Infrastructure Business Monopoly

June 15, 2009 Timothy Prickett Morgan

As the largest provider of goods and services for enterprise data centers and midrange data closets, it usually takes a long time for IBM to shift steer its vastness toward a new opportunity. But when the economy is heading for the rocks, it is surprising how quickly Big Blue moves these days compared to the IBM Company of old. Rather than try to remold the world in its own image, IBM is more interested in trying to take advantage of the world as it is transforming itself.

Nothing has made this more clear to me than the whole Smarter Planet or Smart World effort that Sam Palmisano, IBM’s president, chief executive officer, and chairman has been spearheading ever since the economic meltdown hit last summer in earnest. The recession in the United States started in December 2007, and had a big impact on IT sales in the first half of the year, taking some of the heat off the market. But the popping of the real estate bubble and the consequent collapse of the financial system last summer put IBM and other IT suppliers into a state of nervousness, even if they didn’t show it. Thank heavens the United States, the United Kingdom, China, and a number of other countries were willing to spend trillions of dollars in economic stimulus funds to shore up the banks and insurance companies that played fast and loose with out money as we citizens all played fast and loose with real estate and mortgages, just so we could not have to come to grips with the fact that Americans were, as individuals and as a country, living beyond their means. With all that stimulus money soon to be ponied up, as Big Blue surely knew it would be because Palmisano walks the corridors of power to get his substantial paycheck, it was truly amazing to me how quickly IBM shifted gears from a collection of On Demand, SOA, and server simplification strategies for corporations to this Smarter Planet initiative, which seeks to automate national infrastructures–roadways and train systems, water and electric supply systems, healthcare systems, government operations, and so on.

Imagine if IBM moved with such speed to create a better desktop operating system than Windows, or showed the same level of commitment to delivering great bang for the buck for its hardware. Well, as I explained a month ago, when Big Blue was talking about its future hybrid systems, the company is committed to making big and clever systems, the kind you need to run an instrumented and automated planet. (What sci-fi buffs might even call SkyNet. I am prepared to go back in time to save Linda Hamilton, if anyone needs a volunteer. . . .)

At its analyst day back in mid-May, the company talked about how it could make its numbers despite the economic downturn, delivering $10 to $11 in earnings per share in 2010 and at least $9.20 per share in 2009, a model that it set out a few years ago. Now, when a company can make money no matter what the market is doing, that is usually called a ponzi scheme. IBM isn’t lying about its business–Big Sam loses his job and his perks if he does that, and he becomes an un-person like the ill-fated John Akers, who steered IBM onto the rocks in the recession in the late 1980s and early 1990s and was shamefully replaced by an outsider, Louis Gerstner. Rather, IBM is sure because it has tapped into a huge river of money and only needs to get small streams of it to make its numbers. Uncle Sam and Chairman Mao are still a hell of a lot larger than Big Blue, and they are both throwing huge sums of money around. If there is anything truly smart about all of this Smarter Planet talk, it is that IBM is going after the money and taking on projects that Microsoft and Google might otherwise get.

From a Power Systems i perspective, all of this Smarter Planet talk means one important thing: IBM will make enough money to not feel compelled to kill off the i platform. So we can all go on about our business. And maybe, just maybe, there might even be an i component to some of these Smarter Planet deals. Those people fighting SkyNet will need a reliable database computer that doesn’t speak Linux and MySQL, right?

In last week’s issue, Victor Rozek, our resident conscience here at IT Jungle, took us through the moral and political issues associated with this whole Smarter Planet drive, and I see no point in going over that ground again here. But I did want to give you an impression of magnitude of the money we are talking about here.

Ginni Rometty, currently the senior vice president of the Global Sales and Distribution organization at IBM, is responsible for revenue, profit, and client satisfaction in the 170 global markets where IBM does business, according to her biography. At the May analyst day, she walked everyone through the big numbers that IBM was chasing. Current economic recovery funds allocated thus far since the economic meltdown got in full swing last September total up to $5.5 trillion. That includes about $400 billion in tax relief around the globe, plus $2.3 trillion to prop up ailing banks, insurance companies, car makers and such. The remaining $2.8 trillion in funds is for stimulus spending. China, not the United States, is the top stimulus spender, with $940 billion allocated, followed by $860 billion in the U.S., $160 billion in Japan, $90 billion in Germany, $80 billion in South Korea, $50 billion in Italy, and $40 billion in Brazil.

So what are the effects of the stimulus money that governments are spreading around on IT sales? Rometty didn’t want to give any projections for IBM’s take out of this extra dough (well, it is extra until the taxpayers have to pay it all back, with interest), but she did give a sense of how the stimulus spending in certain key areas would expand the opportunity for IT vendors to chase.

In the healthcare area, where U.S. president Barack Obama has not been shy about saying he wants to see the automation of patient records and care, IBM believes the 2008 market opportunity for IT sales was about $34 billion, with $6 billion in point product sales and $28 billion in solution sales. But with $190 billion in stimulus funds to automate healthcare, there is another $15 billion in expanded IT sales opportunities. So about 7.9 percent of the money governments are shelling out for healthcare stimulus spending is going to end up in IT vendors’ pockets. But with a payback. The world spends $5 trillion a year on healthcare, but if we made patient records electronic, IBM says that $53 billion in savings could be realized in the healthcare systems of the world.

Now, let’s talk about transportation. The IT biz sells about $23 billion in solutions and about $4 billion in point products to transportation companies and public transit authorities the world over. With an additional $880 billion in stimulus funding, the IT opportunity in transportation is expanded by about $6 billion globally. And what do we get out of it? Less congestion and faster transit, presumably.

And what about the smart grid, which is the area where IBM has been pushing hardest. IBM says that worldwide demand for energy is going to go up by 37 percent by 2030 and that power outages cost the U.S. economy alone some $150 billion each year. The IT industry makes about $28 billion selling solutions and another $5 billion selling point products. But with $300 billion in stimulus funds being allocated to energy projects, the IT industry can expect another $6 billion in incremental opportunities to sell products and services in this sector, according to Rometty.

So let’s do some math. In these three areas alone–healthcare, transportation, and electric grids–we’re talking about $1.37 trillion in stimulus spending and $27 billion in incremental IT opportunity. That stimulus spending is roughly the same size as the IT market absent telecom costs, and Big Blue has about 8 percent of that global $1.3 trillion IT market. Now, with IBM helping the Obama Administration create the stimulus package here in the States and shelling out millions of dollars in the first quarter on lobbying the U.S. Congress, do you think Big Blue will get more than its fair 8 percent share of that incremental IT expenditures? Even 8 percent of that extra spending comes to just over $2 billion. IBM clearly is hoping for a much, much larger share of that stimulus pie. And there is a fair chance it will get it, too.

Just remember: as long as IBM is making money, it will leave the AS/400 alone–for better or worse. It is when IBM stops making money that you have to start worrying.

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