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IBM attributes 17% stock gain to expanding development budget

IBM attributes 17% stock gain to expanding development budget
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First Published: Thu, Jul 17 2008. 10 29 PM IST

Competitive mode: IBM CEO Sam J. Palmisano followed in the tracks of former CEO Louis V. Gerstner, who overhauled the research strategy
Competitive mode: IBM CEO Sam J. Palmisano followed in the tracks of former CEO Louis V. Gerstner, who overhauled the research strategy
Updated: Thu, Jul 17 2008. 10 29 PM IST
New York: The world’s largest computer services provider, International Business Machines Corp. (IBM), credits its No. 2 spot on the Dow Jones Industrial Average this year to more than 3,000 workers such as Michael C. Pitman.
Competitive mode: IBM CEO Sam J. Palmisano followed in the tracks of former CEO Louis V. Gerstner, who overhauled the research strategy
He’s not an Internet wizard or a supercomputer designer. He spends his time studying how the light receptor works in the human eye.
One of the last corporations to still emphasize basic research, IBM attributes part of the stock’s 17% gain thisyear to expanding the development budget when competitors such as Bell Labs fellbehind.
IBM spent $6.2 billion (Rs26,660 crore) in 2007, 30% more than it did in 2002, on projects with little discernible impact on the company’s day-to-day work.
Instead, its scientists are tracing migratory patterns of humans and studying the DNA of cocoa trees.
“Research is IBM’s secret sauce, the special house dressing that allows all the divisions to stay competitive,” said Richard Doherty, research director at Seaford, New York-based technologysanalyst Envisioneering Group Inc.
CEO Sam J. Palmisano is following in the tracks of Louis V. Gerstner, Jr., who overhauled research strategy while he ran IBM from 1993 to 2002.
Now scientists, not just sales staff, meet with customers. IBM today has more than 75 development centres worldwide.
IBM on Thursday may report a 10% increase in second-quarter profit, the fourth period in five when the Armonk, New York-based company’s earnings grew at least that fast, according to the average estimates in a Bloomberg survey of analysts.
IBM’s research budget, which includes the science projects and development of new products such as server computers, grew by $1.4 billion from 2002 to 2007.
In 2007, for the 15th straight year, IBM won 3,148 patents, the most US patents won by any company. Research and development (R&D) totalled 6.2% of sales in 2007.
Xerox Corp., whose Palo Alto Research Center (PARC) in California developed the graphical user interface, spent $912 million on researchlast year—about the same as it did in 2002.
That’s 5.3% of sales.
The former Bell Telephone Laboratories, which developed the transistor, were absorbed into Alcatel-Lucent SA in 2006.
Research spending for the two companies combined was $4.3 billion in 2007, a 6.5% decrease from 2002, or 17% of sales as orders slipped.
“Their heyday seems to be over,” Jonathan Eunice, an analyst with Nashua, New Hampshire-based researcher Illuminata Inc., said of Bell and Xerox PARC.
“What IBM did was it figured out how to get value out of the R&D process.”
IBM, which trails only Wal-Mart Stores Inc. in Dow members this year, rose $2.74 to $125.94 on Wednesday in New York Stock Exchange composite trading.
The Dow average has declined 15% in 2008.
At Thomas J. Watson Research Center in Yorktown Heights, New York, one of IBM’s eight major labs, Ted van Kessel and Bob Sandstrom stood in the sunshine on a June day.
Like children burning leaves with a magnifying glass, they focused 230 watts of sunlight through a lens onto a solar cell 1 centimetre square.
The cell converted the energy into 70 watts of usable electricity, about five times what a cell that size typically generates.
IBM doesn’t plan to make or sell solar panels. It intends to license the technology to a solar power company or form a partnership with a utility.
Sales of solar cells totalled $20.3 billion last year and could triple in the next decade, according to research firm Clean Edge Inc.
Last year, IBM got about 10% of profit—almost $1 billion—from licensing itstechnology.
Elsewhere at the lab, Pitman, an expert in biomolecular dynamics, and Ajay Royyuru, senior manager for IBM’s computational biology programme, led a three-dimensional tour through the light detector of the human eye.
On three 48 sq. ft screens, Pitman projected a blue, green, red and white model of rhodopsin, the membrane protein responsible for dim-light vision.
Pitman and a team of scientists created the simulation using IBM’s Blue Gene supercomputer.Working with the National Institutes of Health and university researchers, IBM showed for the first time that a significant amount of water resides in the protein structure during light detection in the eye.
Understanding the make-up of the protein is critical to drug development in a market worth tens of billions of dollars.
“As we develop faster and faster supercomputers, it’s not always clear how to use them most effectively, and this is one example of how to use them to advance drug discovery,” said Pitman.
Blue Gene is also helping IBM study the genetic code of cocoa trees.
The project is part of a $10 million, five-year investment by candy maker Mars Inc. to save the world’s chocolate supply.
The maker of M&M candies and Snickers bars seeks to identify the plants best able to withstand blights.
“Our investments in research enable IBM to see and develop the right technologies,” said Mark Dean, vice-president of systems in IBM Research.
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First Published: Thu, Jul 17 2008. 10 29 PM IST
More Topics: IBM | CEO | Sam J. Palmisano | Budget | Development |