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    We’re not changing our name. Just everything else. And we’re not the only ones. Millions of enterprises aren’t waiting for a revolution. And they aren’t just watching one either. The revolution has arrived. With stunning speed,it has swept all of us into a new kind of economy and a new kind of society. A world of new mindsets and new ambitions,to be sure. But also a world where time-honored assets – customer relationships, smart people,deft strategy – still matter. This is the world of e-business. It is a world where everyone looks both new and familiar. Where any company and every company is a dot-com. e-business is here. We’re never going back.

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    Louis V. Gerstner, Jr. — [ Chairman and Chief Executive Of f icer

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    03 Dear fellow investor, At this point last year, the only thing we knew for frustrating in the extreme. Some outside the company certain was that the coming year would be unlike any say it was a wake-up call. I say it was a starting gun, other. We faced some big unknowns – economic because now, the real race begins. crises in Asia and Latin America, the Euro conversion The dot-coms, it seems, are taking over. You and, of course, Y2K. Underlying it all, making the can’t chart future strategy, execute a transaction, uncertainties even more uncertain, was the tectonic invest money, even read a paper or magazine plate shift of e-business. or watch TV without, somewhere in the process, As it played out, 1999 was, indeed, a roller coaster bumping into dot-coms and, behind them, the for IBM. The first half saw remarkable growth for our whole world of e-business. company, but in the second half, Y2K hit us hard. Some find all this energizing, some annoying, Many of our biggest customers locked down their but everyone’s paying attention. It’s the first question systems and their spending, and because IBM’s I get from any IBM customer in almost any part of customer base contains so many of the world’s the world: “What must I do to survive and win in this leading businesses, government agencies and new world?” In fact, at the moment, it’s just about financial institutions – the very enterprises most the only question I get. at risk from Y2K – our sales suffered accordingly. The fact is, 1999 was the year e-business and the Even so, when you average out the highs global Internet economy came of age. It was a tidal and lows, 1999 was a good year for IBM. For the wave, sweeping everything before it, driving new fifth straight year, we reported record revenue – levels of megamerger activity, carrying thousands $ 87.5 billion, up 7 percent over 1998 . Our earnings of entirely new businesses to unprecedented levels rose to $ 7.7 billion, a 22 -percent increase, resulting of wealth (much of it probably unsustainable), in another new record in earnings per diluted submerging almost as many others, and rearranging common share. Customer satisfaction achieved the landscape of commerce. its highest level in a decade. One conservative estimate is that the e-business After making substantial investments – $ 5.8 billion opportunity will approach $ 600 billion by 2003 , and it on research and development, $ 6 billion on capital could well be even larger than that. While the overall expenditures and $ 1.5 billion on acquisitions information technology (I/T) industry grows at around that strengthened our business portfolio – we had 11 percent, the e-business portion is growing much enough cash to buy back $ 7.3 billion of common faster – at around 22 percent. shares and to increase our dividend to shareholders. All that adds up to a tremendous opportunity Our market value, probably the most important for IB M. I’m not talking here about the pent-up measure of progress to investors, grew $ 24 billion demand that will be released as Y2K lockdowns are in 1999 , and has increased by nearly $ 170 billion unlocked. I’m talking about the fact that customers in the past seven years. are investing heavily in new e-business applications Those are all good numbers, but not good enough. and solutions. We expect 2000 to be a good After building some real momentum over the previous year for our company. However, we aren’t taking two years, IBMers found the last two quarters of 1999 anything for granted. We know how open the field

