, declined to comment on the report, saying it is against his company's policy to comment on rumor or speculation. "We don't have anything to announce yet," he said.

A sale would be the latest evidence that personal computer brands are quickly becoming seen as interchangeable, in an industry where price competition is fierce and few companies are profitable. Several of IBM's largest rivals have merged in recent years -- Hewlett Packard Co. bought Compaq Computer Corp., Gateway Inc. paired with eMachines Inc. -- in an attempt to better compete with the industry's giant, Dell.

For its part, IBM has chosen a steady retreat from the business. It got rid of its disk drive business and stopped marketing computers to consumers to focus on business customers years ago. Then the company acquired PricewaterhouseCoopers Consulting, a smaller power player in the services business, in 2002.

IBM Global Services, IBM's name for its consulting division, is the largest in the world and accounted for more than $40 billion of the company's revenue in 2003. The company pulled in only about a tenth of that amount selling computers. IBM is the third-largest personal computer maker in the United States, behind Dell and Hewlett-Packard.

"The investment community and many others have been yelling at IBM to get out of the PC business for a long time," said Roger L. Kay, an analyst at the research firm IDC. "They're just making a couple percent profit after all is said and done. You could just buy bonds and do better -- and you wouldn't have to worry at night."

But think tank director Paul Saffo, of the Silicon Valley outfit Institute for the Future, said the company's exit would be a "scandal" and "should send a shiver down the spine of anybody who cares about the future of the American economy." In his view, a retreat by IBM would be a distressing sign that U.S. businesses no longer know how to build products profitably.

IBM and Apple Computer Inc. helped lead the computer revolution. Though many companies and computer models had a role in the ascent of the computer, IBM's 5150 computer is often cited by tech historians as having sparked the industry (Mac aficionados would tend to give that credit to an earlier machine from Apple).

Some analysts questioned the wisdom of such a move on the grounds that an IBM computer purchase could influence a company to use IBM's services, but others saw a move in a favorable light. The company's stock closed at $97.08 a share yesterday, up $1.32.

Merrill Lynch & Co. analyst Steven Milunovich rated the potential move as "a moderate positive" in a note to investors, though he warned that IBM would risk losing corporate accounts to HP and Dell, especially if there is no IBM-branded computer. It was not clear yesterday whether IBM would allow a purchaser of its PC business to use the IBM brand on its computer line or not. (Some reports yesterday said IBM had hired Merrill Lynch to help it find a buyer for its PC business. A spokeswoman for Merrill Lynch declined to comment on the matter yesterday.)

Some analysts questioned whether PC brands matter.

"I'm not sure the PC is like the component industry or the disk drive industry," said Stephen Baker, an analyst at NPD. "People don't know what kind of disk drive it is inside their PC, but they do know what the brand is on the computer on the desktop in front of them."

A company's brand name is still important in some parts of this industry, he said. For example, there are companies that won't buy computers with processors built by Advanced Micro Devices Inc. because they trust Intel Corp. microprocessors more, Baker said. "I wonder how those corporations are going to feel about getting a PC from 'Lenovo.' "

For analyst Kay, following the PC industry is becoming more of a part-time job within his other responsibilities, as the industry continues to consolidate.

"One more funeral in this industry, and there's nothing left," he said.


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