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The week's news: $859 PCs cost IBM a billion

Big Blue's PC division lost nearly $1 billion last year, and the company underlined its intentions to focus elsewhere.

6 min read
IBM reported its PC division lost nearly $1 billion last year, largely due to cutthroat price competition, and the company underlined its intentions to focus elsewhere by announcing a $3 billion, five-year deal with EMC under which Big Blue will supply drives, components, and technology to the storage manufacturer.

The $992 million loss grew a whopping 516 percent from 1997's shortfall. IBM's annual report included a subsection entitled "The PC era is over," a statement that carries a lot of weight coming from the company that helped invent the business PC.

Parts, not PCs
But with one eye on broad PC losses, IBM is once again playing to its strengths--hardware technology and manufacturing--and it seems to be paying off. Last month, IBM won a $16 billion pact to provide PC competitor Dell with disk drives and other parts.

The EMC and Dell deals highlight the fact that Big Blue will be a big supplier of electronic components, especially microprocessors, in coming years. IBM's Microelectronics division, known for its state-of-the-art chip fabrication facilities and processor technology breakthroughs, could pan out as one of the company's most successful merchant OEM operations, cranking out everything from chips in cell phones to satellites.

Ironically, on Tuesday IBM released a series of inexpensive business PCs based on Intel's new Celeron chip, even as analysts issued warnings about lower industry profits and revenues.

On Tuesday, Microsoft is expected to hold negotiations aimed at settling its antitrust case with the U.S. Justice Department and 19 states. Early reaction to the company's settlement offer was critical, but the company's stock leapt to record levels.

America Online announced a sweeping reorganization that includes up to 1,000 job cuts divided between AOL and newly acquired Netscape Communications. Each will trim between 350 and 500 jobs, affecting as much as 10 percent of a workforce totaling about 10,000. The company will have four operating divisions, with many executives of the Dulles, Virginia-based company based in Silicon Valley.

Meanwhile, Sun Microsystems' role represents another step in the hardware giant's efforts to become a bigger software player, but analysts question whether Sun can remake itself. The complex deal calls for Sun to pay AOL nearly $1.3 billion during three years, in essence underwriting the merger to gain a license to sell Netscape server software.

Comcast will acquire rival cable firm MediaOne Group in a $60 billion stock deal that would create a broadband communications firm, further blurring the lines over which companies will control access to future voice, video, and data services.

Ericsson and wireless rival Qualcomm agreed to share access to each other's code-division multiple access technology, ending a two-year patent dispute. Ericsson will buy a Qualcomm unit that makes cellular equipment based CDMA, and Qualcomm will receive royalties and access to some of Ericsson's rival patents. The deal could smooth the path toward a worldwide standard for new wireless phones, enabling Internet capabilities and new voice services. Details remain to be worked out.

Extending an existing agreement, America Online struck a four-year, $75 million deal with eBay to promote the online auctioneer on the AOL service, AOL.com, and other AOL brands. eBay will promote AOL as its preferred Internet online service. Separately, eBay filed for a stock sale that would raise more than $1 billion, with some of the proceeds going to company executives.

Low-cost PCs
Retail sales of sub-$600 personal computers surged in February, though overall revenues for PC makers continue to fall due to shrinking price tags, according to a survey. Sub-$1,000 systems continued to dominate with 40 percent, while the sub-$600 market swelled 657 percent over February 1998 and now represent 19.9 percent of PCs sold at retail.

Underlining the trend, a slew of low-cost and relatively powerful PCs hit retail shelves and Web sites last weekend as Intel released yet another version of its Celeron processor. The upshot: PC makers are feeling uneasy that industry sales for the first part of the year won't be as strong as expected. Micron reported lower earnings and Compaq is expected to miss the mark.

DVD drives have become a silent victim of the sub-$1,000 PC revolution, as PC makers are squeezing out pricey add-ons to eke out a small profit. The CD's successor isn't growing as fast as once anticipated.

A Recording Industry Association of America study found a slump in CD sales among 15- to 24-year-olds "puzzling" and pointed a finger at MP3, a technology widely used for online downloads.

Another Apple handheld?
Apple will unveil a small business program next month, and left open the possibility that it will sell a handheld under the Apple brand, although it will not develop one of its own. At its annual shareholder meeting, interim CEO Steve Jobs confirmed that the company had earlier talked to 3Com about buying the PalmPilot and hinted that Apple will come out with a consumer notebook for under $2,000 toward the middle of the year.

Novell announced it will give away the source code to its core NetWare operating system in an effort to attract computer programmers. Separately, the company will bundle NetWare with an IBM application server and associated Java programming tools. The company further outlined its e-commerce strategy.

Next week, Compaq will show off new Prosignia notebooks and discuss changes to its sales strategy for the Prosignia line, which is geared toward small- to medium-sized businesses and mostly sold directly over the Web. It will likely be a happy occasion for chipmaker AMD, whose incorporation in the new portables means the company has moved beyond consumer models, but rougher sledding for the No. 1 PC maker, which will face the question of how can a company simultaneously sell computers directly and through dealers?

On the chip side of the things, Compaq sees Linux as a way to increase sales of its Alpha microprocessor, and the company is trying to encourage other Linux distributors besides Red Hat to support the chip.

Web consulting
Boston's so-called Leather District is filling up with Web consulting firms that are winning business from larger, more traditional consulting companies. Unlike their grayer counterparts who have spent decades on mainframe or client-server projects, the new firms build systems that enable clients to buy and sell online, walking customers through strategic planning, Web design, technology, and systems integration.

Meanwhile, like Europe a decade ago, Asia-Pacific is the next tough nut to crack for global information technology services. Spending about a third of what U.S. companies invest in information technology, the region remains an untapped goldmine, analysts say. But 1997's financial crash remains problematic.

IBM extended its reach in Spain and Latin American markets through a partnership with Spain's largest publicly traded company, Telef?nica. Big Blue will gain access to a host of new customers, while Telef?nica will be able to take advantage of IBM's IT management services and e-business applications. Terms were not disclosed. Analysts said the deal could be worth billons of dollars.

Separately, IBM toppled rival Oracle to regain the No. 1 slot in the database market for 1998 license revenue, according to a market research report.

Electronic Data Systems rolled out a services package for financial firms that want to move to support both paper and electronic billing yet are stymied by aging computer systems.

A mess
As cable operators like AT&T, Time Warner, and Comcast leave the days of simple video service behind, Washington policy makers are struggling to figure out if their old rules can apply to these new broadband leaders. The telecom regulatory regime doesn't apply.

The Social Security numbers of many billionaire executives, including Bill Gates, are still listed on the Internet nearly two years after the Securities and Exchange Commission ceased collecting them on certain public forms.

SBC Communications agreed to sell cellular phone systems in 17 markets, including Chicago and St. Louis, to settle Justice Department competitive concerns about the company's acquisitions of Ameritech and Comcast Cellular.

Also of note
Walt Disney plans to begin offering instant messaging soon, as part of its subscription-based online children's service ? Monday Disney is expected to relaunch its Web site ? Yahoo is said to be considering a purchase of Broadcast.com ? Most consumers paid less than they had planned to spend for PCs in the holiday buying season, according to a survey ? The networking market continues to grow, but at a much slower pace than in past years, a new study shows. In 1996 it grew by 48 percent, but fell to 16-percent gain last year ? Memory prices have been on the increase for three quarters in a row.