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IBM Marshals Software Unit Against Digital : Reorganizes to Beef Up Position in Mid-Size Computer Market

July 23, 1987|VICTOR F. ZONANA | Times Staff Writer

SAN FRANCISCO — International Business Machines on Wednesday unveiled an internal reorganization designed to bolster its position in the software business and strengthen its hand against Digital Equipment Corp. in the hotly competitive market for mid-sized computers.

IBM said it has established a new application systems division to develop and acquire application software for all sizes of the company's computers. The unit will also provide technical support to outside software developers and form partnerships with selected software companies similar to the one the IBM established earlier this year with Lotus Development.

In essence, what IBM is doing is creating the world's largest computer software company, with approximately 6,000 employees and 11 research laboratories in the United States, Europe and Japan. Previously, these employees were scattered among many divisions.

Application software consists of programs that enable computers to perform specific functions. It ranges from relatively simple word processing programs for personal computers to complex programs capable of processing thousands of transactions every minute on mainframe computers. The market for application software is $15 billion a year and growing fast.

Software is a crucially important area for computer manufacturers, in part because of the revenue it generates. In IBM's case, software sales account for 12% of revenue. More importantly, customers increasingly are basing their decisions on what hardware to buy on the quality of available software.

Catching Up With Hardware

For example, in the key battleground for sales of minicomputers--those sized between desktop computers and giant mainframes--Digital Equipment Corp. has been gaining ground on IBM in part because of a plethora of good applications software that runs on Digital products.

"This new division reflects the importance we and our customers place on application software," Edward Lucente, head of IBM's Information Systems Group, said in a prepared statement.

Software development throughout the computer industry has lagged far behind advances in hardware. "It has become clear to us that without a tighter focus on application software, our customers wouldn't be able to take full advantage of the new technology," Joseph Guglielmi, newly named president of the division, said in an interview.

He said the market for applications software has been growing for at least the past five years at more than 20% to 25% per year and will continue that way into the early 1990s.

Analysts peg IBM's share of the market for application software at between 15% and 20%--far less than its 50% market share for systems software, which controls the basic operations of computers.

"Application software is a highly fragmented market," explained William H. Shattuck, software analyst for Montgomery Securities in San Francisco. "There are hundreds of vendors, and customers typically require a lot of support and hand-holding."

But Shattuck said he does not view the announcement as a threat to outside software developers. "There are too many good opportunities out there," he said.

Indeed, IBM went out of its way to reassure outside developers that it wants to work with them. "We want to actively engage the software writing community so they will write for us," Guglielmi said.

"Where appropriate, we will make cooperative marketing arrangements or purchase the rights to an outside vendor's package," he added.

He pointed to the April 27 announcement that Lotus would develop a mainframe computer version of its popular 1-2-3 PC spreadsheet program, which performs financial calculations, as a model for future transactions with outside vendors.

IBM also announced other action to shore up its position against Digital Equipment, which Wednesday reported a 58% jump in second-quarter net income. IBM formed a new marketing support organization for mid-range products, IBM's terminology for minicomputers.

The move, said Lucente, "will allow us to increase attention and resources on this very important part of our business."

Richard Mikita, director of processor research for International Data Corp., a Framingham, Mass., market research firm, added: "This is an organizational move that will give IBM the ability to say with more authority that it is concentrating on the mid-range market."

"In recent years, DEC has stolen the high ground," he added. "IBM is turning its gaze inward to find better ways to compete."

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