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Business News/ Opinion / A technology giant stares into the abyss
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A technology giant stares into the abyss

The graveyard of tech firms is littered with once leading companies

Illustration by Jayachandran/MintPremium
Illustration by Jayachandran/Mint

There’s a special graveyard for technology companies. Only the brightest and best are allowed entry. The tomb stones are markers in the evolution of the technology era. Here’s Motorola, which created wireless technology 50 years before anyone had used mobile phones, and Xerox, which Steve Jobs once said, “could have owned the entire computer industry". And there’s Nokia, which was the top-selling mobile phone maker in the world till just about five years ago. Not too far away is Blackberry, which was the pacesetter in smartphones and mobile broadband, and Hewlett-Packard, the ultimate Silicon Valley garage start-up.

The undertakers are now busy preparing another shiny casket, this time for the biggest blue of them all. IBM, which for 100 years served as an objective correlative for processing data and computing, looks in serious danger of joining the ranks of erstwhile leaders who became victims of fundamental shifts in the industry. It isn’t of course the only one. German software maker SAP and Oracle are also grappling with similar issues. Some analysts say Microsoft, in the midst of a massive transformation, is also headed down that path.

But IBM’s fading fortunes and the stock market’s loss of confidence in the scrip, is a sad tale of a giant turning dinosaur merely because its environment changed far too rapidly. It shows that in the technology business you can do all the right things and still end up dead. Over the last two years IBM has laid off people, got rid of deadweight businesses, carried out an aggressive share buyback programme and pressed all the right business buttons. Yet, through this financial and strategic re-engineering its revenues have kept sliding quarter-on-quarter culminating in its latest disappointing quarterly numbers with revenues and net profit down. In the face of a doggedly adverse market with the strength of the US dollar also going against it, it has finally abandoned an ambitious 2015 operating earnings target.

Even before this, for a decade now, the company has striven to rebuild. Restructuring, making rapid organizational changes and migrating to higher margin businesses, the 103-year-old company has moved from being a mainframes maker to a PC pioneer and when that business became a commodity, to a consulting giant. But success depends on its ability to take a major chunk of the growing cloud-computing business worldwide where its competitors range from Amazon.com Inc., to Microsoft Corp. and Oracle Corp. Its dilemma, like that of many older giants, has been how to migrate from poorly-performing businesses that still contribute a major share of the revenue, to those where margins are high but share of business is still miniscule. Thus, IBM’s “cloud delivered as a service" revenue is growing rapidly (80% in this quarter) but equals just 3% of total revenue.

IBM’s travails highlight the grim reality that in the tech business, size and spread can often be a company’s worst enemies. Size crimps a company’s ability to grow faster and gain velocity in new businesses while spread means that it is vulnerable on too many flanks. So, IBM is losing market share in databases to Microsoft and Oracle and losing share in application server software to Salesforce.com and Amazon. In other areas it faces competition from rivals like SAP and Software AG.

Yet if there is one company that can defy the odds it has to be Big Blue. Already once in the last 20 years the company has pulled back from the dead. In the 1990s it appeared to have missed out on the growing demand for PCs driven by Microsoft’s Windows operating system, with the result that in 1992 it posted a then record loss of $8.1 billion. Over the next 10 years, new CEO Lou Gerstner then brought about a remarkable turn-around in its fortunes and over the next eight years. Led by growth in services and consulting, IBM grew 40% and its stock value rose eightfold.

Now again, it is at the cross-roads. Ginny Rometty, its CEO for the last two years, still enjoys the support of the board and is doing things undeterred by the reverses. In a post-results call, she indicated that there could be fresh layoffs and pointed to “the unprecedented pace of change in our industry". The company has just cemented a cloud-computing partnership with sometime rival SAP to help keep up with the new generation of competitors in the fast growing enterprise software delivered over the Web business. It is the latest battle for survival between a legendary gladiator and vicious market forces. Only this time there may be no winners.

Can IBM rise again? Tell us at views@livemint.com

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Published: 23 Oct 2014, 12:02 AM IST
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