Guild Companies

If one thing has been consistent about IBM's server strategy over the past decade, it's that it wants to drive as many server shipments as possible through its business partner channel and derive as much revenue as it can from that channel. The effect of this channel-oriented sales approach is that more and more customers have a third party, not IBM, as their main IBM contact, and this is changing their relationship with Big Blue.

With the exception of the largest accounts, which use a lot of IBM mainframe and midrange servers and IBM storage, the majority of IBM customer accounts are actually controlled by business partners, not by IBM itself. This is a strategy that has been championed by former IBM CEO Louis Gerstner. When Gerstner took the helm of IBM, back in 1993, the company had several tens of thousands of business partners, and the deals they did were not really within IBM's control, and more importantly, it could not accurately predict the sales volume that such a diverse partner base would deliver on a quarter-by-quarter basis. While Gerstner was obviously keen on charging for services IBM provided to other companies--it has built a huge business on this premise--the company was not keen on maintaining a large direct sales force that competed against other server and storage vendors or against its reseller partners. That is why IBM has gradually ramped up the amount of business that it pushes through the channel, as well as the amount of sales leads, co-marketing money, and other support it gives to partners.

To IBM's way of thinking, it is far easier to manage and predict the behavior of a few thousand key partners than 30,000 or 40,000 partners. It's also more profitable to be a hardware and software manufacturer that distributes to key business partners, which have to train their own sales forces and sell further downstream to resellers, who, in turn, actually sell products to customers. This is effectively the same kind of dealer network that big car manufacturers use, but with a few more layers. IBM gives up between 20 and 40 percent of potential revenues on big ticket items like servers and storage, which gives resellers some room to make money, in exchange for the resellers' commitment to make certain sales targets and keep their people on knocking on doors and up to speed on new technology. In effect, IBM has outsourced its sales organization because it believes that a diverse ecosystem of partners will more efficiently sell its products than a monolithic direct sales force like the company had in the 1950s, 1960s, and 1970s. (Of course, if this turned out not to be the case, it would be nearly impossible for IBM to put that genie back in the bottle. Creating a direct sales force at this point would be very difficult, but IBM could always decide to acquire its reseller partners, or those pieces of them that sell its products, and go direct again.)

According to IBM, about a third of the company's $88.4 billion revenues in 2000 and $85.9 billion in revenues for 2001 came through its partner channel; the remaining two-thirds came from its direct sales and support organizations, its online store, and its telemarketing channel. At PartnerWorld 2001, in February of that year, when Gerstner last addressed the annual conference IBM holds for its partners, he said that when he came on board in 1993, the business partner channel accounted for about only 10 to 12 percent of IBM's sales, including PCs, which were a big channel product then. About $7 billion of IBM's $62.7 billion in sales in 1993 came from the channel; when PCs are taken out of the picture, IBM's revenue derived from the channel amounted to only a small percentage of total revenues, or probably about $3 billion. IBM has been sketchy about its server channel sales, but said at PartnerWorld 2001 that about 80 percent of iSeries revenues and about 65 percent of pSeries revenues it booked in 2000 came out of the business partner channel.

Because I like to gather bits of market data and play around with numbers to create a better view of markets than vendors are often willing to present to customers, I have spent a little time putting together a profile of IBM's server and storage sales in 2000 and 2001 as they relate to the channel. The information in the following table is based on internal IBM documents, reports from Wall Street analysts, and Guild Companies's own estimates.

The first thing that is obvious from this table is that IBM's server and storage revenues, as encompassed by its Enterprise Systems category in its financial filings and its Server Group in its marketing organization (why these have different names is beyond me), have shrunk from 2000 to 2001. They will probably shrink from 2001 to 2002 as well. As best as I can figure, about 56 percent of IBM's Server Group sales in 2001 came from business partners, an increase in market share of a little more than 3 percent. IBM's direct and Web sales of Server Group products contracted by more than 10 percent. IBM's direct sales of iSeries, pSeries, and xSeries servers plummeted in 2001, while business partners increased their business on sales of zSeries mainframes and xSeries Intel-based servers. Partners saw revenue declines in the iSeries and pSeries markets as well, but nothing like the declines that IBM saw. What I can't tell is if IBM threw the channel more revenue to help keep it afloat in the down economy, or if IBM's top-end enterprise accounts simply stopped buying while the small and midsize accounts that IBM's partners control were more amenable to spending. It's a mystery. My guess is that it is a little of both.

The other interesting aspect of these numbers is that we can quantify the effect that IBM's increasing shift on channel sales has on its reported revenues for servers and related storage. The channel is selling IBM's server and storage products--about 83 percent of revenues for the iSeries, 70 percent for the pSeries, and 70 percent for the xSeries, but only 26 percent for the zSeries--while IBM is designing, making, and marketing those products for the 500,000 or so customers that buy IBM equipment around the world. When IBM sells an iSeries server, it books all of the revenue. But when it sells to a channel partner, IBM sells the machine at about 20 to 40 percent off list price. By pushing servers through the channel, IBM kills its own market share and reported revenues, because the market researchers only look at factory or wholesale revenues by vendor. My numbers listed in the table do not take into account the business partner markup, either. My guess is that IBM's Server Group revenues at the retail level (including IBM plus partner sales) were more like $16 billion in 2000 and 2001, not $14 billion or so, as IBM has reported in its financials. The point is, Server Group's products represent a bigger, and perhaps healthier, business than IBM's own financials may indicate.

The word on the street, by the way, is that the company is focusing on its "big play" marketing strategies to drive sales of Server Group products in 2002. I hear IBM wants solution integrators to boost their annual revenues in the Server Group area by 24 percent, and for independent software vendors that have signed alliances with Big Blue to crank up annual revenues by 10 percent. That's a pretty tall order in a down economy. We'll see what the channel can do.