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    04 letter to shareholders is and how huge the stakes are. It’s tough to be 1999 revenue, a 60 percent increase. fast, focused and surefooted in a period of We will continue to shift our portfolio toward explosive change. But that’s what we have to do. the highest-growth e-business opportunities. In this regard, we passed an important milestone last As the race begins, these are our top three goals: year. Our three major growth engines – services, [ 1 ] Accelerate our growth. A hyperdynamic software and component (OEM) technology – now marketplace such as we see today values trajectory provide more than half (in fact, nearly 60 percent) – that is, the potential for growth – more than current of IBM’s revenue. Conversely, we are exiting market position. That’s good for IBM, because businesses where we can’t achieve our growth we’re entering a period of explosive demand for objectives, or where partnership is the preferred everything we have – hardware, software, services, strategy. That’s why we formed a networking component technology, expertise – the whole solutions alliance with Cisco Systems last year. And portfolio. There’s no question the opportunity is it’s why we scaled back our enterprise application there, but thus far we haven’t captured our rightful software efforts in 1999 , instead partnering with share across all segments. leading software developers like Siebel Systems, However, when we set our targets high – to grow i2 Technologies, SAP and Telcordia Technologies. not with the market, but faster – we’ve proved that We are stepping up our work with the NetGen we can deliver. In 1999 , for example, our revenue and dot-com companies and aggressively pursuing for database products on UNIX and Windows NT was opportunities in online trading hubs, application up 56 percent, more than three times the industry service providers and the whole area of pervasive growth rate; our custom-logic chip business growth computing. One standout opportunity is in wireless exceeded 70 percent year over year, as we focused devices, particularly in Europe and Asia, where the on the communications industry; and shipments number of data-enabled cell phones is expected of our Netfinity line of Intel-based servers increased to surpass the number of PC s in just a few years. more than 30 percent. Shark, our new enterprise We recently signed a deal with Vodafone AirTouch storage subsystem, was ordered by half of the to design, build and manage an Internet portal Fortune Global 100 within the first 100 days of its that will allow businesses and individuals to access introduction. In the first three months of the RS/6000 content and services over the Internet using a S80 e-business server, we sold as many as Sun variety of wireless devices. shipped of its competitive offering in its first one and We’re targeting the emerging “white spaces” a half years. And e-business services, the most of the networked world, such as storage, which is exciting growth opportunity since we started our being transformed through the emergence of services business, reached more than $ 3 billion in Net-driven storage area networks (SANs); and the revenue — [ $ in billions net income — [ $ in billions 7.7 87.5 81.7 6.3 75.9 78.5 6.1 71.9 5.4 4.2 ’95 ’96 ’97 ’98 ’99 ’95 ’96 ’97 ’98 ’99

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    05 game-changing open-source operating system IB M Research announced a $ 100 million push to Linux, which we’re moving aggressively to support build a supercomputer named “Blue Gene” – across our entire product line. And we will continue 500 times more powerful than today’s fastest to build on IBM’s e-commerce lead, increasing computers – that initially will be used to model the sales and distribution through ibm.com. In 1998 , mysterious folding of human proteins. e-commerce generated $ 3.3 billion in sales; But innovation at IBM has never been about in 1999 , that rose to $ 14.8 billion. We expect to technology alone, or for its own sake. Especially now, double that this year. when the competitive environment demands that we Finally, as the Net shifts computing workload, create radically new ways in which we go to market, applications and data from PC s to large server attract new employees and structure relationships systems, more and more computing solutions will be with customers and partners. delivered as a service, over the Web. We’ve already For instance, we have stepped up our efforts got a significant Web hosting business, from to reach out to Internet startups – through novel complex sites for customers like Macy’s and the incubator programs and more than $ 700 million in Olympics, to small businesses. And our acquisition planned startup financing and venture capital of Whistle Communications last June strengthened investments. We form relationships with dot-coms our ability to offer network computing services to while they’re still in the incubator, so we can smaller customers. help them make technology decisions before they launch. Just as important, we get to see beyond [ 2 ] In all things, innovate. By innovation I don’t the current technology horizon, understand the just mean technology – though of course I trends and deploy that learning directly in IBM. mean that, too. With our seventh straight year of (And, by the way, we’ve already seen a tidy return patent leadership and another record total (2,756 on our investments.) U.S. patents in 1999 ), IBM’s position as the We’re also innovating in how we build world’s premier commercial center of technology relationships with such important communities as innovation is unchallenged. We will continue to software developers (via our developerWorks invest in that. We will also continue to speed those Web site, a resource for the Web’s 10 million-plus innovations – such as copper chips and record- developers worldwide) and future employees setting hard disk drives – into products (our own, (witness last summer’s “Extreme Blue” internship and those of our customers). And we’ll continue program, which gave some of the world’s brightest taking on “grand challenges” that bring technology computer science students a chance to work on breakthroughs to bear on previously intractable real, cutting-edge IBM projects). problems. For example, in December 1999 , Finally, we continue to drive innovation in total expenses as a percentage of revenue 28.8 28.3 27.5 26.7 23.0 ’95 ’96 ’97 ’98 ’99

