By William Fellows
IBM Corp admits it got off to a slow start developing a software business and by the time it got its act together in 1991 after years of struggling it had missed the client/server boat altogether. But that’s all changing quickly, according to Steve Mills, general manager of the software solutions group. Last year the software business segment itself, contributed $11.9bn (15%) to IBM’s total revenue of $81.7bn and contributed $9.6bn (31%) of gross profit. And after recording a decline in sales of 2% in 1998, software grew 6% in 1998 and 10% in the first quarter of 1999 versus the industry average of 11%. The cash cow of mainframe software is now growing at a slow single digit pace – when it introduced parallel sysplex clustering to S/390s it actually decline – despite a 35% or 40% growth in the mainframe MIPS market.
IBM has hung its hat on being the e-business solution of choice and from around a quarter of total software industry revenue of around $120bn in 1997, it estimates e-business software will account for as much as 40% of an industry worth more than $200bn in 2002. The market was worth around $150bn last year – $75bn of that was done on applications. E-Business software is growing a compound growth rate of 27% versus 24% for embedded standalone and e-business software and just 4% for traditional software. IBM believes that integrated middleware is the key enabler for e- business solutions. It sights BEA Systems Inc as a chief competitior. It is nevertheless, more conservative than some of its chief systems rivals. Application rental or ‘apps-on-taps’ markets being encouraged by the likes of Sun Microsystems Inc and Hewlett-Packard Co will take longer than expected to become established, Mills reckons. IBM will enter them over time, but don’t expect it to be among the first to jump in.
US outdoor equipment supplier REI does 30% of its business out of store opening hours – at rei.com – and web orders are generally twice as big as store purchases. Daimler Chrysler’s supplier network has saved it $2.5bn, while UPS has found enquiries to its self-service package tracker and web site costs four cents versus $1.04 for each live call.
Mills estimates middleware accounts for around 70% of revenue, operating systems 20% and other services that sit above the operating system but below middleware such as file and print account for 10%. He claims that IBM is the market leader in messaging and collaboration, application development, data management, transaction processing and secure network platforms, and number two in systems management. IBM has 6,300 people selling software.
IBM is trying to raise its profile in software. Merrill Lynch & Co says that while hardware gets all the attention because it moves the stock price around on a quarterly basis, it is services and software that provide a longer term opportunity – and the services business is already well understood.
