10/30/95 LOU GERSTNER ON CATCHING THE THIRD WAVE

LOU GERSTNER ON CATCHING THE THIRD WAVE
IBM's CEO sees online computing driving all his businesses
Louis V. Gerstner Jr. caused a stir two summers ago when he declared that the last thing IBM needed was to proclaim a grand vision. Gerstner proceeded to focus on cost-cutting and other management issues and proved the vision-hungry pundits wrong. But having studied IBM, the computer industry, and technology trends, the former McKinsey & Co. consultant has come up with, if not a vision, at least a plan for IBM. Relaxing in a conference room where he keeps a couple of computers to check out everything from kids' software to Web browsers, Gerstner shared his ideas with Information Processing Editor Ira Sager.

Q: You speak of ``network-centric'' computing. What is it?
A: The first wave of computing, 30 years ago, was driven by the technologies of host-based processors [mainframes] and storage devices. Twenty years later, we moved into a second wave, which was driven by microprocessors and simplified operating systems. The third wave of computing is being driven by very powerful networked technologies that provide very inexpensive and very wide [communications] bandwidth.

Q: What will happen to existing computers?
A: People have argued that the host-based [mainframe] model is dead. Well, it isn't dead. People are buying more of those units than they ever have. And no one should say that the stand-alone personal computer is going to go away. But there is no question that the PC-based model is now not the future. The future is a network-centric model. The focus moves to a network that draws out the best of both worlds. That model drives the strategy of this company. When people talk about IBM, it's interesting to hear them say: ``Well, I wonder if they'll get their new businesses to grow fast enough while their old businesses die.'' What they don't understand is, we are reconceptualizing our old businesses. We're bringing them into this new model.

Q: Will IBM put applications on a network and charge per-transaction or
volume-based fees?
A: Absolutely. We call this business process outsourcing. For example, this Internet or networked world will put extreme pressure on traditional providers of financial services. We have no interest in going into the banking business. But we do have an interest in working with a series of banks in which we will provide networking capability through the IBM Global Network and networking applications that we will build. We'll take part of the transaction revenue. It could very well be on a per-click, per-communication unit. It is a strategy that brings our customers into this world of network services. Yes, we will be compensated in nontraditional ways.

Q: That provides a recurring source of revenue--as opposed to one-time product sales. Is this where you see network computing leading IBM?
A: That's the model IBM created with its mainframe software--monthly license revenue. We understand the concept of software paid for on a usage basis as opposed to a shrink-wrap, buy-it-once basis. Now, all of this is going to take time. It's going to evolve differently in different industries, in different companies, depending on their strategies. Large customers are going to take a very long time before they're going to rent mission-critical applications. People will not convert their own legacy systems to this. What will go on a rental model is the new stuff, like electronic commerce.

Q: In a wired world, must IBM remain a big maker of hardware and software?
A: People are going to need a lot of very powerful servers. They're going to need a lot of transaction software. They're going to need a lot of database software. They're going to need a lot of communications software. You don't necessarily have to provide all of these things, but we do. And as long as we're successful in each of them, we're going to continue to provide them. [If] we're not successful, we'll get out of the business.

Q: How does Prodigy fit into IBM's network-computing plans?
A: We are taking a hard look at our Prodigy strategy right now, along with [Prodigy partner] Sears. Short term, we're making a lot of changes. We brought in new management. They've done some new things with their system. Certainly their merchandising and marketing has gotten better. But the long-term strategy for IBM and Prodigy is not clear. We will sort that out in a relatively short time. The fundamental issue is: In the world of the Internet, is there a place for a packager of services? Does the customer want to go surf the Net and go to every one of 50,000 Web sites? Or will people pay a reasonable amount for somebody to go out and preselect and package what they want? My guess is they will both coexist.