IBM sacrificed revenue for margin, largely giving HP the lead in the former but taking a vastly more profitable position in exchange. In addition, one of the questions that was debated in Microsoft was whether they should have a stronger services unit; Steve Ballmer won that debate because of his senior executive position in the 90s. But IBM may be the standing example that perhaps it should have gone the other way. Lets talk about that this week.
HP is growing their services unit strongly with the acquisition of EDS, and its interesting to note that it is largely services in its latest financial results that carried their bottom line. Virtually every other major business line was off significantly. This isnt because HP is badly run; on the contrary, they remain one of the best run hardware companies on the planet. It is because in this worldwide market downturn every business they had was hit, and even a hardware structure designed to weather storms suffered in the face of a perfect storm.
HPs major divisions are PSG or Personal Systems Group, which does PCs; IPG or Imaging and Printing Group, which mostly does printers; and ESS or Enterprise Storage and Server, which does storage hardware and contains their server lines. Each group arguably leads its respective industry. In the case of IPG by a rather impressive, near-total dominance margin. These units, which are nearly totally hardware-based, constituted around 74% of their business in 2008 (note: all percentages are based on Income Contribution).
The other major businesses are services, which with the acquisition of EDS constitute 20%, software, which constitutes around 4%, and Financing, which constitutes 2%. By any measure they are a hardware company that has a strong services unit. As primary competitors they have Sun, which they have pounded into submission; Dell, which they took the PC lead from last year; and every printer company at any level on the planet, which they regularly scare the hell out of.
But not so much IBM anymore.
IBM, which was clearly a hardware company prior to the 90s, had its hat handed to it in the 90s by Microsoft, and has been transformed in this decade.
IBMs software unit represents a whopping 40% of their business and is one of the major areas of emphasis for the company (again, note: all percentages are based on Income Contribution). This unit regularly runs up against Microsoft and companies like Oracle and probably wants to partner with HP more than compete with it. Because of the way software is priced and sold it is largely, at least over the short term, financial storm proof. And you also saw Microsofts Server and Tools unit shrug off the current financial difficulties without much apparent effort as well, validating this.
IBM retains the largest single technology services unit in the world and this unit represents a whopping 42% of their business. As with HP, services have remained in very high demand during the downturn, and because IBM has a larger services unit they achieved a much higher benefit.
Lets stop for a moment and compare: HP is two thirds hardware, IBM is four fifths software and services. Clearly, these are not similar companies.
The rest of IBM is mostly servers and mainframes, which account for 9% of their business; and financing, which also accounts for about 9%, largely to support the servers and mainframes and going back to the original IBM. In reality IBM is as much a bank as they are a hardware company and, given the current environment for banks, its a good thing theyre not much of a bank.