Big tech is struggling with old ageApril 23, 2013: 6:51 AM ET
Some of the world's most well-known and powerful tech titans -- IBM, Microsoft, Intel -- are marked by trying to manage declining aspects of their businesses.
By Kevin Kelleher, contributor
FORTUNE -- At its heart, the tech industry is about the new. Today, tech giants succeeded because of what was new yesterday. The flip side is that the new ages into the old more quickly in tech than in most other industries. And so companies that dominated tech even a decade ago can appear to be aging quickly.
Such is the picture of the tech industry after a week of earnings reports that saw giants like Intel (INTC), Microsoft (MSFT), and IBM (IBM) discuss their financials in the first quarter of 2013. While the individual results and subsequent reactions among investors varied, one thread ran through all three: Each is struggling to manage older businesses in decline even as they push into promising new areas like cloud computing.
The most dramatic example was IBM, which has seen its stock decline 9.3% since it reported first-quarter earnings last week. IBM, a 101-year-old company, sold its PC business in 2004 in an effort to move into higher-margin software and IT services businesses. Its growth since then has made the stock a favorite among tech investors.
Even so, IBM is still struggling with aging businesses. Revenue at the company fell 5% last quarter from the same quarter a year earlier to $23.4 billion, below analyst forecasts. Much of the disappointment centered around hardware, including servers based on x86 architecture that, like PCs, have become low-margin commodities. Some reports suggested IBM may sell its x86 server business to Lenovo (LNVGY), the company that bought its PC business years ago.
IBM was one of the big companies to move early into cloud computing, and yet as companies finally embrace the cloud, that transition is hurting IBM's older businesses. "We suspect accelerating adoption of cloud computing is at the very least creating some delays as customers assess options," Ed Maguire, an analyst at CLSA Asia-Pacific Markets said in a research note following IBM's earnings.
That paradox is also evident in Microsoft's most recent quarter. Under CEO Steve Ballmer, Microsoft has built up a solid enterprise division of Office, Sharepoint, and Exchange, which makes up 31% of its sales. Xbox and other entertainment products make up another 12% of sales and servers still another 25%. For the most part, most have been seeing modest growth in revenue and operating profit.
Investors seem particularly focused on the 25% of revenue that comes from its Windows division. Its stock fell after two independent research firms showed PC sales falling more than 10% last quarter. Microsoft ended up reporting a 23% rise in Windows revenue, thanks largely to deferred revenue from sales in earlier quarters and its own Surface tablets. (Microsoft is selling Windows hardware and not just Windows software, which adds to revenue but weighs on operating margins.)
Ballmer envisioned Windows 8 as a way to pull Microsoft away from traditional PCs like laptops and desktops and into tablets and smartphones. It was the smart thing to do, positioning Microsoft for new markets, but it's also accelerating the decline in demand for PCs that are the core of Microsoft's traditional markets.
Like IBM, Microsoft has been for years preparing for an enterprise software market moving into the cloud. The business software division, currently the largest in both revenue and operating profit, includes enterprise software like Office 365, the cloud-based version of that longtime cash cow, Microsoft Office. The business division saw revenue grow 8% last quarter.
Microsoft's stock has risen 7% since its earnings last week, and while some analysts remain bearish on the stock because of uncertainties in the PC market, others remained optimistic. Raymond James cited "the positive of Microsoft's overall opportunity around cloud, mobile, and Windows 8."
Intel's stock initially dropped on an earnings report that fell slightly short of analyst estimates but has since rallied 6%. PC chips still account for 64% of Intel's revenues, although that figure has declined from 69% two years ago as Intel has pushed into new businesses like server chips powering data centers and software and services to enhance the chips' performance.
In its way, Intel is also steering its business away from chips in traditional PCs and toward the cloud -- that is, chips that power the data centers that are the not-so-ephemeral substance of the cloud.
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As CEO Paul Otellini stressed in what may be his final comments as CEO in an Intel earnings call, the company remains at the forefront of innovation in semiconductor design, with 100 million 22-nanometer processors shipped so far and Intel focused on making 14-nanometer chips. But Intel is focused on making better chips for faster ultrabooks, which is still a declining market.
Some analysts remained concerned about Intel's reliance on a declining PC market, despite its new chip architectures. In a report, Doug Freedman at RBC Capital said he was skeptical such new designs "will drive a revival of newer initiatives including touch and ultrabook in the PC marketplace." Instead, Intel is likely to keep shoring up its stock with improving cost structures and paying dividends.
One of the dilemmas of tech is that success -- if defined by dominating a core area of business -- is so fleeting. The same companies that rode the rise of the PC and server markets may enjoy large market caps and ample cash, but they're also chained to those same markets in decline. As IBM, Microsoft, and Intel show, there is no single, simple answer to that dilemma. Each company is struggling to find its own imperfect answer.