The Sale of the Chip Business Marks the New IBM Future

IBM Fishkill

In case you wondered about IBM completing the restructuring of its business, the company’s quiet announcement this week tells the tale. It unloaded a long critical part of the company, including its semiconductor factories in East Fishkill, N.Y., and outside Burlington, Vt., by paying GLOBALFOUNDRIES to take it off its hands for $1.5 billion.

Dumping the semiconductor is the latest step in IBM’s unloading its manufacturing activity in favor of a new world of cloud support. At this point, it is limited to manufacturing its Power systems and its Z-series mainframes — and it will no longer be manufacturing its own processors for them.

Once upon a time, the IBM microelectronics business changed the world by inventing chip-based memory that eliminated vastly expensive core memories. The impact was stunning. Paul Castrucci, one of the leaders of the development, said he once gave IBM CEO Thomas J. Watson Jr. the cost outlook: “You know, cores are 80 cents a bit. Maybe we’ll get this down to a penny a bit.” At that price, memory would cost $80 million a gigabit, while the going cost for a gigabit today is less than $2. No wonder the capacity of memory could quickly move from kilobytes to megabytes, gigabytes, and even terabytes.

IBM also created large storage capacity by creating the first disk drive, RAMAC (1958, with 5 mb of storage for $160,000). It also played a critical role in inventing the “Winchester” drive, the desktop and laptop hard drive. Like so many other inventions, IBM’s creations ended up as unprofitable players in commodity markets; IBM sold its drive business to Hitachi in 2002.

IBM has been a technology leader of processors, but the industry is dominated by the likes of Intel, Samsung, GLOBALFOUNDARIES, and TSMC, companies whose business depends on big volumes. IBM made an early stab at ruling the business through a partnership with Motorola and Apple in the PowerPC. It might have worked if Apple had beaten Microsoft, but instead Intel ended up with most of the market. Motorola dropped out and IBM, which was clearly losing interest, finally got out of 2005 when Apple moved the Mac to Intel. IBM went on making the Power processor for its own mid-range and up business computer.[pullquote]The death of IBM’s semiconductor effort is a sad event, but one long overdue. [/pullquote]

IBM also partnered with Sony and Toshiba to make the Cell processor, best known as the processor for the PS3 game console. But the PS4 was introduced in 2013 with a processor based on the x86 and designed by AMD. A chip similar to the Cell, the PowerXCell, continues with some specialized use, mainly in supercomputers, but it is a small market.

The death of IBM’s semiconductor effort is a sad event, but one long overdue. What can you say about the prospect for a business that is so bad you have to pay a competitor to take it off your hands? IBM continues to get out of commodity businesses, of which there aren’t many left, to focus efforts on high end services.

Some of IBM traditions go on. The company still is the dominant player in top end business computers and it makes many of the world’s supercomputers. IBM Research continues to be the world’s leading industrial scientific center. And while its efforts include support for many of the services that dominate IBM business, it still does basic work in scientific fields such as physics and materials research.

But the future of IBM’s business is services. The competition is hot, but so is the potential for growth and profits.

Microsoft, IBM, and AT&T: History Comes Around

IBM, AT&T, and Microsoft logos

In his post “Why the Wheels Are Falling Off at Microsoft,” John Kirk paints a bleak picture of the company’s future. It got me thinking about a relevant bit of history about how rich companies handle existential challenges. Around 1990, IBM and AT&T found themselves in similar, difficult positions. The iconic companies had been among the dominant forces of the 20th century, but their world was changing in very unpleasant ways. Each had been through a long and wrenching antitrust battle with the government; AT&T’s loss cost it the local phone business in a breakup, IBM’s victory cost it more than a decade of heavy distraction. Each was seeing its core business eroded by technological change: Satellites and new networking technologies were lowering the barriers to entry into AT&T’s lucrative long distance business, while minicomputers and PCs were eating away at IBM’s mainframe dominance. But each company also had a tremendous advantage–the enormous cash flow from its legacy businesses could buy the time needed for reinvention. It’s what happened next that is important for the future of Microsoft.

IBM turned to new leadership, hiring Louis Gerstner, who had earned his stripes at RJR Nabisco and American Express. He put IBM through a meat grinder that included the dumping of whole divisions and massive layoffs of employees, many of whom had been with the company for years. But the IBM that emerged was fierce  and focused, ready to take advantage of a booming technology market. Today IBM is again one of the country’s most successful companies.

