Aging Tech Dogs Seek New Tricks

EMC's(EMC Quote - Cramer on EMC - Stock Picks) purchase of software outfit Legato offers one more example of the reinvent-yourself theme reverberating through techland. With the once high-and-mighty PC now looking a lot more humble -- retailing at the sub-$500 mark -- the big-name companies that piggybacked to fame on boxes are trying to make inroads into more lucrative stuff.

Software is the most appealing route for companies bent on diversifying, and no wonder, with its fat margins. Case in point: Last year, Big Blue's software division claimed a gross profit margin of 84.4%, compared to a relatively low 27.1% margin for hardware.

It's no surprise that hardware makers have made a spate of software acquisitions over the past six months or so -- witness EMC's recent purchase of a storage-manager product from BMC(BMC Quote - Cramer on BMC - Stock Picks), Sun's(SUNW Quote - Cramer on SUNW - Stock Picks) acquisition of Pixo, and, on a much bigger scale, IBM's(IBM Quote - Cramer on IBM - Stock Picks) purchase of Rational Software.

Rush to Serve

But boxmakers also have made a tremendous push into services -- so much so that the industry has started to see some of the same creeping commoditizing pressures that have afflicted hardware.

Still, exhausted by relentless battles for hardware market share, big boxmakers have clearly come to regard the two-fold combination of software and services as the wave of the future. IBM chief Sam Palmisano has predicted that by 2005, more than two-thirds of industry profits will come from services and software, up from 42% in 2000, according to a Forbes report.

IBM, of course, elicits knee-jerk fawning for its timely makeover into a services shop. Around the time the hardware economy was hitting the skids, Big Blue was watching its share of services revenue surge north of the 50% mark. By last year, services and software together accounted for 61% of total revenue. By contrast, the hardware division chipped in a mere 34% of 2002 revenue, down from 41% in 2000.

Further strengthening its services and software portfolio, IBM has made discriminating buys over the past year, plucking up consulting shop PricewaterhouseCoopers for $3.5 billion and Rational for $2.1 billion.