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By | Cormac O'Reilly 16th January 2008 03:33

IBM: Treasure Island Revisited

Even rivers of gold run dry

Comment If ever there was proof that the financial community does not understand the basics of a legacy IT company, the euphoria over yesterday's IBM results preview said it all. News of IBM's profit sent the technology sector up,which in turn drove up the broader markets, confusing many IT observers. IBM a stellar performer - I don't think so!

Am I the only one that marvels at IBM's inability to translate its great research into profits? Or the fact that its business portfolio is so confusing that it boggles the mind. How can it make money from am increasingly marginalized management consulting business? Or make big margins on Open Source (commodity) based software where most competitors are hurting? Or profitably manufacture niche semiconductors when serious Intel rivals like AMD can't? And am I the only one that has noticed IBM's now has a smaller market capitalization than Apple?

Let's frame those so-called great results with a little reality. IBM generates a hugh amount of its profits and cash from its services and software business, which is where the unbundled legacy software treasure is buried. In the Bob Palmer era, Digital's Global Services division accounted for 1,000 per cent (yes, one thousand) of the company's profit and cash - I was CIO at that time, and a member of the Service Business executive team so I know. Digital's treasure was legacy hardware maintenance: they sacrificed their legacy software fees in a failed attempt to drive Alpha-based hardware sales. By being there, not only did I understand the money flows, but saw Palmer and his pals squander it on no-hope strategies.

IBM's unbundling strategy means that legacy software treasure - the stuff needed to run the billions of lines of business code too expensive to rewrite - attracts 70s sized historically high license fees. Because these fees have very little associated cost, they generate huge margins globally. And a record low dollar massively amplifies those margins.

I suspect that the financial services sector, now in a sub-prime tail spin and likely IBM's biggest legacy fee payers, will accelerate its move to open source-based software. As this happens, IBM's legacy software treasure diminishes. Not a cause for euphoria in my mind.

But who knows: as banks move to contemporary software, maybe we'll will actually see the cent/penny part of the old Cobol-defined ATM amount field disappear!

Cormac O'Reilly is a late sixties IT industry entrant with early developer gigs in London at Abbey National, Unilever & BOC. Senior IT oil field trash in the eighties and nineties; Schlumberger (Houston TX) and Shell (The Hague). Board IT big-wig at Costain (London) before CIO/CTO at Digital and Wang Global/ Getronics (Boston). Non-exec director at two flame-out dot.coms; now spending ill gotten gains and being provocative in Newburyport, MA

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