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Up in the Air

By Eric Nee  |  Posted 01-17-2003 Print

Up in the Air

The upheaval in the computer hardware industry is not unlike what's happening in the airline industry. Think of the old carriers—United Airlines, American Airlines and Delta Air Lines—as the legacy vendors of their industry: high-cost firms providing a multiplicity of products and services for a premium price, as if the airline business were stuck in its past as a luxury enjoyed by the few. Then along comes Southwest Airlines, with a low-cost business model, significantly undercutting the major carriers on price while offering benefits such as better on-time performance. Southwest's advantages didn't matter so much during the high-flying 1990s, when the price of an airline ticket meant little. But the failings of the old model became glaringly obvious when the economy turned down and the Sept. 11 terrorist attacks slowed air travel further.

Today, the major carriers are scrambling to find a way out of the mess. United declared bankruptcy in early December, American is cutting prices on regular flights, while Delta has plans to imitate Southwest by establishing a low-cost carrier of its own, something it has tried before, with miserable results.

If this sounds familiar, it should. Dell's competitors have tried similar tactics, with little success. So change they must. IBM has been the most successful. Over the last decade, Big Blue has all but exited the desktop PC business—a bold move considering the company started that industry. Instead, IBM is focusing on hardware markets where it can offer unique technology, like laptops, or leverage its strength in services and software, like servers. Today, hardware comprises just 36 percent of IBM's revenues.

Meanwhile, IBM has steadily expanded its software and services business, to the extent that it now makes up 60 percent of total revenues, by far the most of any of the old-line computer companies. Software revenues totaled $3.1 billion in the third quarter, while services totaled $8.9 billion. The recent acquisitions of PwC Consulting and Rational Software only add to the company's strength in these areas.

Unlike IBM, HP decided to tackle Dell head-on, first by building PCs to order. But the company was unwilling to give up its retail channel or its extensive R&D budget, and its refusal to go all the way into made-to-order PCs doomed its effort to compete on Dell's terms.

Then it bought Compaq. But that's the same failed strategy American Airlines employed when it bought Trans World Airlines in 2001. The deal helped American lay claim to the dubious distinction of being the largest carrier in the world, but did little if anything to help American compete with Southwest. Like American, HP has spent the last year laying off thousands of employees in an attempt to reduce its cost structure.


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