Despite IBM’s lack-lustre results and ever-increasing difficulties, why does it still receive fairly kind treatment from Wall Street? According to Bob Djurdjevic of Annex Research, speaking at ECLAT’s Third Open European Computer Dealing Conference last week, the answer lies in power leveraging and behind-the-scenes corporate networking. He compares IBM to an iceberg. Only one eighth of its marketing power is visible, and the real muscle is hidden from view. Djurdjevic believes that in terms of influencing other people, IBM’s board with its mere 0.1% shareholding, is probably the most outstanding board in the world. The visible power is direct sales, third party sales, advertising, and the triumvirate of industrial, investment, and press relations.
User flattery
But since the last disseminates information via different channels, it’s extremely difficult to garner one worldwide view of the corporation. However, under the surface, the picture becomes more murky. Djurdjevic says that IBM’s below the line powerbase is a combination of user flattery with board level activities and negotiations. Users are flattered by Senior User Executive Briefings and Senior IBM Executive Calls. Both perpetuate myths that are further compounded by non-disclosure agreements and confidential special bids from IBM Credit Corp. Of course, John Akers did his bit in 1987 by instituting The Year of the Customer. He wants IBM be more relaxed and humourous. Which may explain the Max Headroom Acres of Akers feature on the new RS/6000 workstations, (CI No 1,365). But what is it that keeps a floor unde IBM’s stock? Djurdjevic attributes this to relationships IBM board members have with US financial giants and media corporations. Four fifths of the directors, according to Djurdjevic, are represented on the boards of major US banks. He says that the top 10% of IBM shareholders is all but a list of Who’s Who in American banking. Call it paranoia, but Djurdjevic can also see the long arm of IBM stretching into the Fourth Estate. Akers, Vans, and Scratton occupy board postions on the New York Times, and Hasselbach is involved with the New York Post. Government officials and the legal profession have also been caught in the IBM net.
By Janice McGinn
Djurdjevic suggests that General Motors, Ford, Exxon, and United Airlines combined, have fewer lawyers than IBM has on its board. He believes that IBM systematically recruited lawyers and government officials during the last significant anti-trust case in the US. It was dismissed in 1982 as without merit after six years of hearings. IBM says that it selects people on their ability to contribute to the business, and it makes no difference whether they’re lawyers or dentists. So far no dentists. He describes the rise of leasing within IBM as back to the future. A reference to the rental activities that used to constitute 50% of hardware revenue, but which slipped to 7.2% by 1986. He believes that IBM was right to switch emphasis from rentals to sales, since its rising price scenario didn’t reflect the fall in hardware prices. However, the emergence of IBM Credit Corp created a bleak climate for other lessors, although users experienced a short term gain. In terms of lease equipment purchases, IBM Credit has gone from twice that of Comdisco to four times. At the same time, its margins have fallen drastically, and by 1989, gross margins stood at 2%. As every leasing company knows, the rise of IBM Credit meant that lessors had to lower lease rates – but they have to borrow at considerably higher rates than IBM. Djurdjevic sees a future not dissimilar to the one that existed in the 1950s. In the AS/400 arena, IBM Credit is driving the market towards purchase plus software, plus maintenance. A bundled systems lease which he advises lessors to unbundle. Djurdjevic also addressed IBM’s product strategy and began with mid-range machines. First of all, what prevented the 9370 VAXkiller being a killer? And was it meant to be the 370 for the 1990s? He says that IBM denied the suggestion in 1986. On the other hand, IBM
salesmen have been saying it ever since. As regards being a killer, Djurdjevic says it was left to find its own place in the market, unlike the AS/400, which has been positioned ex-tremely carefully. The 9370 didn’t kill the VAX, but by December, DEC’s market share had fallen from 53% to 38%, largely because of the AS/400. He claims that the AS/400 is a new standard in the bundling of operating systems, and by now, IBM’s second most important line of revenue. Djurdjevic forecasts that IBM is going to adopt a carrot and stick approach to hardware and software. He says that software prices are set to rise in 1990 and hardware will fall, especially if IBM is telling the truth and Summit won’t be available until 1992, which makes 1991 a problem year. Since IBM will be at the mercy of plug compatible manufacturers, it makes economic sense to discount hardware and increase the cost of software.
RS/6000
On the new RS/6000 family, Djurdjevic takes a peculiarly US point of view. He believes that it is a serious effort to get a slice of the technical and scientific market, but he doesn’t see it as a threat to the AS/400 or 9370. On its residual value, he advocates conservatism. Boxes will depreciate very quickly because of the rate of upgrades, and the temptation is to give the box away and focus on software and services. The RS6000, says Djurdjevic, won’t provide free MIPS, but its grandchild might.