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    06 letter to shareholders transforming IBM into a leading e-business – and revenues and workforce will come from services. not just in e-commerce sales, which I mentioned This will mean that, very soon, revered IBM brand earlier. In providing e-care for customers, we attributes like quality, reliability and innovation will handled 42 million self-service transactions in 1999 , primarily be descriptors of IBM people – their avoiding some $ 750 million in support costs. We knowledge, ideas and behavior – just as today they delivered 25 percent of our internal training via describe IBM ThinkPads, servers and software. distributed learning, which has not only saved us We are very proud of what we accomplished more than $ 200 million, but made it far easier and through the 1990 s in reanimating the IBM brand. faster for our people to educate themselves. Going forward, as the nature of our business Through e-procurement, we bought about changes, we will create new ways to make “ IBM” $ 13 billion in goods and services over the Web, relevant, compelling and exciting to people. And since saving at least $ 270 million. And our intranet, so much of the IBM experience will be shaped by our which we believe is the largest and most heavily people, I believe one of the most important tasks trafficked in the world, has emerged as a vital will be building the training, development, reward business platform and knowledge-sharing medium and knowledge management systems that support for IBMers. It is quickly becoming IBM’s digital the IBM workforce. In other words, the strategic nervous system. connection between our culture and our brand will be even more important – and more visible. [ 3 ] Shape the new face of IBM. What will “ IBM” mean to customers, potential customers and What’s Next? Last year I told you about three employees, and the public at large in the years trends that were shaping the immediate future of ahead? Our brand used to be touched and our information technology: company experienced primarily through our > the Internet was creating not just new products. But going forward, a smaller percentage businesses, but new business models; of our customers will buy an item with “ IBM” > competitive advantage in the I/T industry was stamped on it. Instead, when they experience the moving from creating technology to helping benefits of our innovative technology, much of it customers use it; and will be inside other companies’ branded products, > with the rise of the networked world, the PC or at work behind the scenes in the computing era was over. infrastructure of the Net. There was some clucking about my PC era Even more important, they’ll experience IBM in statement by the usual suspects, but amid the ups the person of another human being. Sometime and downs of 1999 , all three trends were confirmed within the next five years, more than half of our and underscored in the marketplace. ADJ USTED TO REFLECT A TWO- FOR- ON E SPLIT OF TH E COM MON STOCK EFFECTIVE MAY 1 0 , 1 9 9 9 capital investments — [ $ in billions dividends — [ $ per share .47 .43 6.8 6.5 .39 5.9 6.0 .33 4.7 .25 ’95 ’96 ’97 ’98 ’99 ’95 ’96 ’97 ’98 ’99

