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IBM Mainframes: Boring but Profitable

Under its Chief Executive Officer Sam Palmisano, IBM (IBM) has expanded relentlessly into lucrative realms such as computer services and software. So mainframe computers would seem as outdated as punch cards. Not so. True, these big computers bring in only about $3.4 billion a year in sales, on average, less than 4 percent of Big Blue's total revenue, analysts estimate. Still, mainframes are a high-margin business and generate additional software and service revenues that IBM covets.

In September, the Armonk (N.Y.) company will start selling the zEnterprise, its latest model, which starts at about $1 million. Lou Miscioscia, an analyst for Collins Stewart, estimates the machines carry profit margins of about 70 percent, vs. a 46 percent margin for the company as a whole. (IBM doesn't disclose mainframe sales or profits.)

IBM "tends to sell additional IT software products and services around the mainframe," says Chris Whitmore, an analyst at Deutsche Bank. When IBM introduced each of its last five mainframes, sales in Big Blue's services division jumped by an average of 3 percent in the following two quarters, according to an analysis by Whitmore. If the 2008 update, which came during the credit crunch, is excluded, the boost is 9 percent.

Most mainframe purchasers are big companies in data-intensive industries such as finance and insurance. With the zEnterprise line, which IBM says is easier to maintain and more energy-efficient than past models, the company is trying to reach out to new customers, especially in developing markets. These big machines may not be IBM's most glamorous business, but they're a critically important one.

The bottom line: Big Iron, which represents only 4 percent of IBM's revenues, helps the company sell additional software and services.

Hoffmann is a reporter for Bloomberg News.

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