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Another Perspective


Who Says Elephants Can't Die?

Fifty years ago, the American computer industry had eight major participants.  IBM had about two-thirds of the market; seven dwarfs shared the rest, and none of them is particularly important anymore.  That is the nature of enterprise.  Many companies prominent in the Dow Jones Industrial Average back in 1966 have faded.  Looking back a century, only General Electric can be found in both the 1914 list and today's roster.  IBM was in the Dow from 1932 to 1939, when it was replaced by AT&T.  IBM didn't make the DJIA again until 1979 and now it might not get a 100-year run.  The way things are going, it might not even get half that far.

Dow
Charles H. Dow
Created an above-average average for measuring the state of the stock market

The last time IBM looked like it was headed for the glue factory was in the early 1990s.  The company's board brought in Lou Gerstner and within a few years it was clear that Blue was going to be big again.  Gerstner's reinvention of IBM as a services company gainsaid the naysayers.  By the time Gerstner left IBM in 2002, observers declared IBM saved.  Under Sam Palmisano, Gerstner's successor, IBM continued to forge ahead, propelled by growth in services, boosting the software business and taking IBM out of two classes of hardware that had thin profit margins: small computers and disk drives.  But all was not rosy.

Toward the end of Palmisano's reign, some old issues that many observers thought were dead came back like zombies to haunt IBM.  The client business, which IBM had abandoned, took off like a rocket.  It didn't rise because of traditional personal computers.  Instead, it blossomed as smartphones and later tablets began to perform many of the tasks that initially made PCs so popular and then learned compellingly attractive new tricks.  Smartphones and tablets incorporated sensors along with geolocation apparatus and merged these technologies with the communications capabilities that made PCs so popular.  The sensors enabled the clients to adapt to their motion, orientation and ambient conditions.  The navigation subsystems enabled client gadgets to know where on earth they were located.  And the communications features that expanded to include not only old text messaging and email but also telephony and videophone capability enabled app developers to give smartphones and tablets myriad amusing, informative and transformative capabilities.

cloud_prices
Cloud Storage Pricing
Cloud pricing (before Microsoft's latest price cuts)
shows the significant disparities between price leaders
like Amazon and followers like IBM

All this stuff not only boosted Apple, which more than any other company has invented the new world of smart, interactive clients, but empowered Google, the master of mobile monetization, and fueled Amazon, the wizard of shopper-friendly systems.  The transformation of information processing into a collection of intensely interactive processes and services has stunned large, powerful and talented companies that only a few years ago were feasting at the dot com diner.

Microsoft, Oracle and IBM, with software revenue in that order, still have vast empires based on the needs of business and of individual users performing businesslike tasks.  They all talk as if they are part of the burgeoning interactive future, but that's just marketing bravado.  They all serve markets with momentum and users whose inertia will keep them buying yesterday's technology tomorrow, but none of them are inventing futures the way Apple, Google and Amazon are.  They might come back to life the way some industrial giants have, but General Electric might not be merely rare, it might be unique.  Economic history, like political history is the story of change, the rise of those who make change and the ultimate fall of those who resist it.

The ebb and flow of fortune was the basis of a publishing empire founded in 1882, Dow Jones & Company.  Its leader, Charles H.  Dow, launched the financial newspaper Wall Street Journal.  A key feature of the Dow publication was its aggregate measure of securities prices called the Dow Jones Industrial Average, launched in 1885.  (A year earlier, Dow created an aggregate of railroad share prices, now called the Dow Jones Transportation Average, which is also considered a useful measure of economic data.) The early DJIA was mainly based on railroad share prices along with one communications stock, that of the telegraph company Western Union.  It quickly grew and diversified, and by 1900 included the top companies in steel, cotton, gas, rubber, sugar and tobacco.  By 1907 it had added General Electric (and dropped some earlier entries), defining the shape of the American business community that would power the U.S.  economy in the years before World War I.  The DJIA in 1907 no longer included Western Union and in fact had no communications companies.

