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JPMorgan Tech Conference: IBM Wants to Keep Its Noncompetitive Edge

SAN FRANCISCO -- Big Blue is happy to remain the man in the middle.

Steve Mills, senior vice president of IBM's (IBM - Get Report) software group, made that clear Thursday to investors at the JP Morgan H&Q Technology Conference who brought up a topic that's often speculated upon: Will the monolithic technology giant expand its reach into software applications, to compete head-to-head with the likes of SAP (SAP - Get Report), PeopleSoft (PSFT) and Microsoft (MSFT)?

Don't bet on it.

"We're certainly not going into the classical applications area," Mills said. "When you do that, you end up competing with everyone in the space, and then they don't want to partner with you. We get more revenue around SAP than SAP gets itself."

Mills was referring to the fact that many software vendors, like SAP, PeopleSoft and Microsoft, build programs such as customer relationship management or supply-chain management software that works in conjunction with IBM's DB2 database or its WebSphere applications server. Of course, the more software vendors who write programs that work with IBM, the easier it is for IBM to sell its own products.

Mills didn't say how much revenue IBM makes from services and "middleware" software set up to work in tandem with software from SAP -- or PeopleSoft or Microsoft, for that matter. But try this on for size. Of the roughly $32.4 billion in gross profit, not revenue, that IBM racked up in year 2000, more than $10 billion came from the company's software group. For the sticklers out there, IBM's 2000 revenue came in at $88.4 billion.

The IBM vice president contrasted his firm's strategy with that of Oracle (ORCL - Get Report), which has been on an ambitious crusade to become the software company that's all things to all companies' computers. Stemming from its core database business, Oracle has pushed into building software that directly competes with the above-mentioned software firms. It has also forged ahead in the applications server area -- software that helps connect the front end of a Web site to the database that sits behind it -- to compete not only with IBM, but also with aggressive younger buck BEA Systems (BEAS).

Touting the 59 strategic partnerships IBM has with independent software companies, Mills said, "We have Oracle to thank because it competes with so many of these companies."

Of course, the underlying catalyst behind Mills' comments is that IBM competes very much with Oracle itself -- and it will likely only do so to a greater extent in the future. That much became clear last week when IBM announced its $1 billion acquisition of Informix's database business.

Oracle currently claims to have 63% of the database market. With Informix, IBM could have as much as 22% of the business.

Mills said IBM would initially maintain two independent software environments for its database business in an effort not to alienate former Informix customers. Oracle has vowed to steal those customers, betting that they'll be miffed if IBM forces them onto the DB2 platform.

"We're clearly going to maintain two software environments for a long time," Mills said. "After all, all the Informix people employees are coming over to IBM. We don't want customers to be forced into anything."

IBM's Mills had a slightly different take on the economic environment than other software execs presenting here. Instead of emphasizing how software spending has slowed dramatically, he stressed that, really, business has reverted back to the way it was before it went insane in the late 1990s.

What else would you expect from someone who works for a technology company that's been around since 1924?

"Currently, what we see is a return to normal," Mills said. "Customers used to do a lot of return-on-investment evaluation, and now we're living in a normal marketplace where they're doing it again. You're not picking money off of trees like you may have."

He said that kind of behavior is now "uniform around the world."

From where Big Blue sits, it ought to know.

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