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    07 financial highlights International Business Machines Corporation and Subsidiary Companies ( Dollars in millions except per share amounts) 1999 1998 FOR THE YEAR: Revenue $ 87,548 $ 81,667 Income before income taxes $ 11,757 $ 9,040 Income taxes $ 4,045 $ 2,712 Net income $ 7,712 $ 6,328 Earnings per share of common stock —assuming dilution $ 4.12 $ 3.29* Earnings per share of common stock —basic $ 4.25 $ 3.38* Cash dividends paid on common stock $ 859 $ 814 Per share of common stock $ .47 $ .43* Investment in plant, rental machines and other property $ 5,959 $ 6,520 Average number of common shares outstanding (in millions) Assuming dilution 1,871 1,920* Basic 1,809 1,869* AT YEAR END: Total assets $ 87,495 $ 86,100 Net investment in plant, rental machines and other property $ 17,590 $ 19,631 Working capital $ 3,577 $ 5,533 Total debt $ 28,354 $ 29,413 Stockholders’ equity $ 20,511 $ 19,433 Number of employees in IBM / wholly owned subsidiaries 307,401 291,067 Number of common stock holders 646,702 616,800 * Adjusted to reflect a two- for- one split of the common stock effective May 1 0, 1 9 9 9 This year I’d like to mention three other important exploded, search engines morphed into portals, developments (actually, they are more like new which helped people find not just information but realities) that are now taking hold: also products and services. Last year we began seeing entirely new business > Up to now, the primary impact of e-business has life-forms – companies that function not like been on individual companies. Now the Internet traditional companies, because they don’t make or is reinventing entire markets – you might say, sell anything themselves, but very much like markets. the very idea of a market. A few years ago, search They help buyers find and qualify sellers. We call engines took off because people needed help these “e-marketplaces” and “e-exchanges,” and we finding information on the Web. Then, as e-commerce already see them facilitating business-to-business number of acquisitions 18 17 15 12 10 ’95 ’96 ’97 ’98 ’99

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    08 letter to shareholders transactions in chemicals, steel, pharmaceuticals, the magic bullet that will establish it as “the next industrial goods of all kinds, capital, even labor. IBM” or “the next Microsoft” – that is, sole owner of As they grow, e-marketplaces hold the potential a key platform. I believe the wild market valuations fundamentally to change the dynamics of every of many dot-coms reflect the persistence of “Next industry, as they venture out into the global, Big Thing” thinking – the idea that one or more of borderless marketplace of the Internet, with millions these companies will lock up some controlling of buyers looking for millions of sellers, and vice position. We’re not managing IBM – or investing its versa. IBM is already working with pioneers in this resources – in the expectation of or hope for that area, like SciQuest.com, e-Chemicals and PartMiner. kind of control. Instead, we’re building an enterprise that will thrive in a more complex, interdependent > Market control is no longer a sensible or an and open world. achievable business goal. I don’t think this is fully understood by Wall Street. In the world we’re now > The intersection of societal issues and the Internet leaving – defined by the era of proprietary will force our industry to grow up – fast – and technology and computing architectures – assume a new level of public responsibility. It is customers were dependent on the providers of key disturbing to see many of the new members of our pieces of technology. New iterations, new features industry – and even some of the “old” ones – act came out when the provider decided they would. as if the rest of society had no call on them. Yet The Internet changes all that. Customers, not modern history shows that when a new technology technology providers, are in the driver’s seat. No really matters, when it changes society in funda- longer is it possible to operate a successful mental ways, the industry that pioneered it – be it information technology company from the lab out; telecommunications, energy, transportation or an e-business economy requires that we organize broadcasting – has always been called upon to ourselves from the customer in. (And this applies not take responsibility for those changes, for their just to labs, but to garages. If what you want to do is impact on people and on the planet. If the industry get some cool new technology into the marketplace doesn’t, people do something about it – as they and then cash out, that’s one thing. But if you want should – often through government intervention. to build an enterprise that lasts, you’ve got to We are now at one of those inflection points. address some real customer need.) The Internet is driving everything our industry creates Breakthrough technology is just as crucial as it into every factory, store and office – and also into ever was – but it doesn’t confer control. For our every home, classroom and voting booth. Crucial industry, that changes everything. No technology issues such as privacy, equal access, data security, company can any longer dream of coming up with national security, protection of children and YEAR- EN D CLOSIN G PRICES ADJ USTED TO REFLECT A TWO- FOR- ON E SPLIT OF TH E COM MON STOCK EFFECTIVE MAY 1 0 , 1 9 9 9 IBM market value — [ $ in billions stock performance 193 $ 107.88 169 $ 92.19 100 $ 52.31 77 $ 37.88 50 $ 22.84 ’95 ’96 ’97 ’98 ’99 ’95 ’96 ’97 ’98 ’99

