IBM Serves Up Some Surprises

It's turning heads in the server market--and gaining ground

When Doris Beaulieu took over as chief information officer at Ultramar Diamond Shamrock Corp. (UDS ) 18 months ago, the first goal he set was to consolidate the San Antonio oil giant's gaggle of computer servers. The $15 billion company was leasing 50 servers--45 from Sun Microsystems Inc. (SUNW ) and 5 from Hewlett-Packard Co. (HWP ) Beaulieu asked Sun, HP, and IBM (IBM ) to put together proposals for fewer, more powerful machines. Sun dragged its feet for months, then came back with a bid that Beaulieu felt was too expensive. Ditto HP. But IBM offered a screaming deal on 10 new, high-end Unix computers, slashing Beaulieu's costs by nearly 40%. "Sun never thought I would move to a new system," says Beaulieu.

IBM is catching a lot of competitors flatfooted. Thanks to new technology, an internal shakeup, aggressive pricing, rich service offerings, and missteps by rivals, Big Blue is coming on strong in servers. In the second quarter, IBM's server revenues rose to $3.5 billion, up 3% from last year. That may sound anemic, but consider the desolate landscape. In the same period, Merrill Lynch & Co. estimates that at Sun, stung by the telecom and dot-com debacles, server revenues dropped 37%, to $1.8 billion. And at Compaq Computer Corp. (CPQ ), the take fell 26%, to $1.6 billion.

True, IBM was coming off a no-growth year in servers, while Sun's 2000 sales had skyrocketed 33%. Still, IBM is gaining market share. And its most impressive gains are in Unix systems, the server of choice for heavy-duty computing on the Web. In the first quarter, IBM picked up five points of market share in Unix servers, climbing to 21%, while Sun's 32% share was flat and HP slipped a point, to 25%, according to IDC. "They've turned around remarkably over the last few years," says Gordon Haff of market researcher Aberdeen Group.

LONG OVERDUE. Servers are a critical piece of IBM's diverse business. They are the backbone of e-commerce systems, a field IBM wants to dominate as the leading provider of computing infrastructure for Corporate America. The machines also showcase IBM's cutting-edge technology in chips and storage devices. In addition, servers boost sales of its software and consulting units. Sanford C. Bernstein & Co. analyst Toni Sacconaghi Jr. estimates that IBM's high- to midrange servers bring in 10% of its $88.4 billion in revenue but account for 40% of sales when you include related software, services, and maintenance fees.

It's too early for IBM to declare victory, though. The company has a history of failing to maintain momentum in servers. And IBM's recent success is drawing fire from rivals. Earlier this year, Sun launched a "Blue Bomber" campaign designed to displace IBM mainframes. So far, Sun claims it has convinced customers to dump 50 IBM mainframes this year. IBM says recent market share figures show Sun's campaign is bombing.

Now, IBM is poised to kick its server business into high gear. In the fall, it plans to unveil a new line of Unix and PC servers, each based on state-of-the-art technology developed in its labs. At the same time, IBM is sinking $1 billion this year into the development of Linux, the popular free operating system, to attract new customers and software developers. "We're at the beginning of what we can do," boasts William M. Zeitler, senior vice-president in charge of IBM's server group.

It's a beginning long overdue. Through most of the 1990s, IBM's business-computer division was like a corporate version of Family Feud. With four groups making servers--ranging from $10,000 PC-based models to multimillion-dollar mainframe-class computers--customers were confused by the overlapping product lines and competing pitches presented by each group's sales force. That changed last October when the company created one server organization under a new brand, eServer.

MOMENTUM. Come October, IBM salespeople will zero in on a new machine. That's when the computer giant will introduce Summit, an Intel-based server with a heavy dose of IBM technology. Summit is a chipset--a group of chips that work in conjunction with an Intel Corp. microprocessor to improve its performance by speeding such tasks as retrieving data from disk drives.

Summit is designed to work with Intel's coming Pentium 4 Foster chip, also due in October, and to ride the momentum of Microsoft's Windows server operating system. IBM claims Summit boosts the power of a machine made with the Intel chip by up to 20%. Summit also allows computer makers to build machines with up to 16 Foster chips, doubling the previous limit. That makes it easier to construct more powerful servers or add computing power to expand existing servers.

IBM is turning up the heat in the Unix market, too. In the fourth quarter, the company will unveil a new top-of-the-line server. A less powerful, midrange version of the machine will roll out by the middle of 2002. Some analysts expect the new server will put IBM at least one year ahead of its rivals. But Sun isn't flinching. "We haven't lost our edge," says Larry Hambly, head of Sun's services operation.

IBM's boldest bet: Linux. A $1 billion investment will fund the construction of Linux development centers around the world and pay for the training of sales, marketing, and services employees who will spread the Linux gospel. Why? The free operating system is the fastest-growing server operating software. According to IDC, by 2004 Linux will have 38% of the server market, up from 27% last year, making it the most popular operating system. Right now, technologists are relying on Linux to perform simple tasks like serving up Web pages. But over the long run, IBM believes Linux could handle all computing tasks from payroll to e-commerce.

With four server lines and at least five different flavors of operating system, IBM may be the Baskin Robbins of computers. For now, customers are finding IBM's all-things-to-all-people strategy quite tasty.

By Spencer E. Ante in New York, with Peter Burrows in San Mateo, Calif.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE