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IBM uses PCs to tap services jackpot

Far from retreating from personal computers, IBM is using its PC business as a launch vehicle for its profitable services businesses.

Far from retreating from personal computers, IBM is using its PC business as a launch vehicle for its profitable services businesses, as the definition of what a PC is changes with the times.

Big Blue appears to be mounting an attack on corporate accounts for increased business and market share, intending it as an entry point for its lucrative services business. Evidence abounds of its aggressiveness of late.

This aggressiveness might surprise some considering chief executive Lou Gerstner's famous comment that the "PC is dead." That comment sparked much reaction, prompting Wall Street suggestions about the need for IBM to get out of the PC box business.

Gerstner, however, and other IBM executives were quick to qualify the statement. Gerstner later added that PCs are not "going to die off, any more than mainframes vanished when the IBM PC debuted in 1981."

Gerstner's point was that the Internet is driving many customer-buying decisions now--not the traditional "client" software such as word processing and spreadsheet programs from Microsoft that run on PCs locally.

Despite languid PC demand overall, IBM has in fact gained substantial market share in desktop computers, according to a report from Don Young of PaineWebber. This growth, however, isn't all hope and glory. In the first quarter, revenue in personal computer systems jumped over 48 percent to $3.5 billion, but sales resulted in a pretax loss of $89 million.

Last year, IBM suffered nearly a $1 billion loss on PC sales.

Companies such as Dell Computer who compete with IBM for large corporate accounts have stated in no uncertain terms that IBM is targeting customers with a ferociousness that they find surprising and believe that IBM is low-balling on prices to win customers.

Compaq executives yesterday in a conference call also said they are seeing heightened competition for large corporate customers and added that IBM "is one our main competitors." Analysts also point to IBM's success with Intel-based PC servers of late.

The reasons for IBM's aggressiveness go beyond trying to make money on the box. Instead of being the high-margin, profit base of before, IBM now sees the PC as an important conduit--and still a very popular one--for its services and solutions business which centers on Internet and large corporate infrastructure applications. In a way, the PC is a necessary evil: something the company has to make so that it can qualify for other projects.

"It is fundamental for us to be in the PC business to provide solutions to customers," said IBM's new general manager at the Personal Systems Group, Jim Pertzborn.

The PC is still immensely popular and "leads to sales of services and other products," said Bruce Stephen, an International Data Corporation.

"As a node on a network the PC is as good as a network computer or anything else," said an industry familiar with IBM's thinking. "Listen, [IBM] is an $86 billion dollar company [they] can lose money here" if it means revenues elsewhere.

A quick glance at IBM's revenues in services for the first quarter shows why IBM still considers the PC an important vehicle for revenue growth. Big Blue posted revenues of $7.5 billion in global services and in the last few month has struck a number of new "mega-deals" worth tens of billions of dollars. Global services also showed a healthy pre-tax income of $973 million.

"The PC market is still growing?but the network is the primary model of computing," Pertzborn said, affirming IBM's view that the PC is just one of many "nodes"--though still a widely-used one--or attach points for the network.

In addition, IBM is ekeing cash out of the PC business by serving as a parts supplier to the likes of Dell and others. By selling PC hard drives and notebook screens to these players, IBM can defray the cost of its own PC operations, provide IBM with insulation against a downturn to their own PC brands, and even provide a stable profit and revenue stream.

Douglas Maine, IBM's chief financial officer, cited encouraging statistics yesterday on the back of PC revenues that were up almost 50 percent in the first quarter. "Sales out of the channel year-to-year were up 25 percent. There was a year-to-year reduction in inventory [and] IBM gained market share," he said.

But IBM isn't the only company trying to reinforce the point that a PC still has value. Hewlett-Packard's chief executive Lew Platt said recently that the PC era was definitely not over.

Yesterday in Japan he also said that PC makers could still make money on PCs if they stayed above $200, according to Reuters.

"We think that as long as they stay in the couple of hundred dollar range and above, it will be possible to make money," Reuters quoted Platt as saying.