By 1916 the economy had changed quite a bit, and with it the Dow Jones Average, American Telephone and Telegraph made the list, and Western Union returned to a position of prominence.  Westinghouse Electric as added to the roster, too, as was a growing powerhouse in the burgeoning automobile business, Studebaker.

services market
Services Boom
The market for cloud services could double
during the next few years, says IDC

Ten years later the DJIA included shares of the young and vigorous retail giants, the Amazons of their day, Woolworth, Sears Roebuck, and the Dow's first listing of client communications devices, Remington Typewriter.  Technology made the big list by 1928 in the form of Radio Corporation and point-of-sale hardware came aboard the following year as National Cash Register joined the DJIA elite.  By 1930 the DJIA picked up its first giant in the image processing field, Eastman Kodak.

The American economy treasured its technology, communications and information processing companies long before IBM became big enough to be called a blue chip.  But the love was fickle.  Most of yesterday's stars of the DJIA are no longer in business or, if they still exist, they are barely the shadows of their deservedly famous ancestors.

The ferment that led to so much change in the Dow Jones Industrial Average was tough on its component companies but very good for the American economy.  The rise and fall of so many great companies turns out to be evidence of a vigorous, evolving economy.  The alternative isn't stability; it is stagnation.  That may make life better for American in general, but, unfortunately, it doesn't make things easier for individuals and companies that depend on a particular corporation for goods, services, or commercial relations.

So it's no wonder then, that in recent years many of IBM's customers have become edgy.  Some of these same customers doubted Big Blue in the 1990s, only to see IBM come back from what looked like the brink stronger and livelier than ever.  And perhaps a similar ride on the wheel of fortune is underway right now.  But some recent developments are so disconcerting that it has become pretty hard for IBM loyalists to get a good night's sleep.

One part of IBM's strategy that is rattling customers and investors is the way the company is shedding hardware manufacturing.  It is selling its X86 server business to Lenovo, the company that bought (and did well with) IBM's PC business in the Palmisano years.  IBM is also trying to dispose of its chip manufacturing division, and right now it looks like Big Blue will strike a deal before this year is out.  So far it looks like IBM will keep making Power and mainframe server hardware, but if Big Blue made (or bought) some other kind of hardware and successfully ported its code to the new iron, most users would go along for the ride.

But the news that is really shaking up IBM at the highest internal levels isn't about a mainframe factory in Poughkeepsie or the kind of machinery that might light up the next generation of IBM i systems software.  It is, instead, the onset of a price war in cloud computing, where IBM might not set the rules of engagement and instead either dance to the tune of Amazon, Google and Microsoft or leave the ballroom.  The state of battle in late March was captured by cloud services value add company TwinStrata, which compiled a pricing table for its customers.

In March the three most visible vendors of cloud computing capacity slashed the price of data storage.  IBM is now trying to sell storage, which is a commodity or pretty close to a commodity, for quite a bit more than larger competitors that are at least as technologically astute as Big Blue.  (Rackspace Hosting seems to be in the same position, along with Hewlett-Packard and other companies looking for opportunity in the cloud computing market.) The price cutting was brought about in part by the perception by participants as well as analysts such as IDC that the cloud services market, currently nearly $50 billion, will more than double during the next three years.

In the immediate wake of the announcement by the three cloud biggies, IBM said, SoftLayer's big enchilada, Lance Crosby, via an article by Arik Hesseldahl of Re/code , that it was going to stick with its current pricing.  The March 31 report made Crosby look plain silly and IBM look like it was heading for trouble.  Adding to IBM's appearance as an April Fool with a "kick me" sign stuck to its back was the reiteration of the company's claim that it was bigger in cloud stuff than Amazon.  IBM's cloud presence might be huge, but that only makes it a bigger target for competitors.  What IBM must do, if it hopes to sell cloud services at a premium in a market largely driven by price, is to find a way to make its cloud offerings more valuable than those of Amazon, Google, Microsoft, and others.

This isn't impossible.  But it seems unlikely, particularly because IBM's designated cloud hitter Crosby didn't have the presence of mind to cast IBM in a favorable light.  For now it looks like the pachyderm that Lou Gerstner sent to Arthur Murray school might be doing a danse macabre on its way to the elephant's graveyard.

— Hesh Wiener April 2014


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