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IBM's PC debate rages on
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March 25, 1999: 5:16 p.m. ET
Ignoring calls to divest PC business, computer giant charts steady course ahead
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NEW YORK (CNNfn) - The debate about whether IBM Corp. should accelerate its evolution from a hardware-driven company to a software- and services-driven firm intensified Thursday, following successive announcements that crystallized the issue in some minds.
Investors awoke to news Thursday that the world's largest computer maker had lost a whopping $1 billion on its personal computer business last year - the lone glaring black eye on a 1998 balance sheet that boasted more than $6.3 billion in profits.
Then, IBM disclosed it had entered a multiyear technology services pact with Spanish communications giant Telefonica de Espana that some speculate could generate upwards of $5 billion in revenues for the company.
Combined, the two announcements only fueled industry calls for the company to jettison the increasingly burdensome PC unit and focus more on other, more profitable product lines.
But company officials reiterated their commitment to the PC business, calling it a necessary component of a well-honed information technology marketing package that few, if any, companies in the world can match.
"We remain committed to that business," said company spokesman Robert Wilson. "We're committed to taking whatever steps are necessary to improving that business."
But while some analysts agreed with the company's rationale, most believed IBM needed to mitigate such catastrophic losses in the future, possibly by outsourcing its PC manufacturing facilities.
"I don't think there's any value-added to doing you own screwdriver work in the PC business anymore," said James D. Poyner Jr., an analyst with CIBC Oppenheimer in New York. "They might even be more competitive on PC pricing" by outsourcing it.
But Poyner argued against eliminating the IBM brand name from PCs all together, noting its value to the company's overall marketing package.
"It's less of a stand-alone business for them and more of a tactical position in the entire package," he said. "I think it's way too important to get rid of."
In his annual letter to shareholders, company Chairman Louis Gerstner lauded the PC unit's contribution to IBM's 1998 second half earnings surge, but went on to admit "the PC era is over."
Indeed, the PC business has grown increasingly competitive in recent years, but analysts note IBM has largely been ahead of the curve in reacting.
The company has gradually refocused its resources on building its software and service-driven product lines, taking the latest step in that direction yesterday in unveiling its joint agreement with Telefonica in Madrid.
That agreement, lauded by analysts, calls for the companies to jointly develop and deliver digital-media and information-technology (IT) applications in Spain and Latin America.
"This is more than an outsourcing deal for IBM," said Sam Albert, a computer industry consultant with Sam Albert Associates in Scarsdale, N.Y. "This is IBM's technology prowess proving it's alive and well."
IBM's stock closed up 1 15/16 at 171 7/16.
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IBM Corp.
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