Lawrence Walsh

Tidal Waves

January 23, 2007

IBM's 2006 earnings were better than expected, but they fell short on two counts: Sluggish hardware sales were less than "The Street" expected, and Big Blue failed to regain its crown from Hewlett-Packard as the world's largest technology company.

But, if you look at the numbers and IBM's long-term strategy a little closer, you see some interesting parallels in channel evolution.

Let's start with hardware sales. IBM's hardware revenue grew just 3 percent, lower than investors had hoped. My thought: So what?

IBM has been steadily moving away from hardware and commodity technologies. When it sold its PC unit to Lenovo, it wanted out of low-margin laptops so it could focus on higher yield products. And that strategy appears to be working. Software and services rose 8 percent to $26.3 billion.

Big Blue's biggest gains were in consulting through its IBM Global Services unit, which saw sales jump 55 percent on the strength of more than $17.8 billion in new contracts.

Notice anything familiar? Services and software are continuing to make major strides in place of the evaporated hardware margins. IBM recognized long ago that professional services have sustainable, recurring revenue streams where hardware -- and even software -- will eventually commoditize. This is something solution providers have recognized for the same reason, and are seeing new benefits, as well.

According to the Institute for Partner Education and Development (IPED), the research and training arm of the CMP Channel Group, solution providers with the strongest services offerings and revenue are the most competitive. The reason is simple: Because they don't have to compete on price for hardware and software sales, they can win more business and still make money on their value-added services.

It seems what's good for IBM is good for the channel. Who cares if the analysts on "The Street" are still looking for hockey-stick growth in hardware?