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FROM HEGEL TO GOOGLE
The renowned philosopher Georg Hegel, whose life coincided with the Industrial Revolution, analyzed social change and the resultant conflict of old and new. His ideas galvanized Karl Marx, 50 years his junior. Two centuries after his birth, Hegel's wisdom guided Silicon Valley's sensational inventors.
At its best, our economy is nourished by a hearty Hegelian stew of technologies seasoned with a dash of Ninotchka. At its worst, we try to feed on an Apple duly but dully managed by former ibmocrat Tim Cook as we listen to a hoarse Yahoo.
It's very difficult to go from zero to Hegel. If you've taken a couple semesters of philosophy, you've probably been on the path that leads to Hegel and beyond. Hegel's work has roots in classical Greece, in the words of Socrates as conveyed by Plato. The ancient Greeks explored learning in the form of conversations or dialogues. Philosophers use the term dialectic for the two-way exchange of views in the quest for truth. It gets complicated if you are just jumping in at the deep end. It took scholars a couple thousand years of discourse to get from the Greeks to the nineteenth century, and philosophy has kept moving since.
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When Vulcan gets riled, steer clear of volcanos. Be nice. Show him some respect. Admire his metalworking skills. Celebrate his holiday, Vulcanalia, on August 23. Don't hurt Vulcan's feelings as Pompeii apparently did. In 79 AD, Pompeii was buried alive in ash and lava. Vulcan is obviously implicated: Vesuvius erupted on August 24, right after Vulcanalia.
IBM, which has supported a huge study of Pompeii's destruction, should know better than to trifle with Vulcan. But Big Blue has been vexatious, deprecating the hardware business. Vulcan is surely offended; he could strike at any moment. Watch out!
It's not entirely surprising that IBM has underestimated the wrath of Vulcan. Of all the many Roman gods, Vulcan was the ugliest. He didn't have a handsome face. He had a crippled leg. And his work at a forge often left him filthy. He doesn't seem to rate a lot of coverage in literature; his wife, the beautiful Venus, has always gotten better press.
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JIMMY CHOO HILL
In the American West during the last quarter of the 19th century, quite a few people died with their boots on, thereby ending up in Boot Hill. These days, few people die in a saddle. Some die in gunfights. Plenty die at their desks, the way Bat Masterson did in 1921. A boneyard whose occupants expired at work wouldn't be called Boot Hill anyway. Instead, particularly if it catered to the computer business with its many women executives, it would be named Jimmy Choo Hill.
There wasn't just one Boot Hill. There were plenty across the Great Plains and into the West. One of them, however, is by far the most famous. That is the one in Tombstone Arizona, a town known for the 1881 Gunfight at the OK Corral. That ruckus added a few occupants to the local graveyard, including at least three gun-slinging cowboys. Boot Hill also is the final resting place of a Well Fargo station agent named Lester Moore who was shot during a dispute with a customer. Moore's marker says, "Here lies Lester Moore, four slugs from a .44, no Les, no more."
The survivors of the OK Corral shootout included three Earp brothers, the most famous of which was Wyatt, and Doc Holliday. Bat Masterson was one of their buddies. He missed the fight because he had to go to Dodge City, Kansas, to help one of his brothers who had problems in the saloon business. Masterson survived numerous adventures in the West but ended up in New York City, where, for 18 years, he wrote a newspaper column on sports, mainly boxing. In 1921, at the age of 67, he suffered a heart attack while at the New York Morning Telegraph. He was buried at Woodlawn Cemetery in the Bronx; Damon Runyon was one of his pallbearers. Wyatt Earp outlasted him, dying at the age of 80 in 1929. Earp is buried in Hills of Eternity, a Jewish cemetery in Colma, California, south of San Francisco, at a gravesite where he was eventually joined by his third or fourth wife, Josephine Sara (Sadie) Marcus.
