Is IBM still making nice?

July 14, 2008: 8:47 AM ET
IBM Software chief Steve Mills says that while Big Blue is doing more with application software, he'll be careful not to rough up his allies. Image: IBM

In a software industry defined by big egos and ruthless tactics, IBM built its empire on smart alliances. Rather than try to write every application customers needed to put their businesses on the web, Big Blue marshaled an army of allies and sold their programs in packages on top of its own. The result: A lot of successful companies – folks like PeopleSoft, Siebel Systems and Lawson – made their fortunes with IBM's help. And along the way, IBM built its own $20 billion enterprise software business into the industry leader.

Now the times seem to be forcing IBM (IBM) to tweak its friendly approach. Although the company promised to avoid offering its own programs to compete with its partners (and executives say that policy stands), some industry insiders note that the giant has begun flouting its no-compete policy as growth in its software business slows and it seeks new avenues for sales. Just look at some of the companies IBM has gobbled up recently: Cognos for business intelligence, FileNet for content management, MRO Software for asset management, to name a few. Do those qualify as applications? You bet.

Not that the changes put IBM in imminent danger. IBM's software business still supplies nearly a fifth of the company's revenues and 40 percent of the profit, helping to make the company a favorite technology stock on Wall Street this year. The stock is up about 15 percent in 2008, and analysts expect steady results when the company reports earnings on Thursday.

And while he allows that his strategy has evolved enough to raise eyebrows, software czar Steve Mills insists IBM's allies have nothing to worry about. Mills is the mastermind behind the company's big-tent software strategy, and he knows he still needs that ecosystem.

"The basic premise of keeping partners happy remains in place," says Mills, senior vice president and group executive of IBM Software, in a chat with Fortune. "There are a few rub points – but by the way, some of them have a few rub points with us as well."

In other words, Mills would like to assure everyone that he isn't morphing into Oracle's (ORCL) Larry Ellison or Microsoft's (MSFT) Steve Ballmer, two software executives more likely to steamroll smaller competitors. Instead, IBM is mostly sticking to its playbook of offering a foundation of databases and middleware, while recruiting smaller companies around the world to build on top of it. Does that mean IBM won't build more applications businesses? Well, Mills won't count that out entirely. But overall, he'd like everyone to know that where its partners are concerned, he's still a lover, not a fighter.

Given the challenges ahead for IBM, that's probably a good idea. The technology world is in the throes of a shift from selling installed software – Oracle databases, IBM middleware, Microsoft Exchange e-mail and the like – to selling access to online services. So far, the hot online service leaders like Amazon.com (AMZN), Google (GOOG) and Facebook tend not to rely on that traditional software to deliver their products; so it's not clear that this shift to "cloud computing" will be kind to IBM.

"From a cloud computing perspective, frankly IBM's performance up to this point has been disappointing," says James Governor, an analyst at RedMonk. He and others note that the major Web 2.0 service providers are mostly cobbling together their own software infrastructure to handle a flood of Internet traffic, rather than rely on off-the-shelf database and middleware offerings from IBM. For a company that's used to being a go-to supplier for that stuff, the trend should be a little scary. Says Governor: "There's plenty of headroom at IBM, but it is at a crossroads." And while IBM firms up its software-as-a-service strategy, it would be wise to keep its partners from defecting.

IBM has to keep its ecosystem allies happy, even as it pursues growth and adapts for the future. That way, it can keep offering a broad portfolio of software products to its customers, and hopefully buy more time to figure out that cloud computing thing. Jonathan Eunice, analyst at Illuminata, puts it in plainspoken terms: "You want to keep your current cash cow as healthy as possible for as long as possible."

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