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    09 education are all profoundly affected by this onrush. own company through this challenge). A year In most cases, our technology is at once a threat ago, a severe backlash against technology in the and an important part of the solution. wake of Y2K seemed likely. Going forward, people The implications are clear. Our industry has a will probably feel confident in I/T’s ability to survive very limited opportunity to step up to these even the severest of threats. imperatives and demonstrate responsible But the biggest reason for my feeling of optimism leadership. Just as we are entitled to ask our public about IBM’s prospects is the change in IBM itself. institutions to adjust to a world that runs at Web In identifying and defining e-business, we have speed, so the information industries themselves created a huge, entirely new kind of market for our must learn to define their ambitions with the goods, services and expertise – and we are broadest constituency – and longest time frame – stepping up to an entirely new set of challenges. in mind. The business of e-business is not the We are reshaping our own company into a IPO ; it’s the future. At IBM, that’s how we’re fundamentally different enterprise, what Business shaping our business decisions and our actions Week magazine recently called “The Biggest in the ever-more-essential arena of Internet-driven Dot.Com of Them All.” public policy. I don’t make predictions. Even with 1999’s uncertainties largely behind us, our industry, our * * * economy, the developments in technology and the There has never been a headier time to run a shape of the emerging global culture remain far too business – or a more challenging one. For all its dynamic to predict outcomes. But I am certain of fluctuations, though, I find myself more optimistic one thing that 2000 holds in store for IBM. This year than I have been in my seven years at IBM – and we will attack our remarkable opportunities with a that optimism has been deepened by three lessons new level of aggressiveness. of 1999 . First, the global economy has proven a lot more Watch this space. resilient than many of the doomsayers predicted. A networked world, it turns out, cushions rather than amplifies local downturns. Second, technology and technology profes- sionals came through the challenge of Y2K with flying colors (including tens of thousands of IBMers who exemplified our company at its very Louis V. Gerstner, Jr. best in the way they helped our customers and our Chairman and Chief Executive Officer

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    e-business is here.

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    11 e-business innovation center atlanta georgia To help customers take their franchises to the Net in a way that’s smart, cool and consistent with their existing brands, IBM’s growing global network of nine e-business Innovation Centers is staffed with experts in areas like interactive design, Web use analysis, portal personalization and data mining technologies for proactive selling.

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    12 jagged edge mountain gear www.jagged-edge.com telluride colorado Started by twins Paula and Margaret Quenemoen, this outerwear manufacturer and retailer turned to IBM’s Small Business WebConnections service to get the same e-business edge as bigger competitors. The service provides a single, easy-to-install Internet connection – utilizing the toaster-sized Interjet from IBM’s Whistle Communications – as well as registration of a dot-com name, business-class e-mail, firewall security and around-the-clock technical support. And it’s all available as an inexpensive monthly service – so a major capital investment won’t push them over the edge.

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    13 eToys www.etoys.com santa monica california With no physical stores (but very big warehouses), eToys has become the Internet’s largest seller of children’s products. To make sure it can handle the traffic – even during those heavenly but scary holiday spikes – eToys uses NUMA (non-uniform memory access) servers pioneered by Sequent Computer Systems, which IBM acquired in July. Sequent’s specialty is linking lots of Intel processors to operate as a single UNIX system.

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    14 internet capital group wayne pennsylvania To build relationships with fast-growing Net startups, IBM has committed $ 200 million to venture capitalists like Internet Capital Group (ICG) – part of more than $ 1 billion we’ve committed to NetGen companies. Among those currently hatching in the ICG incubator are United Messaging, Inc. (UMI), a business-to-business startup offering outsourced services for high-performance e-mail options such as Lotus Notes/ Domino. In a local coffee shop, Stephen Layne, president and CEO of UMI, goes over the marketing, architecture and terms of a multimillion-dollar deal to use IBM’s Netfinity servers for its Managed Messaging Services platform.

