From: pkedrosk@student.business.uwo.ca (Paul S. Kedrosky)
Subject: Re: Future of OS/2 and IBM???????????? (LONG)
Organization: University of Western Ontario
Date: Fri, 18 Dec 1992 14:14:03 GMT

furballs@sequent.com (Paul Penrod) writes:
> In article <1992Dec16.152535.12204@jupiter.sun.csd.unb.ca> hwhalen@jupiter.su
> >In article <1992Dec16.072137.28867@sequent.com> furballs@sequent.com (Paul P
> >>In article <1992Dec15.210437.934@gn.ecn.purdue.edu> ashwath@gn.ecn.purdue.e
> >
> >[Stuff about IBM laying off 25,000 people deleted]
> >>
> >>I think it would be prudent to ask the question as to where the
> >>cuts are coming from. Remember, IBM has started decentralizing it's
> >>busineses and while the PC products Division may be going great
> >>guns, their mainframe division may be suffering terribly, so you
> >>might find the cuts coming from a source that has little to no
> >>impact on the product (OS/2) that you are currently using. Also,
> >>IBM is among the most conservative of the blue chip stock companies
> >>and has long earned it's reputation as a stable commodity in the
> >
> >Ahem .... stable? I believe that around 1987 IBM stock was trading at 
> >approximately $178 per share. Yesterday it was trading at $56 per 
> >share. God help us if this is stability. :) 
> >
> 
> Yes, stable. You obviously don't play the stock market with
> professional investors or you would realize that stock price is not
> relavent, unless you are going short term. DIVIDENDS are the
> stability. And, IBM earned it's BLUE CHIP status by producing
> DIVIDENDS that are, up till now, consistently better than the
> average.

This is possibly one of the strangest definitions of stock stability I
have heard. There are two components to returns on a stock: dividend
yield and price appreciation. If the share price fluctuates madly then
so does the dividend yield, which is why IBM all of a sudden became a
good investment again when its price fell below $85 or so and its
dividend yield became high in relative terms. Price appreciation is the
other part of the investment equation and saying it is only the concern
of the short term investor is naive, goofy, and just plain wrong. IBM
earned its blue chip status, or perhaps I should say, kept it, because
of the naivete of many institutional investors who simply never
understood (in the same that IBM has only slowly understood) the
fundamental changes in its lines of business. That is not the same as
calling IBM blue chip.
 
> >>volatile stock market. This implies that they have planned for this 
> >>and are trimming the fat from the company to be come more 
> >>competative. 
> >> 
> >>While the numbers are gargantuan as compared to someone like 
> >>Borland or Microsoft, it represents a much smaller percentage of 
> >>IBM as a whole than Microsoft. I would not worry about OS/2 support 
> >>suffering. Right now, it's becoming a cash cow for them and they
> >                                       ^^^^^^^^ 
> >
> >Cash cow? I don't think so. The most optimistic numbers I've heard are 
> >2 million units sold. Lots went out at what ....$49. Others have gone 
> >to retail outlets and since the retail outlets have to make a profit 
> >the full price of these units did not go to IBM. Subtract costs for 
> >disks, manuals, suppport!!!!, bug fixes!!!!, shipping, order taking, 
> >advertising, beta testing, etc. and there is no way that this product 
> >*at this time* is a cash cow. If IBM got an average of $50 per unit 
> >sold then they received at most $100,000,000  from OS/2 sales. This is 
> >not much in a company that has over $50,000,000,000 in sales. It is at 
> >most .2% of their sales.
> >
> Think again. IBM makes a large portion of it's money on hardware
> and service. They could give away the OS for all intents and
> purposes, so long as they get the service contracts and sell
> hardware. That's why their called International Business MACHINES.

This is a very misleading statement; IBM, far from making all or most
of its money on hardware and services, makes most of its money in one
place: mainframes. That's mainframe hardware, mainframe software, and
mainframe services (like maintenance). They are suffering everywhere
else, at least partly because of a horribly bloated infrastructure and
an outdated business model. IBM's old model of relying on hardware and
maintenance services to make up their bottom line is simply unworkable
in the 1990's. Look at the PC industry, that business will not accept
marked price premiums from IBM hence their introduction of ValuePoint PCs in
response to the low price mail order houses like Gateway and Dell.

At any rate, none of this makes OS/2 a cash cow in any sense of the
world. OS/2 is strategic, plain and simple. IBM spent around $2
billion on developing the thing and see it as their path back to
control of the desktop. If they make back their investment in the
product, ever, I for one will be very surprised.

> >>have announced plans to integrate it into their other system
> >>platform. As long as people continue to buy OS/2, IBM will continue
> >>to promote it's growth and useability.
> >
> >Maybe, in fact, probably .... but more as a matter of strategy and ego 
> >rather than the dubious fact that it's a cash cow.
> >
> 
> Old marketing strategy they never teach in college:
> 
> "I'll give you the razor, so long as I can sell you the blades..."
> 
> One last thing. According to the sattelite news service, IBM is
> having problems producing enough OS/2 packages to sell and bundle
> with their PS/2 hardware, which is selling a record clip. Yes, I
> would call that a cash cow.

This is what I would call a floating defintion of "cash cow". That IBM
is selling many PS/2s does not imply that the things are cash cows if
IBM's margins are not significant. I'm not suggesting their margins
are not at least respectable, IBM has made it clear many interviews
with business and industry publications that competition has broken
the margin back at IBM and they are feeling the pain of selling in a
commodity low margin PC world. Not exactly a cash cow. A volume cow, maybe.

Paul
 __________________________________________________________________________
     Paul S. Kedrosky              __/ "In a certain village in La Mancha,
    pkedrosk@business.uwo.ca      __/ which I do not wish to name, there
   University of Western Ontario __/ lived not long ago a gentleman..."
  (519) 679-2111 x5174          __/