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PYTHIA AND THE TWO-LEGGED PIG
The great temple of Apollo stands at Delphi on Mt. Parnassus. Centuries ago, an elder priestess at this temple, yclept Pythia, was an oracle, offering prophecies to those able to correctly interpret her words. Today, Warren Buffett, whose Berkshire Hathaway is IBM's largest shareholder, is called the Oracle of Omaha. Buffett looks the part, resembling a benign grandma. He has more money than all of Greece, although right now plenty of people enjoy that distinction. Like Pythia the Oracle, Buffett can be baffling; less gifted people cannot understand why Buffett is up to his ears in IBM stock.
It's been nearly five years since early 2011, when Berkshire Hathaway took a big stake in Big Blue. Currently, Buffett's outfit is IBM's largest shareholder, with close to 9 percent of the company's shares, acquired at a cost of more than $13 billion. In November 2015 those shares were worth more like $11 billion. Buffett's company had, on paper, lost around $2 billion or 15 percent of its stake. Undeterred by what the investor must believe is a temporary downturn in the stock price, Berkshire Hathaway bought another million shares during this year's third quarter, even as it was selling other holdings to raise cash for a planned acquisition of Precision Castparts.
A skeptical observer might say that Buffett is in a trap. If he tried to lighten up on IBM shares, other investors might overreact, causing the stock price to plummet. In addition, Buffett's company, deservedly known for its astute investment strategy, would have to tell its own shareholders that it seems to have made a big mistake. By contrast, during the most recent quarter Berkshire Hathaway reported a gain of $4.4 billion on one deal alone, its stake in Kraft Heinz, which soared in value as food giants Kraft and Heinz merged their interests. That gain is real money, and it is more than twice the hypothetical loss Buffett's company has taken on its IBM investment.
As an investor, Berkshire Hathaway is almost always in it for the long haul, so if IBM shares spend a couple of years in the doghouse Buffett won't get rattled. He has apparently braced for the poor performance expected to be reported by IBM during the remainder of 2015. It's probably too early for anyone, even Warren Buffett, to guess how IBM will do in 2016. But right now it's seems fair to say that Berkshire Hathaway is not only IBM's biggest investor, but also one of the company's most optimistic.
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From the 13th into the 18th century, except for an interlude beginning in 1494, the Medici family dominated Florence and surrounding Tuscany. That exceptional 18-year interval began as Girolamo Savonarola, a Dominican monk, spearheaded a dramatic reform movement. The epitome of Savonarola's campaign was the spectacular burning of valuables deemed tokens of sinful self-indulgence: bonfires of the vanities.
Savonarola irritated many powerful people, including the Pope. Ultimately, he was tortured, convicted of heresy, publicly hanged and burned. Since then, inspired reformers in politics and commerce have often chosen to tread lightly, even at decorous institutions like IBM.
When Virginia Rometty took the reins at IBM, she soon discovered that her company wasn't as tidy as it looked from the outside. Her predecessor, Sam Palmisano, had stayed the course chosen by IBM's prior chairman and CEO, Louis Gerstner.
Gerstner had rescued IBM from disaster. He slashed its payroll. He reshaped Big Blue as a powerhouse in computing services, reducing the portion of its revenue generated by manufacturing. He enlarged IBM's extraordinarily profitable software business. And, as the company returned to fiscal health, he significantly increased the size of its Indian operations, building up a powerful intellectual capacity to support IBM's growing need for application programmers, software analysts, operations specialists, and the mid-level managers needed to bring their gifts to bear on clients' workloads.
Palmisano continued and enlarged Gerstner's Asian strategy, giving IBM a talent pool that had the excellent skills needed to win contracts along with the competitive costs to participate in services deals not only in the wealthy post-industrial economies of North America, Europe and Japan but also to deliver good results in the cutthroat services markets of Latin America, Asia and Africa. But it has now emerged that Palmisano didn't run a sufficiently tight ship.
