Big Blue Yonder: Can IBM Bounce Back Again?

In Photo: Chairman, President and CEO of IBM Ginni Rometty speaks during a discussion with the Economic Club of Washington at a hotel in Washington, DC, on December 3, 2014.

TECHNOLOGY giants are a bit like dinosaurs. Most do not adapt successfully to a new age—what is known in the industry as a “platform shift.” A few make it through two and even three such shifts, but only a single company spans them all: IBM, which is more than a century old, having started as a maker of tabulating machines that were fed with punch cards.

After 21 quarters with falling year-on-year revenues, however, doubts had been growing about whether IBM would manage the latest big shifts: the move into the cloud, meaning computing delivered as an online service, and the rise of artificial intelligence, which is a label for all kinds of digital offerings based on insights extracted from reams of data.

In May Warren Buffett, chief executive of the holding company Berkshire Hathaway, announced that his company had sold a third of its total stake in IBM, then valued at $13.5 billion, saying that “I don’t value IBM the same way I did six years ago when I started buying.” Analysts were starting to wonder how long CEO Ginni Rometty would remain at the helm.

On October 17, however, IBM’s quarterly results suggested that the skeptics might be wrong. Revenues slipped again, to $19.2 billion, but they did so less than expected. The company indicated that it could see growth return in the next quarter and on October 18 its shares rose by 8.9 percent, the biggest one-day gain since 2009.

Could Big Blue, still one of the world’s largest information-technology companies with nearly 390,000 employees, have turned the corner?

If big IT companies often fail to adapt to such shifts, it is because these changes require more than adopting new technology. They also force companies to question what they stand for, according to Michael Cusumano, a business professor at the Massachusetts Institute of Technology. The company’s brand, its technical skills and how its products and services are sold all must be examined. Many companies choose to defend their existing domains instead.

After a near-death experience in the early 1990s, when sales of its mainframes collapsed, IBM seemed to have found a formula to stay ahead in technology. Under former CEOs Louis Gerstner and Sam Palmisano, the company quickly adapted to the internet and was one of the first big IT firms to back open-source software. It ditched businesses about to become commodities, such as personal computers and low-end servers, and it stuck to a financial “road map” telling investors how profitable it intended to be during the next five years. It didn’t hesitate to spend billions buying back stock to lift its earnings per share.

However, this fixation on financial metrics, a stance that predated Rometty, is a big reason why IBM had a late start in the cloud, a trend it had spotted earlier than many competitors. As a result it is now an also-ran in cloud computing, at least in the part of it called the “public cloud,” or networks of big data centers shared by many companies. IBM is No. 3 at best, with Amazon and Microsoft leading the pack by some distance, benefiting from the growing number of companies moving applications into the cloud, rather than running them on their own computer systems. More than 40 percent of IBM’s revenues come from products and services that directly compete with public-cloud offerings, said Steve Milunovich of UBS, an investment bank.

IBM has tried to avoid the problem, being, for example, the first tech giant that went big on AI Building on a technology called Watson, in 2013 IBM launched a new line of business to help organizations make predictions from patterns in their data. It promoted the effort heavily and invested billions, particularly in health care, for example to help hospitals to use patient data to gauge health risks.

Progress has proven slow, however, mainly because it is often hard to make sense of patient records. Earlier this year the MD Anderson Cancer Center in Houston canceled a Watson project, after spending $60 million, because it was deemed not ready for clinical use. People in the field of AI are now dismissive of Watson, which in turn affects its ability to attract talent.

The slow takeoff of its AI business makes managing the decline of its old businesses while quickly building the new ones even harder for IBM. In addition to the cloud and AI, it is developing cyber-security, mobile services and offerings based on blockchains, the special databases that also underlie Bitcoin, the cryptocurrency.

“It’s like having to run up an escalator in the wrong direction,” said Frank Gens of IDC, a market-research company.

For the past five years, IBM has not been running fast enough, resulting in declining revenues. Now—according to its own measures, at least—it has enough upward momentum that it no longer will be slipping down. Revenues of what it calls “core business,” or sales of IBM products and services that are used in conventional computing, fell by 9% in the latest quarter, down from 11% in the previous one. By contrast the firm’s “strategic imperatives,” which mainly include the cloud and AI, grew by 10 percent, up from 7 percent. These generate 45 percent of IBM’s business, up two percentage points from the previous quarter.

“We are now exactly where we promised, early this year, that we would be,” said Martin Schroeter, the company’s chief financial officer.

© 2017 Economist Newspaper Ltd., London (October 21). All rights reserved. Reprinted with permission.

Image Credits: Mandel Ngan/Agence France-Presse/Getty Images

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