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NOVEMBER 22, 2002 COMMENTARY By Alex Salkever The End of the Hardware Era? IBM's decision to put $1 billion into services R&D is a telling sign that the ground under info tech is shifting radically
So it was no small thing when Big Blue announced on Nov. 20 that of the $17 billion it plans to spend on research and development in the next three years, a cool $1 billion will go specifically to innovations in technology services. A dedicated army of 200 R&D consultants will work with IBM's 3,000 other researchers to create new approaches to solving problems -- primarily via software. Their efforts will focus on experimental economics and pricing mechanisms, advanced mathematical solutions of logistical problems, and integrating disparate pools of information for easier access and use. Those sound awful fuzzy for the folks who molded exotic carbon nanotubes into transistors so tiny that they could someday be used to build computers more powerful than today's mainframes but smaller than the eye can see. HUMAN RESOURCES. However, while research at Big Blue has historically focused on materials science, it had already been skewing toward more software research. While IBM declines to break out just how much of the total R&D budget goes to software vs. hardware, look at it this way: In 1990, only 5% of IBM's researchers were working on software. Now, that's where 50% of its deep thinkers concentrate. At the very least, this shift implies that Big Blue is throwing tremendous human capital (and most likely far in excess of the new $1 billion budget line) at technology services, which are typically software-related. It was in the last few years that IBM moved further out on the continuum away from hardware toward services, under the aegis of recently departed CEO Lou Gerstner. And his succesor, Sam Palmisano, has made it clear that he's betting the farm on services. In October, 2002, he finalized a deal to buy tech integrator and services shop PricewaterhouseCoopers for $3.5 billion, making IBM the second-largest tech services firm in the world. The deal means that, for the first time, the majority of IBM's revenues will soon come from tech services. In 2002's third quarter, global services accounted for $8.9 billion of IBM's total $19.8 billion in revenue. That number doesn't include sales that would be coming from the PwC deal, which was closed in October and would significantly goose both total revenues and those from services. SPEED ISN'T EVERYTHING. While IBM's gross revenues for the third quarter stayed about flat compared to 2001, year-over-year revenues for global services went up by $300 million. And for 2002's first three quarters, Big Blue's total revenues were down by 5.6%, but services' slipped just 0.4%. Clearly, the formal announcement of a $1 billion R&D budget targeted at services is a signal moment portending a sea change in the technology world. Simply put, the age of hardware supremacy is on the wane. Chips -- and the computers and gadgets they power -- will continue to get faster. But speed itself will matter less and less, thanks to a host of confluent trends. On the other hand, services will increasingly be where both the value and the interesting activity are. "The whole [info-tech] industry is becoming more services-based. The growth of services is outstripping the growth of hardware and software," says Paul Horn, an IBM vice-president who heads its R&D operations. Other traditional hardware vendors such as Dell (DELL ) and Sun Microsystems (SUNW ) are rushing to beef up their services practice. And one of the key drivers behind the Hewlett-Packard-Compaq (HPQ ) merger was to create a stronger services arm to compete with IBM and others. STACKS OF BOXES. The handwriting for hardware is on the wall. For starters, the network truly is becoming the computer, as Sun CEO Scott McNealy has long proclaimed. The Internet now reaches over 150 million Americans. Their connections are increasingly fast, with close to 20 million users surfing the Net on broadband connections and dial-up users now achieiving regular download speeds approaching 56 kilobytes per second. As a result, more and more computing is being offloaded to central servers. Those servers, however, are more likely to be cheap boxes that can be easily stacked and configured in ways to handle the majority of computing tasks. So, faster and faster chips and computers have a marginally smaller return when IT managers can simply throw another box in the rack and add 10% more power and processing speed, as needed. Dell, the world's top seller of PCs and Intel-chip-based servers, is doing a boffo business in so-called high-performance computing clusters. These are groups of relatively low-powered servers linked by software to create virtual supercomputers. In fact, many supercomputer makers now build machines using Intel processors in custom architectures. INDUSTRY LEADER. Another key factor in ending the hardware era is simple satiation. Hardly anybody outside a corporate IT shop fills a 100-gigabyte hard drive. And for the average consumer, the marginal difference between a 2-gigahertz Pentium and 2.4-gHz processor is virtually zero. That might change somewhat as video and other more processor-intensive applications take off. But even those new uses for computers seem unlikely to push hardware capabilities to now-undreamed-of levels. In that context, IBM's decision to pump up R&D in services shouldn't be so surprising. Still, when the biggest research lab in the private sector acknowledges that the interesting work in computing will now come from problem-solving in the services sector, the industry has to take notice. After all, as IBM goes, so goes the IT business. Sure, plenty of groundbreaking research into hardware and materials sciences will continue to be done, much of it at IBM. But the reasons why Big Blue is putting more emphasis on software and services research will only accelerate as computing becomes increasingly commoditized. "You could work on the next-generation computer, and you could make it a little faster. But the real exciting problems are figuring out how you can manage and understand genomic data, and help a drug company build a blockbuster that saves lives," says IBM's Horn. Farewell, then, to the days when happiness was a faster processor. Say hello to an era, still taking shape, when the computing hardware is almost besides the point.  Salkever is Technology editor for BusinessWeek Online Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | NOVEMBER |
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