Thoughts on IBM

During class today, I was thinking about the IBM's shift to services, and wondered if part of their strategy in doing this is to fuel mainframe sales and follow-on services. A recent Economist article led to this thinking:

"High 'switching costs' explain in large part why mainframes are still a good business for IBM. It is the only big firm left selling them, at prices that start at $100,000 but often reach the millions."

I dug around IBM's most recent 10K, and although their hardware sales are a small fraction of their overall revenues, the point I'm trying to make is that sales of software and maintenance contracts don't seem to be the high-value services advertised by the Smarter Planet initiative. Again, from the Economist article:

"Sales of mainframes are said to have brought in about $3.5 billion a year, on average, in the past decade. Although this is only about 3.5% of the firm’s overall revenue, each dollar spent on hardware pulls in at least as much from sales of software and maintenance contracts. Toni Sacconaghi of Bernstein Research estimates that 40% of IBM’s profits are mainframe-related."

(Full article here)

Numbers from their 10K: