Monday, December 6 2004 3:30 pm

The financial press is abuzz today about the news that IBM is attempting to sell its PC division. I am not surprised at this news. In fact, in my 2001 book I anticipated this evolutionary path for IBM when I wrote: "Services have been the main source of revenue growth in IBM since 1990, which indicates that IBM will continue to evolve into a services company and away from being a product producer." In the last few years IBM has done just that, selling its disk drive division to Hitachi and its PC manufacturing operations to Sanmina-SCI, while acquiring PwC's consulting operations to bolster its professional services business. In support of this strategy, IBM's software company acquisitions have been primarily in the "glue ware" category, i.e. software that can give IBM a strategic edge in offering efficient professional integration services to its customers.

Once IBM has disposed of its PC operations, they will find it increasingly difficult to stay in the Intel-based server business as well. The reason is that the amount of attention a computer manufacturer can command from suppliers such as Intel and Microsoft is directly tied to the amount of volume they can generate, and the volume end of the business is in PCs.  Dell and H-P will get the attention, access to latest information and chips, and price breaks - not IBM. To make this situation worse, IBM makes processors and software that compete directly with Intel and Microsoft, while Dell and H-P do not. So I fully expect to see IBM withdraw from Intel-based servers in the course of time. Whether it will continue to make its other servers will depend on how well the market for those architectures holds up, and, of course, whether there is another company interested in buying the business units from IBM at reasonable prices.

Is this the demise of IBM? Absolutely not. In fact, this is very close to the formula that I recommended in my 2001 book for all large computer companies. I called it the "Distribution Model". Essentially, IBM is focusing their company around owning the "solution sale" distribution channel. In other words, IBM is increasingly positioning itself as the trusted company for large international companies to go to when they need solutions to complex information technology problems. Owning a PC or disk drive operation is unnecessary and potentially even at odds with this type of business.

If you look at the industry from a distribution model standpoint, the strategies of the big three computer companies become much clearer and differentiated. Dell is focused completely on owning the on-line distribution channel, while H-P has the opportunity of owning the retail store distribution channel. Once the big three have solidified their control over their respective distribution channels, they will need to turn their attention on efficient ways to get new technology products into their channels. For reasons elaborated elsewhere, products based on new-to-the-world technology have to come from startups, so efficient methods for incubating, buying and integrating new startup-developed technology will be key to the success of these strategies. Once those methods exist and are in full operation, a new golden era will dawn for the information technology industry.