IBM's Win-Win in Exiting PCs

Certain names and products go hand in glove. Like, say, IBM (NYSE: IBM  ) and computers. It was the big mainframe manufacturer's 1981 launch of the IBM PC -- which challenged Apple's (Nasdaq: AAPL  ) fast-selling Apple II -- that really launched the personal computing marketplace.

For a base price of $1,565, you got an Intel (Nasdaq: INTC  ) 4.77-megahertz 8088 microprocessor, one 160-kilobyte floppy disk drive (no hard disks back then!), 16 kilobytes of memory, and a version of Microsoft (Nasdaq: MSFT  ) BASIC in read-only. Add in the VisiCalc spreadsheet -- the killer application -- and the IBM name got the PC onto corporate desktops.

Compaq Computer, now part of Hewlett-Packard (NYSE: HPQ  ) , changed the landscape forever with its 1984 launch of the first cloned IBM PC. (For those walking down memory lane with me, remember when 1984 stood for George Orwell and Big Brother -- not the reality TV show?)

IBM's pricing strategy worked against it and opened the market for powerful, lower-priced PCs, which, over the years, dominated the market.

As Fool writer Seth Jayson reported last week, the rumor mill was churning that IBM would sell its PC business. The company made it official last night when it announced that Lenovo Group, China's leading PC manufacturer, would buy the business for approximately $1.75 billion.

So, what does it all mean? IBM says it will be free to focus on the business client. Really? IBM was selling PCs mostly to business clients! The reality is that $9 billion in sales (roughly 10% of total sales) is being jettisoned at an extremely low price-to-sales ratio because it was producing red ink and IBM has no critical mass to turn that situation around.

The tombstone on the IBM PC business will read, "We created the market and got buried by the competition." But the winners in this deal are IBM, Motley Fool Stock Advisor recommendation Dell (Nasdaq: DELL  ) , and Hewlett-Packard. IBM will stop the flow of red ink in personal computing, and that will help its profitability. Lenovo, even with IBM standing behind it, will certainly lose customers who were buying the IBM reputation -- and that will help Dell and HP.

Fool contributor W.D. Crotty, an application software consultant, does not own stock in any of the companies mentioned, but he did write this article on a Dell computer.


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