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TheStreet Open House

IBM: Tech's Golden Oldie

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Yet unlike its neighbors and rivals in Silicon Valley, IBM has roots planted firmly in the early twentieth-century, an era which gave birth to the company's clubby and appropriately-titled rally cry, Ever Onward IBM.

Initially called the Computing-Tabulating-Recording Company (CTR), the firm was renamed International Business Machines in 1924 by Thomas J. Watson Sr., the man credited with turning the company into a global tech behemoth. The shift towards computing happened 20 years later, though, when the company created its Automatic Sequence Controlled Calculator, described as the first machine to execute long computations automatically.

The innovations soon started flowing, including Dynamic Random Access Memory (DRAM), UPC barcodes, the floppy disk and magnetic tape drives. IBM also sat firmly at the forefront of PC development during the 1970s and played a not-so-small role in helping NASA to help put a man on the moon.

Along the way Big Blue learned to use PR to its advantage, pitting its deep, uber-geeky technologies against top human minds to highlight advancements in computer intelligence. The company's Deep Blue supercomputer famously defeated world chess champion Garry Kasparov in 1997 (albeit amid some controversy), and Watson, the sleek rack of Power 750 servers powered by 15 terabytes of RAM and 2,880 processor cores, piqued the interest of millions of Jeopardy! enthusiasts when it appeared on a three-night, two-game run against two of the game show's most winningest champs. ( And yes, Watson won.)

IBM has already discussed the application of Watson's deep analytics technology in other areas such as healthcare, where it says that the underlying tech can trawl vast quantities of data quickly to help doctors make diagnoses.

It's IBM's agility, though, that has won some of the biggest plaudits on Wall Street. In the 1990s, for example, under pressure from consumer-centric hardware rivals such as HP (HPQ) and Dell (DELL), the company shifted a bulk of its resources to software and services.

These two areas accounted for more than 75% of the company's total revenue, the company said during its recent fiscal first-quarter results.

Then, in 2004, IBM sold its PC business to Lenovo, a move that helped keep the company's margins healthy at a time when PCs were becoming increasingly commoditized.

Pund-IT's King says that IBM has also proved adept at embracing emerging technologies, such as in 1999, when it was the first major vendor to announce support for Linux, the open source operating system. "What IBM understood at that time, that a lot of vendors didn't, was that Linux would be a lingua franca that worked across the entire data center," he told TheStreet. Additionally, IBM's decision to port Linux to mainframes gave the high-end enterprise systems a new lease of life.

"There's a nimbleness that's hard to see because the company has tended to be a bit ahead of the curve," said King. "For example, I attended the Lotusphere conference two or three years ago when IBM announced a group of social networking tools that it was incorporating into its Lotus Suite -- I didn't hear of anyone else doing that at the time."

For the future, cloud computing looms large; IBM expects to generate around $7 billion from the technology by 2015. IBM launched its "Blue Cloud" strategy in 2007, which aims to allow corporate data centers to more easily and more quickly compute. The company recently unveiled a slew of new products and teamed up with the likes of Lockheed Martin (LMT) and Citigroup (C) to develop cloud standards.

IBM: Idiot Boxes Not for Us



Other huge target markets include business analytics, an area where IBM has recently spent lots of M&A dollars, and smarter planet, an initiative to sell services and technology into industries such as energy, transport, healthcare and manufacturing.

"I think IBM has done a terrific job over the past several decades by increasing the strategic-ness and richness of its revenue mix," said Brian Marshall, an analyst at Gleacher & Company, in an email to TheStreet. "IBM will continue to migrate down this path with a specific focus on analytics, smarter planet and cloud computing."

Overall, Marshall expects IBM to continue to grow at around one to two times GDP while offering investors improved margins.

Buoyed by consistently robust quarterly numbers, IBM raised its 2011 earnings guidance and recently saw its market cap edge past Microsoft's (MSFT) for the first time in 15 years.

IBM is clearly a very different beast to the one that started life in five modest buildings in Endicott, N.Y. Once focused on sales of products such as servers and mainframes, IBM's future success rests on its ability to sell customers a mix of software, services, and hardware.

"I think that, in the back of IBM's mind, the company is clearly an infrastructure player now," added Pund-IT's King. "In a sense they would like to be the GE (GE) for the information industry."

--Written by James Rogers in New York.

>To follow the writer on Twitter, go to http://twitter.com/jamesjrogers.

>To submit a news tip, send an email to: tips@thestreet.com

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