For IBM, software leads to hard cash

In the days when people used to say that you would never get fired for buying IBM, the company was seen primarily as a hardware business. In more recent years, it has been seen as having successfully re-invented itself as a services firm. What both these descriptions have ignored of course is the fact that Big Blue is one of the largest software suppliers in the industry.

  • E-Mail
By  Peter Branton Published  August 20, 2006

|~||~||~|In the days when people used to say that you would never get fired for buying IBM, the company was seen primarily as a hardware business. In more recent years, it has been seen as having successfully re-invented itself as a services firm. What both these descriptions have ignored of course is the fact that Big Blue is one of the largest software suppliers in the industry. That's not exactly news: IBM was in fact for a long time the largest software supplier (before being overtaken by Microsoft), and its software business is worth US$16.8 billion, larger than most IT firms. However, most discussion of IBM's software business has tended to focus on how it fits in with its mainframe sales: the perception has been that while software is still a steady and reliable source of income, it was going to become slowly but surely overshadowed by the more exciting — and more profitable — services business. This month's string of acquisitions suggests that thinking is very far off the mark. IBM has bought three software suppliers in a short space of time, including two very big-ticket acquisitions: FileNet for US$1.2 billion; and MRO Software for US$740million. These deals are just the latest in an acquisition drive initiated by CEO Sam Palmisano that has seen the firm capture 31 software firms in three years. That focus on software has resulted in improved performance of the business: software now contributes more profit than services to Big Blue. In the firm's most recent results statement, Palmisano acknowledged that IBM's "performance was led by our software business," adding that the firm sees it as an "integral" part of its portfolio. While IBM overall grew at just 1% in the second quarter, software grew at 4.5%, posting revenues of US$4.2 billion. "Software is not only the fastest-growing but the most entrepreneurial and the most profitable part of IBM," Business Week quoted analyst Bob Djurdjevic of Annex Research, as saying last week. According to Annex Research's estimates, software will contribute 20% of IBM's turnover this year, but up to 37% of its profits: more than services, which represents more than half of IBM's revenues. As the industry’s push toward service oriented architecture (SOA) gathers momentum, expect software to become even more important to IBM. The company already has a 44% market share, according to some analysts, and the various purchases it made this month are seen as helping it round out its SOA framework. We can therefore expect to see more software acquisitions from IBM in the next year or so, and the days of the software business being forgotten seem well over. ||**||

Add a Comment

Your display name This field is mandatory

Your e-mail address This field is mandatory (Your e-mail address won't be published)

Security code