STINGING from nearly $1 billion in losses from last year's PC business, IBM chief executive officer Louis Gerstner has told shareholders in a letter recently that "the era of the PC is over." The five-fold increase in red ink from its PC business fueled speculation that IBM may make a move to get out of the PC business entirely, choosing instead to license its technology and brand name to other PC makers, and to specialize instead in technology, components and services.

Analysts for the most part were not surprised by the announcement.

"IBM has not had a comprehensive strategy for the past two years," says David Stremba, a principal analyst at Dataquest. "When you look at their overall business, the margins are much higher in other business areas: the services, software, components, and in the heavy iron, like servers." Stremba predicts that IBM will become a technology and components supplier to the PC industry rather than a supplier of finished goods. One hint in that direction was the recent multiyear pact between IBM and Dell, through which Big Blue will supply Dell with PC components over the next seven years. IBM also announced Thursday a five-year $3 billion deal with EMC Corp under which IBM will supply disk drives for EMC's enterprise storage products.

But Stremba doubts that IBM will outsource its entire PC line to any one vendor. "I believe they would strike several deals with several vendors. I really think they want to get out of the business of being a finished goods supplier, and it makes sense, because they have a lot of internal technology and development capabilities that most of their peers within the PC industry do not have," he says.

Some IBM PCs are already outsourced to contract manufacturers like Celestica, itself a former IBM unit. However Bill Schaub, another Data-quest analyst, said that IBM probably builds much of its commercial line, and certainly its Thinkpad notebooks, in house.

"IBM hasn't made money in this business for many years. They're just not very efficient. There's too much overhead," Schaub says. "They were doing some of their commercial products with channel assembly. I don't know how much of their business they were actually doing like that. We never thought it was going to be successful, and obviously it was even worse than we had imagined." Schaub says IBM is unlikely to actually sell off its Raleigh, North Carolina-based manufacturing operations, but is rather more likely to simply stop making its own PCs.

"If they want to have an IBM logo on something, they'll slap it on somebody else's box, much like what Unisys does," he says. "Their weakest link is in the desktop. They can't do build-to-order. They tried to do this channel assembly that looked more like build to order but was really just a bunch of parts all over the US." "There's only three companies making money on PCs right now. Dell, Gateway and Compaq, and there are questions over whether Compaq is making any money on the desktop right now," he says.

Arik Hesseldahl

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