AT&T , by contrast, used its money for what turned out to be a calamitous series of acquisitions. The post-breakup AT&T desperately wanted to get into the computer business  and in 1991, it bought NCR Corp. for $33 billion. The company launched an unsuccessful series of minicomputers and lost billions getting into, then out of, the PC business. NCR was spun out in 1997. In 1994, AT&T bought the two-thirds of McCaw Wireless it didn’t already own for $11.5 billion.  This acquisition, too, withered under new ownership and AT&T ended up spinning the wireless business out as an independent company that eventually became Cingular.

In the most humiliating deal of all, AT&T in 1998 bought Tele-Communications Inc., the country’s second-largest cable operator, for $48 billion. After spending many billions to upgrade the network, AT&T sold its cable operations to Comcast for $45 billion. These failed attempts to get into new businesses left AT&T an empty husk with a proud history, a valuable brand, and an aging backbone network. In 2005, SBC, a company born of the merger of AT&T Bell System subsidiaries, bought what was left of its former corporate parent and assumed its name. The AT&T name and its T stock symbol lived on, but the company founded by Alexander Graham Bell was gone.

Like AT&T and IBM, Microsoft was battered by a long antitrust battle with the government. Like them, it is having serious problems coming up with an adequate response to technological and competitive change eating away at its core businesses. And like them, it still has a lot of money coming in that will make a transition possible.

The question is, which model will Microsoft follow, AT&T or IBM? Will it emerge as a chastened, perhaps smaller, but very competitive company? Or will it just slowly fade away? The money gives it time to fix things, but it has to make key decisions about what sort of future it wants soon, and whether the leadership the company now has can get it there.

Celebrating the IBM PC’s 30th Birthday

I joined Creative Strategies the year that the IBM PC was introduced. In those days Business International owned Creative Strategies and IBM was one of their major clients. Business International is a WW global econometric consulting firm and IBM used them often to help them open new IBM offices around the world. And Creative Strategies was their technology-consulting arm so we were often drawn into these types of projects to help on technology related issues.

Image Credit: IBM

A side note to this is that the first time I had to visit the Business International Offices in NYC, not far from the UN, I met a black intern who was working there during the summer while he was in law school. I did not know it at the time, but the intern was Barack Obama who, as you know, has gone on to become the most powerful man in the world.

But I joined Creative Strategies at a most interesting and fortuitous time in my career as well as history. In those days, the world of computing was dominated by mainframes and mini-computers and at the time, that was the focus of Creative Strategies research and consulting. But with the introduction of the Apple II and release of the IBM PC in 1981, the company had decided to add PC’s to their research focus. And although I was working in the company’s marketing group at the time, with my background in semiconductors, I was asked to lead their first PC analysis group and in a sense and by default, became Creative Strategies first PC analyst.

And in a wonderful quirk of fate, my first outside project was with IBM’s PC group. Not long after the PC was launched IBM asked us to help them with their retail and consumer strategy. As a result, I got to work with Don Estridge’s team as they charted their future strategy for the IBM PC and got to see the evolution of the IBM PC from the inside.

Now, 30 years later, all of the people who were part of those early days of the PC and have watched the impact of the PC on business, education and consumers are marveling at the impact this product has had. It has changed the way we work, learn and play and has democratized information. And while we are entering the Post PC era, it is important to remember that the PC is not going away. It will continue to be an important tool in business and education and be at the heart of productivity based computing. In fact, we will continue to sell around 400 million PC’s a year for at least the next 5-7 years and while it may not be as sexy as tablets and smartphones, it will continue to be the workhorse for serious productivity.

For me, the PC has been at the center of my personal and business life for three decades now and I can’t imagine what life would be like without it. It has helped shape and define my career as well serve as an important tool for my own personal productivity, education and entertainment. And it has provided the livelihood and fortunes for millions of people who are involved with the PC industry and continues to be an important source for innovation in the Internet age.

There have been some wonderful retrospectives on the PC written by many colleagues and I list some of the one’s worth sharing below..

From Mashable- IBM PC History

From PC Magazine- a timeline- PC History Timeline

Tech icons reflect on the 30th anniversary of the PC

Ten Ways to Celebrate the IBM PC

IBM Marks PC’s Anniversary