International Business Machines Corp, which has for decades largely avoided competing against rivals on price, is being forced to do just that as companies spend less on computers, software and services.
The world's largest seller of computers said it has been matching prices for more than 12 months on some of Dell Computer Corp's server computers, which run corporate networks and Web sites. IBM started cutting prices on personal computers by as much as 34 percent in July to compete with Dell and other rivals, First Albany Corp analyst Walter Winnitzski said.
IBM, whose advertisements and press releases have omitted the price cuts, has long preferred to focus more on selling bundles of services and software with machines. The cuts, along with cheaper financing IBM announced last month, may boost sales at the expense of profit margins, especially if IBM gets dragged into a price war with low-cost producer Dell, investors said.
"I don't think winning business on price from Dell is something that IBM wants to do, but they have to do it," said Marty Shagrin, who helps manage US$65 billion at Victory Capital Management in Cleveland and owns shares of Dell and IBM.
IBM was so unhappy with sinking prices in retail PCs, caused by competition from rivals including Dell, that IBM in 1999 left the business. Sanmina-SCI Corp makes desktop PCs for IBM, which resells them to companies and consumers.
The company's "refuse to lose" policy with Dell on servers powered by Intel Corp chips has been in effect for more than a year, said Jeff Benck, IBM's director of marketing for Intel servers. "We have been extremely aggressive with Dell on price."
Intel servers, which cost US$499 to US$50,000, are used by businesses to run applications including e-mail and inventory management on Microsoft Corp's Windows operating system.
"IBM can undercut competitors [in servers] and make that up through services and solutions and software sales," said Adam Friedman, who helps manage US$23 billion and about 100,000 IBM shares for National City Corp.
IBM last month offered a server with 2 Intel Xeon chips operating at speeds of 2GHz, along with 512MB of memory and an 18GB hard-disk drive, at a retail price of US$4,222, said Joseph Zhou, an analyst with research firm DH Brown Associates Inc. A comparable Dell PowerEdge machine was listed for about US$300 less though IBM is making up the difference for buyers because all computer makers offer discounts, he said.
Last month, IBM expanded financing discounts for small and medium-sized business customers to entice sales. It also has cut prices on its database software used by those types of companies as well as notebook PCs. IBM defines small businesses as those with 99 or fewer customers and medium companies as having 100 to 999 workers. The moves are being closely watched by investors.
"Any time we see aggressive pricing activity, we pay attention to it because it could have a major impact on the company's profitability," said Kay Doremus, an analyst with Banc Of America Capital Management, which manages US$230 billion and owns IBM shares.
"Pricing is definitely a key element to the decision process right now in terms of [companies] purchasing PCs and servers."
Banc of America owned 8.5 million IBM shares as of September.
Sam Palmisano, who succeeded Louis Gerstner as IBM's chief executive in March, has been cutting jobs, costs and underperforming units to maintain profitability amid slumping corporate demand for computers, software and chips. IBM's quarterly net income has declined year-on-year the past six periods. Sales from continuing operations rose 0.2 percent in the third quarter, after dropping the past five periods.
IBM has declined to cut or match prices on more expensive Unix servers that are powered by the company's POWER4 chips and run the Unix operating system, said Karl Freund, a vice president of product marketing for IBM's server business.
The shares of IBM fell US$0.71 to US$80.01 at 4pm in composite trading on the New York Stock Exchange yesterday. They have dropped 34 percent this year. Dell shares fell US$1.12 to $29.82 on the NASDAQ Stock Market.
IBM's Intel server revenue increased 29 percent in the third quarter to US$306.7 million, according to Gartner Inc's Dataquest research unit. IBM's sales rank third in the market, behind Dell and Hewlett-Packard Co, according to Dataquest. Armonk, New York-based IBM, which ranks first in sales of all servers, declined to give the dollar amount of its server sales.
Sales in IBM's hardware business, which includes computers, chips and components, dropped 11 percent to US$33.4 billion last year. It is IBM's second-biggest division, after services.
Dell is "pretty confident" in its market position, Dell spokesman Bruce Anderson said.
Other rivals like Hewlett-Packard and Gateway Inc have unsuccessfully tried to beat Dell on price, though investors say IBM is better insulated in its new willingness to discount.
The pricing competition "impacts Dell more because they don't have those other businesses," Victory Capital's Shagrin said. "Dell should be worried about IBM. The question is how long IBM wants to or will be able to sustain such aggressive pricing."
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