During Palmisano's tenure, IBM's hardware groups were coasting. IBM produced ever-more-powerful proprietary servers, but these systems inexorably lost ground to less costly equipment, mainly X86 machines, made by rivals. IBM's own industry-standard line of X86 boxes offered great technology but brought their maker little if anything in the way of bottom line financial benefits even as they helped IBM gain revenue and market share. Similarly, IBM introduced ever-improving storage subsystems that repeatedly suffered unsatisfactory sales results compared to EMC and other rivals. As was the case with servers, IBM's offerings were very good but customers often chose other vendors' even more appealing products for technical or economic reasons. Making the corporation's deteriorating situation even worse, IBM's services business, which brought in more than half the company's revenue, was heading for tough times, bidding aggressively to win contracts in competition with increasingly capable rivals and consequently suffering from an erosion of margins.
IBM's complex bookkeeping processes enabled Palmisano's company to escape prompt recognition of mounting difficulties. It was not until after Rometty took over that the enormity of the company's challenges became visible. Even then, the emergence of IBM's profitability issues, obscured by the complex accounting in the services business and elsewhere, took quite a long time. Rometty took office at the start of 2012, but didn't publicly recognize IBM's weakened situation until the end of the third quarter of 2014. It was at that time that Rometty said IBM would not fulfill its promise to generate $20 per share in profit for the full 2015 year.
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PUTTING ITS MONEY WHERE IT'S MALTHUS
In 1798 Robert Malthus triggered a perpetual debate about the damaging effects of demographic pressure. An Essay on the Principle of Population asserted that, unchecked by canon, custom or calamity, a nation's fecundity will outpace its ability to produce or procure food. A similar phenomenon can weaken a company. IBM's revenue per employee has fallen since 2004, two years into Sam Palmisano decade-long reign. IBM's subsequent leader, Ginny Rometty, hasn't been able to reverse this dire trend; consequently, IBM's corporate culture is losing vitality as its employees become financially undernourished.
For IBM, as for other cultural aggregates since biblical times, it's not just about recognizing the problems posed by absolute or relative poverty, but about developing and implementing an effective coping strategy.
In ancient Egypt, according to the Old Testament and the Koran, a worried pharaoh turned to a prophet named Joseph to interpret disturbing dreams. In the dreams there appeared seven fat cows and subsequently seven very lean ones that ate the first seven. In another sequence, seven healthy corn plants were followed by seven sickly ones that consumed the first seven. When the pharaoh, following a courtier's suggestion, asked Joseph, who was a prisoner at the time, what the dreams meant, Joseph said that the pharaoh had been given a timely and valuable warning: Egyptian agriculture would be blessed with seven very good years but after which it would suffer seven years of crop failures and potential famine. The pharaoh reckoned that careful management of the bumper crops might enable his empire to ride out the lean years . . . if he could find a way to do that.
There was nobody near the top of the political heap in Egypt that the pharaoh could rely on to competently manage the Egyptian economy through a 14-year cycle. So the pharaoh took a chance. He appointed Joseph, an untested character and an imprisoned alleged criminal to boot, his chancellor. Joseph was charged with developing means to store a portion of Egypt's annual harvests and, after seven years, if hard times hit, to manage the distribution of the previously stored grain.
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NERVES OF STEEL
As 2014 drew to a close, the Wall Street Journal, which undoubtedly can recognize an outfit in decline, said IBM shares would be the year's worst performing component of the Dow Jones Industrial Average. IBM was the biggest loser of the DJIA in 2013, too. The last company to do so poorly was Bethlehem Steel in 1995 and 1996; it was kicked off the DJIA in 1997. In 2001, Bethlehem went bankrupt, and two years after that it was dismembered. If IBM doesn't change quickly and dramatically, it is a goner.
Goodwill impairment may be the ruin of IBM. So, perhaps it's time for Big Blue's customers to understand just what it means. When one company buys another for more than the market value of its net assets (meaning assets minus liabilities), the difference between the net value and the acquisition price is called goodwill. When both companies are publicly held and the acquiring company pays more to buy its target than the price the stock market had previously concluded was its worth, the difference is easy to discern as goodwill.
