The week in review: IBM's missteps

Meeting with financial analysts, chief executive Lou Gerstner acknowledged the company has been struggling mightily with desktops and server computers, key segments for the computing giant. Restructuring will lead to better sales, he asserted.

Big Blue's discontents
Topping the list of IBM's shortcomings: faster hard drives for large servers. "We were late; we screwed up the design," Gerstner said. "It cost us in the first quarter, and it's going to cost us again in this quarter."

Server storage will account for as much as 75 percent of new corporate hardware spending, he said.

News from the PC division hasn't been much brighter. The company called a halt to retail sales in the United States late last year, a move that produced a steep, 42 percent drop in the first-quarter unit sales. Industry share fell to 4 percent from 7.9 percent a year earlier. At the start of the week, IBM introduced its NetVista line to reverse the trend.

IBM further bolstered its midrange server line as part of its continuing attempt to close ground on market leader Sun Microsystems. But the fast-growing segment is fiercely competitive. Sun promptly introduced innovative discounts for educational customers.

Unrepentant?
Microsoft said it would accept restrictions on its business practices if a federal judge dismisses a government proposal to break the software giant in two. Specifically, the company would allow PC makers more freedom to customize the "start-up screen," refrain from using exclusive contracts that encourage PC makers and Internet service providers to favor Microsoft products, and give software developers access to information essential to making their products work well with Windows, among other proposals. The government said Microsoft's apparent lack of contrition makes these empty concessions. In a related matter, a delay in ruling on the government's proposal seems likely.

A Filipino computer student admitted he may have released the "Love" bug. The virus has been deemed one of the most destructive ever, affecting more than 600,000 computers and causing an estimated $2.5 billion in damage.

Intel acknowledged a problem with components inside some Pentium III computers that causes systems to freeze. Released in November, Intel's "memory translator hub" is used by computer makers that want to incorporate the 820 chipset without using Rambus, a high-cost, high-speed memory technology. The problem could cost Intel several hundred million dollars to fix.

Separately, Intel posted the microarchitecture for its upcoming Itanium processor in an unusual effort to make it easier for open-source programmers to build applications for the new chip. Linux appears destined to play a substantial role in the acceptance of Intel's first 64-bit processor.

Cut rate
Hewlett-Packard cut prices on its leading business PC lines by up to 21 percent. The company has been pulling closer to leaders Compaq and Dell, recently overtaking the latter as the fastest-growing manufacturer with first-quarter 2000 shipment gains of 67 percent domestically and 56 percent worldwide.

Dell's quarterly revenues bested last year's figure by more than 30 percent, and its net income improved by more than 20 percent, taking the PC manufacturer well past Wall Street's expectations. The company credited sales of servers, storage devices and PCs associated with use and construction of the Internet.

Sony's PlayStation2 will debut with a suggested price tag of $299 in late October, ahead of Nintendo's Dolphin and Microsoft's Xbox, due next year. The new unit is able to play DVD movies and audio CDs, but will not ship with a built-in modem. In response, Sega discounted its Dreamcast to $149. The company also is offering subsidies for customers who sign up for its Internet access service.

Surging demand for flash memory, used to store data and programming algorithms in cell phones, digital cameras and MP3 music players, is creating a spiral of consequences for the industry. With sales expected to climb to $10 billion this year from $4.5 billion a year ago, manufacturers such as Intel, AMD, Atmel and Fujitsu are expected to reap substantial profits. At the same time, supply shortages are worsening, which may lead to product delays and rising prices.

Self-inflicted
The recent flap over whether Time Warner had the right to pull Disney and ABC TV programming from its cable TV systems has raised the question among cable industry leaders: Will the dispute have implications for the regulation of broadband Internet content? Separately, CMGI is rallying Internet companies to demand further government scrutiny of America Online's pending merger with Time Warner, citing AOL's refusal to open its instant messaging services to rivals.

MP3.com offered an olive branch to the record industry, agreeing to remove all major-label content from its controversial My.MP3.com service. The company was sued in January by the Recording Industry Association of America and the five big music labels, and last month lost an important round in court. The fight over MP3.com's service has helped sketch how far Web companies can stretch the boundaries of copyright law as they seek to expand their offerings online.

Napster said it blocked 317,377 user screen names that have been identified by Metallica as allegedly infringing on the rock band's copyrights, but let members know that they have a way to appeal their eviction. Meanwhile, a few tech-savvy subscribers figured out a way around the ban and started posting instructions for the others on Napster's online bulletin boards.

Many political portals may lack sustainable business models to carry them beyond the November presidential election. Political information is generally free and advertising dollars aren't flowing in because traffic figures are low. Some predict that e-government sites will suffer the same fate as medical and health information services, which launched with a flourish but fizzled by the end of last year.

Commercial email--mail selling products and services--is expected to increase 40-fold by 2005, with marketers spending about $7.3 billion a year to send it, according to a study. The average number of marketing messages online consumers receive per year was 40 in 1999, and may rise to more than 1,600 in 2005. Sixty-five percent of companies are spending up to 5 percent of their marketing budgets on email marketing, cutting into direct mail.

Also of note
Sun Microsystems boosted the speed of its popular Java software for desktop systems, but distribution challenges may slow adoption of the performance update ? Microsoft is nearing completion of Windows Me and is expected to release the new consumer operating system sometime in June ? The House voted to extend the ban on Internet taxes for five more years ? The Republican-led branch House also hopes to ease restrictions on the number of visas given to foreigners with technical skills, another move favored by the high-tech industry, but the Clinton administration is trying to finesse the issue ? Viant launched a program to fund its employees' most-promising entrepreneurial endeavors ? Rick Thoman resigned as chief executive of Xerox after only one year ? Former Excite@Home chairman and chief executive Tom Jermoluk joined prominent venture capital firm Kleiner Perkins Caufield & Byers.