IBM SWINGS INTO THE ON-LINE FAST LANE
On the Information Superhighway, IBM hasn't set any speed records. In the race to create a world of interactive information and entertainment, Time Warner, Bell Atlantic, Tele-Communications, AT&T, and Microsoft have been grabbing the headlines with technology demos, megadeals, and bids to build the next on-line service. Big Blue, which pioneered multimedia information kiosks in the 1980s, built the infrastructure for what is known as the Internet, and has been in the on-line-service business for 10 years, is driving in the slow lane.
Not that IBM has been asleep at the wheel. Chairman Louis V. Gerstner Jr. has declared "network-centric" computing--IBMspeak for the applications, content, and services that are delivered via the Infobahn--a cornerstone of his turnaround plan. Last summer, Gerstner set up a high-level task force that was headed by chief strategist James A. Cannavino and had plenty of brainpower on retainer from Gerstner's alma mater, McKinsey & Co. Its mission was to map out a broad strategy and pull together long-gestating I-way efforts.
The result: two new divisions--the IBM Global Network and Networked Application Services--one to build IBM's own highway from existing IBM networks, the other to create new services for the network. Cannavino estimates that the total market opportunity--from running private networks for customers to interactive TV to electronic commerce--is in the $150 billion to $200 billion range. "It's an enormous market," he says.
"PHENOMENAL THINGS." But can IBM grab it? After all, this is the company that saw the Infobahn taking shape early on but failed to capitalize on that vision. It created, then disbanded, a far-flung operation to develop multimedia products, including those that could be delivered across the emerging broadband networks. And former Chairman John F. Akers launched joint-venture talks with Time Warner Inc. in 1992 but never consummated the deal.
This time, IBM can't afford to miss. Microsoft Corp., IBM's longtime nemesis in personal-computer software, has signaled its intention to dominate in a new era of on-line services, too. The software giant will launch its own service to compete with Prodigy Services Co., an IBM-Sears, Roebuck & Co. joint venture, and already has deals with Chase Manhattan Bank and Visa International that will take the software giant into financial services. "Rather than get worked up about operating systems," says Bob Djurdjevic, president of Annex Research, "I'd be much more concerned about Microsoft's moves on line or with Visa, because that's the next stop on the food chain."
Indeed, the on-line world constitutes the next computing wave. As information increasingly becomes digitized, ultrafast multimedia networks--carrying voice, video, and data--will be the key information technology. IBM's new approach will focus on bringing this revolution to the operations of Corporate America. That means everything from converting all sorts of information into digital form to creating new on-line ways of reaching customers and suppliers. "There are some phenomenal things that can happen once you digitize content," says Carolyn S. Chin, general manager of a new IBM unit that, among other things, is designing on-line purchasing systems for IBM customers.
Now, Gerstner is getting ready to pull into the fast lane. In November, he put the new network groups under Dennie M. Welsh, the sales executive who has been revving up IBM's services business and now oversees 14 marketing groups that focus on customers in specific industries, from insurance to travel to finance.
The sales and marketing people under Welsh's command will have a new line to sell: all sorts of on-line computing, communications, and transaction services to be created and delivered by IBM. These setups--for electronic shopping or internal videoconferencing--can be delivered over the Internet, Prodigy, or the IBM Global Network. With network connections in over 90 countries and 700 cities, IBM is one of the biggest companies in the communications business. "We are the businessperson's Internet," says John M. Whiteside, general manager of the network, which already serves 25,000 corporate customers.
ONE-STOP SHOPPING. Creating the basic software for such applications will be the job of the Networked Application Services Div. Run by Fernand B. Sarrat, the 400-person unit is developing a variety of products, including a setup for "collaborative" computing, which will allow people in different parts of the world to share a program or look at a picture simultaneously. Also in the works: a videoconferencing service, interactive TV, video on demand, and systems for electronic transactions. And the Intelligent Communications service will automatically collect messages from different networks for mobile workers. These projects will emerge next year, but sales will not start to ramp up until 1996.