For instance, if IBM bought a publicly held company with a total market capitalization of $1 billion and paid $1.5 billion to clinch the deal, IBM would put on its books assets totaling $1 billion plus a half billion dollars denoted as goodwill. Things can get a bit more arbitrary if the acquired firm is privately held, but accountants will arrive at a figure they stipulate is the market value of the company and call the amount by which the purchase price exceeded that value goodwill.
In the past, the acquiring company would slowly write down the value of goodwill, taking as long as 40 years to complete the process, slowly digesting the acquisition the way a python digests a large meal. But accounting rules change and in the USA, since 2001, companies are not permitted to amortize goodwill. They are, however, required to review the goodwill on their books. If a company decides that one of its acquisitions is no longer worth its former value because it could not be sold for at least the original acquisition price, the acquirer is supposed to declare a diminution of the goodwill on its balance sheet. The result would bring the acquired company's declared value in line with its actual or presumed market worth. The sum lopped off goodwill is called impairment.
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TWO CALVES AND CALVES NOT
In Semitic mythology, Jews at the foot of Mount Sinai embraced an invisible God rather than one represented by a golden statue of a calf. From that pivotal moment, the followers of Moses and eventually the other people of the book, Christians and Muslims, vested their faith in software rather than hardware. A couple dozen centuries later, the resultant monotheistic civilization controls the bulk of the word's wealth and power. This year, one of that civilization's great industrial institutions, IBM, shifted the burden of its strategic trust from physical hardware to intangible software and cloud computing.
For many customers, and probably for most of them, IBM's evolution is late rather than early. Users of IBM i technology have long since learned that Big Blue re-hosts their computing environment from time to time. In the past there has been some disruption (but not the same amount for every user) and a lot of progress (but not always as much improvement in price/performance as performance for legacy workloads). If IBM changed the i's hardware platform again or even embarked on a course that promised changes every few years, committed users would adapt. They would embrace gains from whatever progress directly helped them. And some would grumble. Change might lead to defections, but for lively i shops, lack of change would present an even greater temptation to exit the IBM i universe. The System/34, System/36, and their families faded away when they were frozen, not while the equipment was evolving.
Mainframe customers are often more tightly bound to their hardware than i users because quite a few run ancient applications or use venerable patches that depend on the specifics of IBM's instruction set and its implementation. Some of the oldest code run by mainframe shops is cloaked in mystery, its origins uncertain, its documentation little more than folklore, its behavior when run on a new platform capable of surprises. Nevertheless, mainframe shops have flocked to less costly IBM-compatible systems whenever they have had a chance, from the long-ago days of Amdahl and Hitachi PCM processors to the more recent FLEX and Hercules platforms. Amdahl and Hitachi built IBM-like hardware and wrote IBM-like firmware. FLEX and Hercules emulations run on X86 hardware. Users generally got all their code to work and only abandoned or avoided the non-IBM alternatives when Big Blue scared them off. So, if IBM introduced a new hardware generation and promised support for all or nearly all legacy code, as it has in the past, offering in return improvements in functionality, power and particularly value, users would stick with their big iron. As is the case with the IBM i, progress can keep the mainframe alive, while paralysis would kill it off.
The IBM Power platform that is used for AIX and Linux as well as the IBM i operating system changes a bit with each generation, more or less the way X86 and ARM processors do. Generally speaking, instruction sets get richer, functions that have become more important to users get additional improvements and characteristics that are connected to fundamental properties of chips, such as cell geometries, change as transistors and their interconnections become smaller.
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A lot of things are going wrong at IBM. Frustrated investors, disgruntled employees, and anxious customers are trying to figure out why. They share the absurd belief that proper understanding could mitigate Big Blue's malaise. For an individual, knowledge might cure pain caused by ill-fitting shoes; but not the agony of terminal cancer. For a vast organization like IBM, myriad woes are a concomitant of existence. Why? The myth of Pandora provides an explanation. Tricked by Zeus and trapped by her nature, Pandora unsealed a container and unintentionally beset mankind with perpetual afflictions. IBM can prevail, but not without struggle.
