IBM's Big Push to Steal Sales from Its Rivals

Interest-free payments and no money down until 2011. It sounds like a car salesman's pitch. Actually, it's IBM's (IBM) latest effort to poach corporate customers from rivals Oracle (ORCL) and Hewlett-Packard (HPQ).

Starting this month, Oracle and HP customers that switch to IBM's latest package of servers, software, and storage, priced at upwards of $75,000, will get trade-in credit and can defer all payments until next year, interest-free. Big Blue also will help finance the cost of taking out a client's old equipment and transferring the data over to its Power7 system.

IBM, which managed to steal 500 customers away from competitors last year, hit that mark in just six months in 2010, says Jeff Howard, the marketing director for Power7. Now it's hoping the sweetened financing will help keep the momentum going. "Some customers have budget money in 2010, some don't," says Dan Ransdell, general manager of IBM global financing for North America. "It's one thing we can take off the table. It should not be the inhibitor." The sales incentives won't crimp IBM's bottom line because the company sells the systems to its global finance division, which in turn leases them to customers.

Big Blue is trying to capitalize on uncertainty surrounding Oracle's integration of its $7.4 billion acquisition of server maker Sun Microsystems, for which IBM had also bid. Larry Ellison, Oracle's chief executive officer, has declared war on IBM in advertisements and in presentations to investors, saying he can challenge the company in the server market by packaging Oracle's software with Sun's hardware.

So far, Ellison is not getting many takers. Oracle's server sales fell 11 percent last quarter, pushing down its share to 8.4 percent for the period, from 10.8 percent the year before, according to research firm Gartner (IT). IBM's Howard points out that 61 percent of the customers IBM won over from rivals in the first half of the year were from Oracle. Some clients have been wary about committing to Sun's servers because Ellison has been vague about his plans for the product line, says Cal Braunstein, CEO of Robert Frances Group, a technology analyst firm in Westport, Conn. Oracle spokeswoman Deborah Hellinger declined to comment.

IBM, meanwhile, is playing catch-up with HP, whose share of server sales rose to 32 percent last quarter. IBM's slipped to 27.7 percent, a nearly five-percentage-point drop from the year before. That marked the second straight quarter IBM came in at No. 2, after having dominated the market for two years. The reason, according to Gartner, is that demand for lower-end servers, where HP is stronger, is rebounding faster than the market for IBM's higher-end servers. Big Blue also took a hit as customers postponed upgrades, waiting until the company rolled out new mainframes and server systems at midyear, explains IBM spokesman Joe Barkan.

IBM can expect stiffer competition from Oracle now that Ellison has appointed former HP CEO Mark Hurd as co-president. Hurd—who left HP in August after an investigation of a sexual harassment claim found inaccurate expense reports filed by him or in his name—has a 30-year-plus track record in the hardware industry.

Nonetheless, Braunstein expects IBM to continue to make inroads, thanks to the attractive terms it's offering. "They've eliminated the costs associated with upgrading and made themselves competitive," he says. "It will entice a number of people."

The bottom line: IBM has been losing ground to Hewlett-Packard in servers. A sweetened pitch could lure customers away from rivals.

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