After large-scale enterprises (CI No 2,727) and small and medium-sized companies (CI No 2,730), let’s turn to our third customer group, which is consumers. We’ve recently done a lot of work on the consumer market to decide whether we should pursue it aggressively and if so, where and when. And we’ve defined this market in a certain way that I want to explain to you. You can define it lots of ways – by channel, by product. But we define it by behaviour. We define it as individuals who buy information technology products and services with their own money. A $54,000m market in 1993, we expect it will grow to $116,000m by 1998, a 17% growth rate. In 1993, consumers represented 18% of the US market. In the 1993 to 1998 period, they will represent 39% of the growth in the US market. The product category includes home PCs, PC peripherals, software games, network services – you know what they are. And interestingly, most categories and growth rates are the same all over the world. It’s a highly fragmented business and, therefore, represents an opportunity for us. It is obviously being driven by the underlying and very basic long-term trend toward computer literacy in the world.

Children

Those of you who have children know the difference between those of us who were born on the dark side of the PC world – and those who are on the light side: 34% of the US population was comfortable with this technology in 1990. In 1995, that number grew from 34 to 56 – and it’s expected to go to 62% by the year 2000. Very similar trends in Europe and Asia. So we’re right in the middle of this boom. It’s a growth opportunity we cannot ignore and we will not ignore – if only because of the trend I mentioned earlier: the commercial and the consumer markets are being integrated by the new computing model and we want to be operating across that entire model. Now, this is not a business in which we historically have had a focus. We do not have a leading position from which to start – but we do have a position. We have several billion dollars of sales today in this business, primarily in consumer PCs and on-line services. Importantly, the studies we’ve done show that the IBM brand is well known among consumers, has very positive attributes and it’s very extendible into this space. We have a global manufacturing capability and we can command prime shelf space. But we’ve got a lot of things to work on. We’ve got to work on the perception that we have expensive products. We’ve got to improve the look and feel of our products. We need to learn to do much better at high-volume, low-margin manufacturing as we’ve learned in our PC business. And we and the rest of the industry have to better understand product cycles, fulfillment cycles, shelf life, quick-response logistics, marketing – all those things that drive consumer businesses. Most importantly, we’ve got to lead the industry in ease of use. Now, where will we compete? Well, in this study we did we considered 70 different product and service categories and we boiled it down to 10. I’m not going to tell you those 10 because they’re competitive at this point, but I will tell you what our next steps are. We are in the process of establishing a new integrated worldwide consumer unit – a whole new division within the company that will operate worldwide. We will focus initially on six to 10 major countries. We will move all related hardware, software and services into the new unit. We will have a dedicated marketing and development organisation, but we will draw on common IBM technologies. And we will attract world-class partners. Stay tuned on this one. This is all futures.

By Louis Gerstner

Now let me talk about the fourth customer group – which is both present and future – and that’s OEM, the sale of our technology to other manufacturers. It’s one of the unsung success stories in IBM. It’s one of the fastest growing segments in the IT industry. It’s growing 16% a year and we’re growing much faster than that. Our OEM sales were a few-hundred-million dollars in 1992. Th

ey were $3,300m in 1994. And they should top $4,000m this year. From zero to $4,000m in a little over three years. Our margins are competitive with the OEM industry in every segment. In IBM Microelectronics, our gross profit margins increased 16 points from 1993 to 1994 and they should increase about the same this year. In storage, our margins increased 15 points from 1993 to 1994 and they should improve about 13 more points this year. Our OEM customers value the very rich intellectual property that exists inside of IBM – which, in the past, we put a bushel-basket over and did not make available outside the company. You know we ranked number one in patents in the US in the last two years. We ranked number one through the first six months of this year. What you may not know is that IBM leads in software-related patents. We have 1,700 US software patents. We have 40% of all front-of-the-screen software patents. We have 27% of all database patents. We’re filing 600 software patents a year versus 100 for a well-known West Coast competitor. When we first entered this market, we basically sold what we had. And if we ran out, that was it, no more. We never designed anything specifically for the OEM customers. Since then, we have made a lot of progress in building up a marketing infrastructure, designing industry-standard parts and developing channel partners. These are very important customers of ours. Our top 11 OEM customers will do $2,000m with us this year. And they’re all our competitors. Almost all: Apple, Unisys, Toshiba. Virtually all of Apple’s 1994 and 1995 Power Mac product line is supported by IBM technology – not just our PowerPC chips but our disk and memory. Going forward, our technology will appear in some unexpected areas. You all know the world is rapidly going digital. Things that are dumb today will be intelligent tomorrow. Once digital, these products will be tied together into the entire digital infrastructure. Again, the new computing model. For example, in most factories, all the controllers running machine tools aren’t connected to anything. Potentially valuable data is lost. Connecting those little brains in each one of those machine tools would yield very valuable information – resulting in better utilisation of assets, optimisation of schedules, and redirecting production from one factory to another. You can expect us to continue to invest heavily in basic semiconductor and storage technology. Our last customer group is distributors and third parties – retailers, value-added resellers, as well as the independent software developers.

Middlemen

Historically, IBM has treated these important institutions as middlemen – as conduits that we can use to distribute our products to the real customer. No longer. We now view these people as critical customers themselves. Our job is to help them succeed and make money. We tip our hat to Lotus and how it learned to work with industry partners and independent software vendors. We will learn from Lotus. I’ve just talked about the importance of the consumer in the small- and medium-size businesses. We can’t afford to send a salesperson out to every consumer and mom & pop store around the world. We need to work with third parties, so our growth strategy in the future is heavily focused on ensuring that we treat them well, serve them well and manage the inevitable conflicts that exist. So, those are our five customer groups and some of the things we’re doing to exploit our opportunities. Cutting across all of them is our over-arching strategic view of the business which I mentioned earlier. That is that the industry is rapidly moving to the point where it values services and solutions more than raw technology. The emerging computing model is moving away from the stand-alone desktop model, the stand-alone host model, into a highly connected collaborative world. The new technology supporting ease of use and ease of management will grow in importance. And finally, there’s an extraordinary amount of excess capacity in this industry. Success will go

to those who lead at the forefront of where the growth is – not lead in the old dimensions of the industry.