Knowing that existence brings difficulties doesn't change the nature or severity of the problems. In Greek myths, immortals and mortals alike encounter challenges. If a protagonist overcomes a threat, the tale of that victory is a single case. The general nature of existence remains the same; vicissitudes persist. This is the case with IBM, too. It can meet and overcome specific problems, or fail to do so, but neither a single victory nor any group of victories will change the inhospitable climate of the world in which it competes.
But before I explore the possibilities available to IBM, I would like to make sure we all know in a basic way the story of Pandora and how it was erroneously changed by a 15th century Dutchman named Desiderius Erasmus, to the detriment of our appreciation of Hesiod, a poet who lived several hundred years before Christ, and of the engineering skills of the Classic Greeks.
Like Eve in the Old Testament, Pandora is a woman who brings the wrath of God down on the human race. Also like Eve, the first woman in the Bible, Pandora is the first woman in Greek mythology. Pandora was created by Hephaestus under the direction of the great god Zeus. She was beautiful and various lesser gods gave her many attractive characteristics plus a couple of flaws, such as the double-barreled gifts for persuasion and mendacity. Unlike Eve, who was created as a gift for Adam, Pandora was devised to punish men. The bride of Epimetheus, dull brother of the sharp Prometheus, she was given as a gift a sealed container and warned not to open it. But Pandora would succumb to curiosity, as Zeus knew she would, and open the vessel, releasing its noxious contents. That act gave Zeus his revenge on mankind for adopting the fire that Prometheus gave to humans, defying the will of Zeus who had wanted fire to belong only to the gods.
The container opened by Pandora was not a box but a pithos, which is the Greek term for a very large jar or urn. During the Iron Age the Greeks learned how to make these sturdy containers and used them to store oil, grain, and other things that were kept under a sealed lid. Large ones were a couple meters tall and, when full, could weigh one or two tons. Some stories about the supremely witty philosopher Diogenes say he lived in a pithos, although other accounts of his life have him sleeping in a barrel.
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WHEN OXFORD WAS OBNOXFORD
It was December 1208 or 1209. New Year's Day in England was March 25; the month after December 1208 was January 1208. Somebody bumped off a young woman who lived in Oxford. The villagers blamed university students, and, led by their mayor, hanged two. The remaining academics blew town right away, many moving east from their ford on the River Thames to a bridge over the River Cam. That is how Oxford University gave birth to Cambridge. They were the sole universities in England for 600 years, providing an organizational model for many academic institutions and some commercial companies.
The University of Oxford got its start a couple hundred years before the establishment of its rowing rival. The village, well outside the reach and largely beyond the influence of London, became a home for schools, not yet colleges, engaged in training theologians for the holy and lawyers for those less so. They were chartered and influenced by the Roman Catholic Church, but nevertheless retained some independence. They were governed by canon law rather than civil law, a fact that made the hanging of two clerks, as students were known in those days, even for alleged participation in a murder, extralegal.
At the time, however, there wasn't much the Church could do to intercede. England's King John had a falling out with Rome. England was under an interdiction for five years beginning in 1208. John, who didn't accept the Church's choice for Archbishop of Canterbury, was excommunicated by Pope Innocent III.
The last thing college masters, nominally supervised by bishops, wanted was to fight the political establishment. They had a lot to lose, including the tax exemptions and other legal perquisites. Eventually, John caved, apologized to the Pope in writing and thus ended the sanctions. By 1213 the hubbub in Oxford had settled down to some extent and the University of Oxford enjoyed a rebirth. A couple years later John make another important compromise when he signed the Magna Carta, sharing power with other nobles and putting England on a path that would eventually lead to democracy.
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WHO SAYS ELEPHANTS CAN'T DIE?
