Zeitler, the senior vice president and group executive of IBM’s Systems Group, said that along with Dell Inc [DELL], IBM is poised to continue to increase its share compared to hardware competitors.

There are two businesses gaining: Dell with their superior business model and execution at the low-end, and IBM with superior technology and innovation at the high-end, he said. Zeitler added that in the 11 quarters since IBM introduced its eServer brand (in October 2000), IBM and Dell had gained market share over their rivals in all 11 quarters.

The market has been difficult for the past two-and-a-half to three years, but we’ve been gaining share significantly, he said. And if anything in the last six months that share gain has increased.

While IBM’s share of the server market might be increasing, and Zeitler’s Systems Group remains profitable, there is no hiding from the fact that hardware is generating less and less revenue for the company compared to services and software.

Since 1997, when hardware was responsible for $36.6 billion, or 46.7 per cent of IBM’s total $78.5 billion revenue, it has fallen 25 per cent to be worth just $27.5 billion, or 33.8 per cent of IBM’s total $81.2 billion revenue in 2002.

In comparison, revenue from IBM Global Services has risen 44.5 per cent in the same period from $25.2 billion, or 32 per cent of the total, to $36.4 billion (44.8 per cent). Software revenue has also risen by a more modest 17.1 per cent in the period, from $11.2 billion (14.2 per cent) to $13.1 billion (16.1 per cent).

Despite this seeming lack of interest in hardware, Zeitler maintained that it is still of critical importance to IBM. In the late 1990s, people were looking for point products to integrate, and not just in hardware, he said. Buyers are interested much more in solution buys now. That doesn’t mean they’ll just buy services though. Customers don’t care about hardware as much as they once did, but that doesn’t mean that vendors don’t care about hardware. Hardware is enormously valuable to us.

Despite the increasing commoditization of the hardware market, Zeitler also maintained that there is room for innovation in hardware, and praised the role of the company’s hardware experience and services business in differentiating it from its competitors.

One of the greatest benefits we get from working with IBM Global Services is having access to information of what their customers are looking for so we can build it back into products, he said, before highlighting virtualization, provisioning and systems control technologies that the company is now bringing down from its mainframe systems to Intel Corp processor-based servers.

People say to us ‘the hardware business is commoditizing, why not buy everything from Dell and be done with it?’ he said. These things are a differentiator, the ability to scale smaller systems into larger ones. If we were just chasing fewer, cheaper things, this wouldn’t be a good business to be in.

Zeitler said he expects these aspects of differentiation to come to the fore as a move to on-demand and grid computing environments drives a focus on simplification, cost of ownership, and ease of operation.

The leading companies are going to use open technology and virtualize servers to create the flexible operating environment, he said. People are looking for dramatically less complex environments to reduce the cost of management.

It is with technologies such as virtualization that Zeitler believes IBM can walk the tightrope between providing customers with reduced cost of acquisition and ownership, while maintaining IBM System Group’s margins and profit levels.

A new mainframe with a thousand Linux servers on it is much more valuable than a mainframe and one thousand Linux servers, he said. That is more valuable to the customer and more margin to us.

This article was based on material originally published by ComputerWire.