IBM to sell servers direct

The server market is expected to become much more competitive when Intel announces the powerful Xeon Pentium II processor later this month. The Xeon architecture will allow direct vendors such as Dell and Gateway to offer high-performance systems which rival Unix servers. Xeon systems from direct vendors will also present more of a competitive challenge to veteran server vendors such as IBM.

IBM said today that customers may now qualify to purchase Netfinity servers directly and receive support directly. IBM sells its Intel-based servers under the brand name Netfinity.

Though IBM will still work through its resellers, "We are also determined to satisfy the needs of those customers who consider a direct relationship with their server vendor to be critical to their enterprise computing needs," said David Thomas, senior vice president and group executive, IBM Personal Systems Group.

IBM may face problems with its resellers, however, since this potentially takes business away from them.

But this program applies to less than five percent of its business, according to Dave Boucher, general manager of the Advancement Fulfillment Initiative operations at IBM. He added that these are large accounts with more than $5 million in server business with IBM.

The Intel-based server segment is one that Chairman Louis Gerstner had targeted for special attention during his annual meeting with Wall Street analysts in May and one in which Compaq Computer is currently the market share leader.

Under the two-phase program, corporate customers will contact IBM directly to order servers and obtain services. IBM will ask its sales partners to configure and assemble the computers.

IBM expects that the program, when completed, should close the price and feature gap currently enjoyed by direct marketers such as Dell and Gateway, William McCracken, general manager of sales and services for IBM's Personal Systems Group, said in an interview.

IBM will achieve that goal by shrinking inventories of finished systems, he said. In turn, IBM should be able to trim system prices because delaying system assembly means the company can take advantage of falling component costs, he added.

The first part of the program, called Netfinity Direct, will be launched over the coming months.

The Netfinity Direct program will eventually include an Internet based service for ordering servers, Boucher said, similar to what Dell and Gateway provide. This should be ready by the third quarter, he said.

While the change in some ways mirrors the methods of direct marketers like Dell and Gateway, the program aims beyond that, McCracken said.

IBM, which has one of the largest computer services businesses in the world, is hoping to draw on that advantage in its competition with direct marketers.

"This is not to be confused with Dell or Gateway or those kinds of folks," McCracken said. "This is not just hardware. We're also giving customers the opportunity to decide how they want software, product service, and support to come to them."

Rather than build a large services organization itself, Dell has forged partnerships with companies like Wang Laboratories and Unisys. Dell is also beginning to offer services where it configures computers for customers in their factory on a customized basis. Customers provide a so-called "image" of what their particular software configuration is and Dell configures the computer with this image. IBM does this also.

IBM is not retreating from its relationship with resellers, which are a key element in its sales strategy, McCracken said.

Instead, the second prong of the program will focus on completing a shift in how IBM handles sales and manages inventory sold through partners.

IBM plans to expand its practice of having its sales partners configure and assemble computers to order under the new program, in part by implementing processor and component-level assembly on IBM systems.

IBM said four distributors--Ingram Micro, MicroAge's Pinacor, Tech Data, and Inacom--would play key roles in providing supply for resellers under the second part of the program.

Because delaying system assembly means the company can take advantage of falling component costs, IBM also should be able to trim its system prices, McCracken said.

Reuters contributed to this report.