IBM hitting pay dirt with software push

Part 2 of a two-part series

ARMONK, N.Y. - IBM's software business finally has found a focus. Three years ago IBM stopped trying to make its own business applications and turned its attention to building infrastructure software, including application servers, databases, collaboration tools, and network and security management products.

Today it's reaping the rewards.

While IBM's software group isn't the company's largest revenue producer - in the first nine months of last year, Global Services took in 45% of IBM's total revenue, the hardware division 34%, and software group 16% - it's a major profit engine. In the same time period, the software group contributed more to IBM's total profit (37%) than Global Services (32%) and the company's hardware division (23%).

With software profits on the rise, IBM is gunning for a variety of markets. It's pitching money, consulting and sales resources at its software suite and battling Microsoft for corporate customers; the two vendors arguably are alone in offering a full complement of development tools, messaging and collaboration servers, databases, and management and security products (see Part 1 of this series).

In many of the software markets in which it competes, IBM steadfastly is increasing its share of new business, at the expense of a slew of other vendors. IBM's WebSphere Application Server is neck-and-neck with BEA Systems' WebLogic for the lead in application-server market share. IBM's DB2 took the top market-share position away from longtime leader Oracle's database product in 2001. And its Tivoli brand is among the top three network management software suites and a front-runner in security management software.

Of course, there's still work to be done. After an acquisition-active 2002 in which it shelled out billions of dollars for software companies, including Access360, Holosofx, MetaMerge, TrelliSoft and Rational Software, IBM needs to digest its infrastructure additions and work to integrate its newly acquired technologies.

In addition, IBM's $13 billion software group has a new territorial focus: midsize customers.

While IBM is a natural fit with large corporations buying IT wares, it is trying to extend its customer range to include midsize companies with 100 to 999 employees. There's a $15 billion middleware market opportunity among 400,000 such midsize companies, IBM says. That compares with an $11 billion opportunity among 30,000 large companies with 1,000-plus employees.

IBM's midmarket plans center on a growing number of independent software vendors and partners that will embed, install and resell IBM software products. To help these channel partners reach customers, IBM is investing $1 billion in partnering and alliance strategies, the company says.

In addition, the software group last fall unveiled scaled-down versions of its application server, database, portal and integration software designed and priced for midsize consumption.

"IBM has been trying to move downscale for years and years," says Frank Dzubeck, president of Communications Network Architects. "They have finally figured out some ways to do this."