IBM is still working on various deals with TV and phone companies (table), but Sarrat's focus now is decidedly corporate. "Business will pay for this long before the consumer will," he says. And that could help be a step back to the good old days, when corporations paid IBM for computing by the day or month, rather than buying equipment outright. IBM will shoulder the expense of creating the network and related software that few big corporations could attempt to build. The resulting fee-for-service business could provide Big Blue with new growth and fatter profits. "As you start to supply things that are less expensive to rent than to buy, you can make a lot of money," says Cannavino.
Consider Coopers & Lybrand. The Big Six accounting firm is working with IBM researchers on an electronic purchasing system. It is the crux of IBM's efforts to develop a variety of electronic systems for commerce--from corporate purchasing to on-line consumer shopping to inventory management. Jeffrey Block, Coopers' director of national purchasing, estimates that it cost his company anywhere from $40 to $67 to process an order the old way. With the on-line system, that will come down to around $20--including the IBM network fee. IBM will also charge an up-front subscription fee. "I was a tremendous IBM-hater," says Block. "But this has been the most interesting IBM experience I've had."
Here's how the Coopers system works: An employee uses a PC to call up an on-line catalog of approved products and suppliers complete with product pictures and descriptions. Also in the system are department budgets and the manager who approves purchases. Everything is done with icons and menus. Click on paper supplies and choose between steno pads, envelopes, or stick-it notes. Want to comparison shop? You can look at different suppliers' specs, pricing, and availability side by side.
Once the product is selected, the order is passed on for approval and then sent to the vendor via IBM's network. The system tracks the order's status at every step, and for the suppliers, it could simplify what is becoming a confusing web of separate electronic links with each customer. IBM would act as a central clearinghouse.
Delivering all that will require lots of telecommunications smarts--one reason Cannavino tapped Whiteside, a former MCI Communications Corp. manager. "My job," says Whiteside, "is to make sure that the IBM network has all the on/off ramps, is very well paved and surfaced, and goes everywhere." If the pieces fall into place, IBM will be excellently positioned to offer customers a one-stop shop for communications--everything from running private networks to supplying voice communications to allowing customers to tap into applications on the IBM network.
That big ambition will require a huge investment in equipment. Whiteside says he'll have portions of the network upgraded with new technology by the middle of next year. But IBM may be making those moves without partner Sears, which owns 30% of Advantis, the U.S. section of the IBM Global Network. "We're evaluating our options," says Sears Chairman and CEO Edward A. Brennan. The retailer, insiders say, is considering selling its stake back to Big Blue, but it will hold on to Prodigy, which it has jointly owned with IBM since 1984.
Indeed, after a decade, Prodigy is finally looking like it was worth the billions IBM has invested. "Prodigy gives us a view of how people think and use information in their households," says G. Richard Thoman, the senior executive in charge of Prodigy. And when IBM gets finished paving its truck lanes for the I-way, that knowledge will help it build the local roads to consumers, too. IBM'S ROUTE TO THE I-WAY
NETWORKED This 400-person division oversees interactive TV, video on
APPLICATION demand, electronic commerce, videoconferencing, CD-ROM
SERVICES publishing, and Internet connections.
PRODIGY A window into the consumer market, the on-line service--a
SERVICES joint venture with Sears Roebuck--has 2 million subscribers.
IBM GLOBAL Aimed at heavy-duty corporate traffic, the network serves
NETWORK 25,000 businesses and 2 million users. May double as the
backbone for Prodigy.
ALLIANCES Motorola, Apple, 3DO, Microware, Kaleida Labs, Compression
Labs, Scientific-Atlanta, Philips, ICTV, Digital Domain.
IBM'S I-WAY DEALS SO FAR
HONG KONG TELECOMMUNICATIONS
Set-top boxes and video servers
System to "download" movies and music onto blank media in stores
DATA: BUSINESS WEEK, IBM, KREBS & ASSOCIATES
Ira Sager in New York, with bureau reports