After another dismal performance in its System i server division last quarter, IBM ( IBM) is apparently shaking up its hardware group to re-invigorate the longstanding product.

According to longtime IBM observer and shareholder Bob Djurdjevic of Annex Research, IBM has recently created a small- and medium-sized business SMB division in the hardware group to develop the SMB market, with System i "as the vehicle chosen to underpin the effort."

Amid its fourth-quarter earnings report earlier this month, the company said System i revenue fell 10% (14% at constant currency) compared with the year before.

It was a familiar result: This was the fifth sequential quarter that System i revenue declined. In the third quarter, System i sales dropped 22%.

While not a cash cow like IBM services are, the company's hardware segment is still an important part of the business, representing about a quarter of overall revenue. IBM does not break out revenue for its individual server products.

Many IBM investors agree that System i needs a shot in the arm, and targeting smaller businesses would make sense.

"One issue with IBM is so much of their customer base is large corporations," says Bill Gorman, vice president of PNC Wealth Management, which holds IBM shares. In terms of the company's exposure to SMB, "I would say there's room to grow there."

"It's my understanding that SMB spending has been pretty aggressive on this IT spending cycle," he says. "System i hasn't benefited during that time. Obviously, they need to make that more of a priority."

Kim Caughey, a senior equity research analyst with Fort Pitt Capital Group, which also holds IBM shares, says that "the SMB market would be a good target for the i series, but it's going to be a tough row to hoe, and that's because there's so much competition out there for department-sized servers."

IBM shares closed Friday down 6 cents to $97.45.

The company has named Marc Dupaquier, vice president of worldwide marketing for IBM's highflying software group, to lead the new SMB division in hardware, Djurdjevic says.

If Dupaquier is making the jump to hardware, it could bode well for System i. The company's software group had another stellar quarter, growing at its fastest rate in five years and boosting revenue by 14%, or 11% at constant currency.

Mark Shearer, general manager of System i, declined to comment on any speculation about a new SMB division in hardware, but he outlined new strategy for System i that appears to support the idea, with marketing an important component of success.

System i was introduced in 1988 as the AS/400, renamed the i Series in 2000 and renamed again as System i in early 2006. The system is preloaded with storage, server, software, security and networking in one box and is designed to run an entire business's operations.

"We're trying to accelerate new client acquisitions, new System i sales," Shearer says. "Since the beginning of the AS/400, that's always been best achieved by solving a client's business problem."

"Our application focus is designed around simplicity and integration," he says.

That involves combining IBM hardware and system software with business products as well as targeting local markets, Shearer says. IBM is working with local application providers in specific "industry verticals" who can market and sell the entire package to local small- and medium-sized businesses.

For example, IBM is working with a New York City firm that specializes in applications for labor unions. The local company packages System i with its own industry-oriented application and sells it to that specific market. In this case, labor unions are the target market.

"We're trying to co-market with local firms ," Shearer says. " We're relying on our business partners to provide the industry-specific skills and solutions."

IBM started the revamped program in the fourth quarter in 10 market segments (such as local produce providers in France and local retailers in Australia) and will expand to 80 in the current quarter.

The new packaging approach could be the jumpstart that the segment needs to return to growth.

"Trying to push servers out the door ... just doesn't make sense on its own," Caughey said. "Good for them that they figured it out."

If you liked this article you might like

EDS Back on Track

EDS Back on Track

Citrix to Miss 10-K Deadline

Citrix to Miss 10-K Deadline

VeriSign to Miss Filing Deadline

VeriSign to Miss Filing Deadline

Audible Shares Skyrocket

Audible Shares Skyrocket

Audible Narrows Loss

Audible Narrows Loss