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Lou Gerstner, Web Plumber

Information Processing: SOFTWARE


IBM's new software may be just what core customers need

With $13 billion in sales, IBM is by far the largest software company in the industry. But that's a dubious distinction considering that three-quarters of that business is in aging software for mainframe computers--a lucrative but slow-growth market. While the software industry as a whole is growing at 12%, Big Blue is turning in an anemic 4%. Meanwhile, highfliers such as Oracle Corp. and Microsoft Corp. saw 1996 sales surge 38% and 25%, respectively.

Those stats have to gnaw at IBM Chairman Louis V. Gerstner Jr. Over the past two years, Gerstner has shelled out some $5 billion to acquire companies in fast-growing markets, including Lotus Development Corp., creator of the popular Notes groupware program, and Tivoli Systems, a maker of software that manages computer networks. The goal was to jump-start IBM's software business. But the new companies--though growing faster than the industry--are just not big enough to boost the bottom line. "Software growth rates have got to be regarded as a disaster," says Bob Djurdjevic, president of Annex Research, a high-tech consulting firm.

READY, SET, GO. Big Blue is out to fix all that. On Apr. 15, it's set to lay out its game plan. It centers on software to turn its hardware--from PCs to parallel computers--into sophisticated Web servers ready for Internet commerce and other cyberfunctions. A new line of powerful Web-server programs, called Go after the Japanese strategy game, will become the high end of IBM and Lotus' Domino Web-server software.

Now, IBM says it has the pieces in place to make its software business take off. "In the past, software hasn't been a growth engine, but we've turned the corner," says John M. Thompson, IBM senior vice-president and software group executive. His goal: to get IBM's software growth in line with the industry's.

Don't expect any razzle-dazzle, though. While its rivals grab the limelight by going after browsers and WebTV, IBM is focusing on a decidedly unglamorous side of the business--middleware. That's the software "plumbing" that can link crucial business programs that process thousands of transactions a second--for banks, airlines, and other big customers--to the Web.

IBM could be in the right place at the right time. Web sites from Federal Express Corp.'s package-tracking system to Charles Schwab & Co.'s eSchwab online-trading site tie into IBM mainframe systems. Schwab uses a Netscape Communication Corp. Web server, but it relies on Big Blue software to do the heavy lifting. "We'd be nuts to use anything other than a very proven product for a core business transaction," says Hugh Westermeyer, manager of development at Schwab.

He's not the only one with that view. Japan's Fuji Bank Ltd. is testing debit-card payments over the Net using IBM's database programs and new electronic-commerce software. Outfitter L.L. Bean and book chain Borders Inc. also are using IBM software to do Net business. "Credit-card transactions, travel, banking--those are the killer apps on the Internet," says Thompson.

IBM is spending mightily for Web connections. On Mar. 19, the company took a majority stake in NetObjects Inc., a maker of Web development tools. At the same time, the company is making major investments to develop state-of-the-art Internet software, including everything from security and encryption programs to online retailing applications. Salomon Brothers Inc. analyst John B. Jones estimates that on the Java front alone, IBM is plowing $100 million this year into developing software written in Sun Microsystem Inc.'s language, which creates Web applets that will run on any computer system.

COHESIVE PLAN. As more business is done over the Internet and corporate intranets, the software that runs those setups is going to be critical. "The action's gonna be in the plumbing," says Chuck Phillips, an analyst at Morgan Stanley & Co. When you take Lotus servers running Notes, connect them to IBM's traditional transaction-processing software, and throw in Tivoli software to manage it all, IBM finally has a cohesive software plan for corporate intranet systems. "It's as if someone sprinkled pixie dust on these enterprise systems," says Irving Wladawsky-Berger, general manager of IBM's Internet Div.

Big Blue will need a lot more than pixie dust to put it back on the software map. Thompson is still struggling to transform his 23,000-person organization into a software company. He has reduced the number of development labs from 26 to 12 to bring costs in line with industry norms. And he has created a sales force of 5,000 IBMers dedicated to software. It's tough for IBM to compete with Silicon Valley firms for software talent. And IBM, says Beatriz Infante, senior vice-president of Internet & Media Products at rival Oracle, "is still very much tied to a hardware platform strategy."

Still, there are signs of progress. IBM's $4 billion non-mainframe software business is growing at around 30%, says Thompson. And new mainframe models expected by September could spark demand for high-margin software, which has been flat to down. That could add up to some decent growth next year. In 1998, Merrill Lynch & Co. projects that IBM software revenues will jump 7.4%, to $14.5 billion. An improvement--but, with Microsoft at its heels, if IBM doesn't do better than that, it won't be the biggest software company for long.By Amy Cortese in Armonk, N.Y., with Ira Sager in New YorkReturn to top

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