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IBM's Dell deal signals shift in strategy

While the $16 billion dollar mega-deal highlights ongoing strategy shifts at computer makers, it also shows IBM's de-emphasis of PC sales as an area of growth.

While the $16 billion dollar mega-deal between IBM and Dell highlights ongoing tectonic strategy shifts at computer makers, it also shows IBM's de-emphasis of PC system sales as an area of growth.

Dell said it will purchase a massive amount of hardware, totaling $16 billion over three years, from IBM, including storage systems, chips, networking equipment, and liquid crystal display screens (LCDs). (See related story)

The agreement, which highlights the future strategies of the two companies, could signal fundamental changes for IBM, whose own chairman declared the death of the PC era in an interview last fall.

IBM may not entirely leave the business of selling PCs under its own name, but the deal "is definitely a step in that direction," said Matt Sargent, an analyst with ZD Market Intelligence.

While Dell's star has been rising in the PC market, IBM's hasn't--and it has a lot to gain by hitching itself to Dell's wagon. Though IBM is still a large supplier of PCs, its growth opportunities are in other areas. These include becoming a hardware OEM supplier of everything that Dell has signed up for and more.

Dell's rise, on the other hand, is based not on making hardware--as virtually no major components are made in house--but in assembling PCs and servers with components from outside suppliers and configuring them quickly and efficiently for corporate customers.

Dell's and IBM's respective fortunes in the PC market are manifested in market share numbers. While Dell had 5.5 percent of the world PC market in the fourth quarter of 1997, this jumped to almost eight percent in the same quarter in 1998, making it the No. 3 PC supplier. But IBM, at No. 2, saw its worldwide share slip from 8.6 to 8.2 percent in the same time frame, according to Dataquest.

"There is only a limited amount of additional revenue that can be derived from box [PC] sales," said Bruce Stephen, a vice president of research at International Data Corp. (IDC), adding that all the large PC companies are trying to transform themselves by diversifying. Hewlett Packard Tuesday announced a major restructuring of its businesses.

"IBM says their strategic direction is to grow OEM [hardware] sales with service. They need to push their competencies away from PCs," he adds.

Indeed, this is what Big Blue is doing. Its OEM component business has been growing 40 percent annually since 1993 and generated $6.6 billion in revenue in 1998, according to James T. Vanderslice, senior vice president and group executive at the IBM Technology Group, speaking at a press conference today.

IBM has also seen strong growth in other non-PC areas such as services and software offerings attached to its AS/400, RS/6000, mainframe computer lines, and high-end Intel-based computers such as Netfinity servers.

It is also pushing ahead aggressively with large-scale storage subsystem sales, a good match for Dell, because it is trying to gain expertise in this area as its server computer business grows, according to a Dell spokesperson.

As it rises to the top of the industry, Dell needs to gain better access to technology, according to Stephen. "When you get into a leading market share position, you need to create opportunities for yourself," he said.

Dell has historically been a company that gets its technology from the outside and now needs fast access to more leading technologies.

Dell already has relatively good access to processor technology from Intel and software from Microsoft, but technologies that IBM can supply are also linchpin components that can make or break a PC product launch, including hard drives, LCDs, and memory.

Unbeknownst to many, IBM is one of the largest makers of LCDs in the world and owns a massive facility in Japan. It is also the leading manufacturer of hard drives for notebook PCs, typically delivering the largest capacity drives before competitors do.

It is also a long-established manufacturer of processors and memory chips. Dell, for example, would have access to the newest chips based on IBM's SOI and copper chip technology. This may include chips that are used in servers, a Dell spokesperson said.

The seven-year agreement also stipulates "broad patent cross-licensing between the two companies and collaboration on development of product technology," the companies said.

"We have access to all their patents and this likely means no more royalty payments," Dell said.