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Thursday, December 02, 2004

End of an Era: IBM selling its PC Business
This is a news.com reprint of a NY Times story. And it's important for a couple of reason, two of which are the story itself. Little did I know back in the days when I leaked the story of IBM's PC to the London Times that IBM not only wouldn't be a player at this point, but it wouldn't even have a playground. The other thing is, who would have even considered the foundation of modern computing may soon find a home on mainland China. (Although PCs make up about 12% of IBM's annual $92 million dollar revenues, the profit margins are razor thin.)

The other thing is something the authors said in the story: "In the 23 years since IBM lent its prowess in mainframe computers to the production of desktop machines, it has been widely criticized for having destined the machines to commodity status by giving Microsoft and Intel the rights to those essential standards. And although Apple Computer holds less than 4 percent of the personal computing market worldwide, it has been able to command relatively high prices and richer profits because it has controlled the software and hardware that goes into its machines."

This is classic wrong thinking. The last sentence should read: "Although Apple has been able to command relatively high prices and richer profits because it has controlled the software and hardware that goes into its machines, it holds less than 4 percent of the personal computing market worldwide." It's a question of whether you want to make $10.00 one thousand times or $100.00 forty times. (Put your fingers back in your pocket. You'd want the ten bucks...)

IBM, of course, did an excess of wrong moves in its climb to the bottom. That's the important part.

# Permalink Posted at 11:55 PM 11 comments Email this Link

Comments on this Item:

The argument about selling 1000 for $10 or 40 for $100 isn't exactly valid in this case because computers require a LOT of infrastructure to make, sell, and support. If you've sold 1000 machines you have potentially:

1000 callers to your call center (all with the same expectation of service NOW since I bought your crappy product)...
1000 hard drives, floppy drives, cables, fans, that can fail (and you may have to replace)
1000 OSes to support with upgraded drivers
1000 users potentially hitting your website looking for information fixes, drivers, support, etc...

It is much easier to support a smaller number of customers with a higher quality product because there are fewer variables at the time of ship and fewer still after shipping...

If the PC was a closed box solution that never changed and only required warranty type replacement support. Perhaps the story would be different, but that isn't the expectation people have for these systems and especially not for a big-name branded system like IBM, Dell, HPaq...

It might work that way in the game console business, though.

# posted by Anonymous 8:18 AM

Oh Todd from the Peanut Gallery... You're making unwarranted assumptions --like there'd be a difference in quality between the two PCs. Why? Just because one is less expensive than the other that doesn't make it crappy. What if one was just priced higher than the other? And the 8% of profit from the $10,000 will pay for more support services, etc., than it would from $4,000.

# posted by Bill 8:39 AM

But your not taking into account that the 1000 @ 10 is being divided by many vendors. That's not to say Apple is the most profitable vendor (their not) but compared to most PC makers out there they are rolling in cash.

# posted by Anonymous 11:18 AM

Actually, I believe that he is. In any case, these are not real numbers. They're just being used to illustrate a point - and that point is that it's more profitable to sell the greater volumes with a lower margin than to sell less with larger margins. Everyone recognizes that Apple does not make more money than the big-name x86 PC manufacturers. I would also be willing to bet that a *very* sizeable portion of Apple's profit comes from the sale of iPods and iTunes downloading.

# posted by David 11:33 AM

$92 million annual revenues? For IBM? More like $92 BILLION!

# posted by Anonymous 11:41 AM

This is what happens when I swear off valium... I took those figures straight from the article and didn't give it a second glance. Now the reprint is gone and there's a news.com story without numbers. The truth is, through the first nine months of 2004, IBM's personal systems group, which is responsible for PCs, reported pre-tax income from continuing operations of $70 million on $9.4 billion in revenue, according to investors.com. Mea Culpa. I'm going to turn off my VIC 128 and take a nap now.

# posted by Bill 11:54 AM

According to eTrade IBM's 2003 revenue:

$89,131,000,000

IBM's (gross) profit:

$33,018,000,000

Apple's revenue for 2003:

$8,279,000,000

and its (gross) profits:

$2,259,000,000

So for every $1 of stuff IBM sold, they made about $0.37. For every $1 of stuff Apple sells, it makes a little over $0.27. Take from that what you will.

# posted by David 12:08 PM

I think it means Apple has one of the highest overheads of any computer manufacturer or its mis-reporting its earnings. ;-)

# posted by Bill 6:41 AM

Oh Bill of the righteous and profound, here's to thinking that you aren't simply reading into remarks your own personal thoughts and beliefs...

My post didn't state that the cheap product was any less good. It only stated that when someone calls your product support line their immediate reaction is that your product is crap because it isn't working... and if you want a good reputation you better have someone on the other end of the phone making sure they are happy when they hang up.

Your +2.5x of sales doesn't cover a +25x increase in support, unfortunately, and that's business and not materials costs that are already razor thin and barely covered by the sale price.

# posted by Anonymous 5:22 PM

I have trouble following your volley of nonsequitors. It must be age-related.

# posted by Bill 2:46 PM

Don't many of us remember IBM's Apple-like clone, the PS2.

# posted by Anonymous 9:12 PM

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