Fifty years ago, the American computer industry had eight major participants. IBM had about two-thirds of the market; seven dwarfs shared the rest, and none of them is particularly important anymore. That is the nature of enterprise. Many companies prominent in the Dow Jones Industrial Average back in 1966 have faded. Looking back a century, only General Electric can be found in both the 1914 list and today's roster. IBM was in the Dow from 1932 to 1939, when it was replaced by AT&T. IBM didn't make the DJIA again until 1979 and now it might not get a 100-year run. The way things are going, it might not even get half that far.
The last time IBM looked like it was headed for the glue factory was in the early 1990s. The company's board brought in Lou Gerstner and within a few years it was clear that Blue was going to be big again. Gerstner's reinvention of IBM as a services company gainsaid the naysayers. By the time Gerstner left IBM in 2002, observers declared IBM saved. Under Sam Palmisano, Gerstner's successor, IBM continued to forge ahead, propelled by growth in services, boosting the software business and taking IBM out of two classes of hardware that had thin profit margins: small computers and disk drives. But all was not rosy.
Toward the end of Palmisano's reign, some old issues that many observers thought were dead came back like zombies to haunt IBM. The client business, which IBM had abandoned, took off like a rocket. It didn't rise because of traditional personal computers. Instead, it blossomed as smartphones and later tablets began to perform many of the tasks that initially made PCs so popular and then learned compellingly attractive new tricks. Smartphones and tablets incorporated sensors along with geolocation apparatus and merged these technologies with the communications capabilities that made PCs so popular. The sensors enabled the clients to adapt to their motion, orientation and ambient conditions. The navigation subsystems enabled client gadgets to know where on earth they were located. And the communications features that expanded to include not only old text messaging and email but also telephony and videophone capability enabled app developers to give smartphones and tablets myriad amusing, informative and transformative capabilities.
All this stuff not only boosted Apple, which more than any other company has invented the new world of smart, interactive clients, but empowered Google, the master of mobile monetization, and fueled Amazon, the wizard of shopper-friendly systems. The transformation of information processing into a collection of intensely interactive processes and services has stunned large, powerful and talented companies that only a few years ago were feasting at the dot com diner.
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IBM FOURTH QUARTER SALES DOWN, EPS UP, POWER DOWN, MAINFRAMES UP
IBM closed 2016 with respectable financial performance. Revenue slipped a bit but earnings per share rose. Hardware sales fell, but the big decline came from falling intake in the Power systems market, while mainframe revenue rose. IBM's services business presents a mixed picture, and it may be suffering as customers move from traditional methods to cloud-based services. The company wants investors to focus on its stratgic imperatives, activities that it believes will provide a healthy future, rather than legacy operations that are giving way to newer alternatives.
Overall intake from systems and software dropped about 12 percent to $2.5 billion, of which about 20 percent came from operating systems software. IBM's most severe challenge is visible in the Power segment, mainly sold in the Unix market but also supporting the IBM i business systems; Power revenue fell 34 percent compared to last year's fourth quarter. Storage sales also took a hit, dropping about 10 percent. But IBM z mainframes did well, bringing in 4 percent more than they did in last year's fourth quarter.
IBM's services revenue remains under pressure, and the outlook for next year is grim. Contract signings fell 8 percent from the level they achieved during the fourth quarter of 2015. IBM's software business presented a mixed picture, with middleware and applications revenue up 6 percent as transaction processing software fell 3 percent.
Wall Street financial analysts vary in their view of IBM's prospects for 2017, and the company shares gyrated a bit during the 24 hours following IBM's earnings report. Basically, the bullish analysts remain optimistic and the bears insist IBM's move into new realms is taking too long to produce good results right away.
IBM FORTH QUARTER PERFORMANCE BY SEGMENT
|Systems Hardware And Software||2,530||156||579||21.6%|
|Technology Services & Cloud||9,307||214||1,882||19.8%|
|Global Business Services||4,121||100||522||12.4%|
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