Both IBM and Microsoft released financial results in the last week of January. While Microsoft is heavily into the cloud, software, and AI, so is IBM. However, IBM also has a far larger hardware portfolio than Microsoft. It is, therefore, fascinating that IBM software grew at 11%, which is just one point short of Microsoft’s 12% growth rate. That’s impressive. Other IBM units were either flat (Consulting) or declined slightly (Infrastructure). While this was generally a good quarter for IBM, it does beg the question of why IBM didn’t spin off software.
The reason I’m addressing the question is because when the spin-off of IBM software was being considered, I was the West Coast team lead for that effort. While both teams concluded that IBM should spin off Software (including the various consultants we brought in), the effort was killed to protect the hardware.
What if IBM had spun out software?
Why Did the Effort to Spin Out IBM Software Fail?
This effort was activated under Louis Gerstner, who was trying to restructure IBM so that it would survive its near-death experience in the early 1990s. The problem was that IBM had lost track of its customer focus, had been mining customers for money, and had entirely forgotten about customer satisfaction and loyalty, two major aspects of the brand since the company’s founding.
Software was massively more profitable and flexible, and Microsoft was a clear example that a software-focused company at IBM’s scale would not only be better at competing with companies like Microsoft, but it would also be more agile and potentially vastly more profitable.
However, the SVP of sales at the time didn’t believe hardware could survive without software, meaning that the collateral damage of a spin-out would have been catastrophic for the remaining company even though hardware pure-plays like Dell, HP, and Compaq were (at that time) doing just fine and showing decent growth.
So, my team was outvoted, the GM behind the project quit the company,y and we all moved on.
But What if IBM Had Spun Software Off?
However, IBM was historically a one-stop shop and had been using a lock-in strategy similar to what Apple and Oracle use today. While IBM’s near collapse was largely blamed on that policy, senior executives (particularly sales at that time) were wedded to it and didn’t want to give up the perceived advantage even though it nearly killed the company. Eventually, IBM abandoned that strategy anyway.
Instead, over time, IBM spun out PCs and X86 servers to Lenovo. While both units were struggling under IBM, under Lenovo, which had a tighter hardware focus, both units flourished, indicating long after the fact that had IBM spun out software and focused on hardware the way Lenovo does, it likely would have been far more successful.
In addition, it would have been more able to focus on its Watson AI efforts, which are software-based, and adequately fund them. IBM started its AI effort ahead of NVIDIA and scaled before NVIDIA did, but NVIDIA out-invested IBM. Now, it is NVIDIA, not IBM, at the top of the AI pile because IBM’s effort is tied tighter to IBM’s hardware (watsonx), while NVIDIA’s can free float between hardware OEMs. Oh, and IBM uses NVIDIA’s technology.
Wrapping Up
IBM’s long-term problem is one of complexity and an inability to fully fund efforts like watsonx, which had the potential to return IBM to its past glory. By keeping Software in the combined company, it not only crippled software growth, a pure-play like Microsoft both regularly beat and outgrew IBM, but it also crippled hardware as the PC and x86 Server group showcased inside of Lenovo.
As a spin-out, IBM Software could have supported the most popular platforms, not just Power and Z, and hardware would have been freer to partner with other companies, making both their PC and X86 hardware groups more focused and successful. Even Z might have benefited because that line of business remained incredibly profitable for a long time due to an increased ability to work with other third-party software vendors who wouldn’t see IBM as a competitor.
Finally, AI would have advanced far more quickly and there is a better chance that either IBM would have exclusively benefited from a deal like NVIDIA did with OpenAI or co-benefited with OpenAI, putting IBM in a far stronger AI position than it’s in today.
One of the last things I learned from Thomas Watson Jr. was his directive to be willing to change everything about the company but who it was (IBM’s focus was customer care, security, and dependability), and I think he would have agreed that IBM should have spun out software so that both software and hardware were as free to grow as Microsoft and Lenovo currently are.
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