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    15 ibm consulting group chicago illinois post-PC design raleigh north carolina IBM’s Industrial Design team is thinking Sometimes, the rush to the networked world takes “out of the box” – literally – to dream up and design on a “ready, fire, aim” quality. But if you’re betting the ranch new “Net appliances” for the post-PC age. As computing (or even a part of it) on a move to the Net, success power moves to the network and touches our lives requires a plan – and the expertise to implement it with in myriad new ways, the venerable personal computer speed and precision. With more than 65,000 consulting and is morphing into a variety of specialized, systems integration practitioners, IBM is the world’s ergonomic and inconspicuous “edge of network” number-one provider of e-business transformation services. computing devices. IBM’s recent creations include concepts (shown clockwise, bottom-left to right) for an electronic newspaper (download, roll up and read anywhere); a PC in a hardhat with a built-in display and wireless Internet connection; and another you can strap over your shoulder.

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    90,000 partners 17 san diego california This January, 4,000 of IBM’s 90,000 Business Partners – which now include Web integrators, software developers, Internet service providers, and application service providers, as well as retailers, distributors and remarketers – converged on San Diego to plan ways to grow the $ 28 billion in IBM revenue they generated in 1999.

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    18 “extreme blue” summer internships cambridge massachusetts The Net creates new ways to do everything – including attracting the best and brightest. In one novel summer internship program called Extreme Blue, college students get the chance to team with top IBM software developers on projects like instant messaging, Web site content management, Java and XML. Overall, IBM hired more than 37,000 people in 1999 . ibm.com call center greenock scotland Call centers – and the Net – make it easy for any customer to have a direct relationship with IBM. Recently, IBM’s call centers – like this 60,000 -square-foot facility, one of 24 worldwide – were integrated with Web-based sales and support. In 1999 , IBM sold nearly $ 15 billion over the Internet and handled 42 million Web-based self-service transactions.

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    19 netfinity manufacturing greenock scotland Every important e-business application resides on some computer server, somewhere. This IBM manufacturing site turned out nearly half of the hundreds of thousands of Netfinity servers shipped to customers in 1999 . Netfinity’s ability to bring mainframe-style reliability to the red-hot market for servers based on Intel processors is one reason it increased its market share last year. next generation internet singapore The Next Generation Internet will transmit video, audio and data 1,000 times faster than today. But what will the world do with so much speed and bandwidth? In development centers worldwide – including Singapore, where virtually every home has a high-speed, broadband connection – IBM “Internet jockeys” explore next-generation applications like global videoconferencing, virtual reality-enabled manufacturing, and telemedicine, as well as full-screen, interactive distance learning.

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    20 project blue gene thomas j. watson research center yorktown heights new york How do subtle changes in the way proteins form turn otherwise normal red blood cells into cells that cause the condition known as sickle cell anemia? In December, IBM announced a $ 100 million multiyear initiative to build a supercomputer powerful enough to explore such questions by simulating the “folding” of proteins into their complex, final shapes. Dubbed “Blue Gene” by IBM researchers, the computer may help unlock hidden causes of cancer, Alzheimer’s disease, cardiovascular problems, stroke or arthritis. Armed with that kind of information, scientists can then begin the search for new diagnoses and treatments needed for cures. When completed, Blue Gene will be able to calculate at one “petaflop” (a quadrillion operations per second) – some 500 times more powerful than today’s fastest supercomputers. To achieve that kind of performance in five years (a full 10 years ahead of the information technology industry's current rate of performance improvement), IBM is developing a new architecture that will be, appropriately, “self-healing” – so the system can overcome failures during the more than one year of computation needed to simulate the folding of just one protein.

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    21 banesto bank madrid spain Banesto’s customers literally carry a full-service bank in their pockets. The first Spanish bank to provide secure electronic payments over the Web is now one of the first banks anywhere to enable Internet banking using the Wireless Application Protocol – the de facto global standard for Internet communications on wireless devices like cell phones.

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    23 international space station 220 miles straight up There’s an intranet in outer space, and it’s controlled by IBM ThinkPads. Already on board the International Space Station, ThinkPads run everything from e-mail to tracking and rendezvous applications. Shown here is a component of the station, a connecting module, awaiting deployment from the Space Shuttle Endeavour’s bay. IBM has been computing in space since Explorer I in 1958 – participating in the Mercury, Gemini and Apollo missions, and the Pathfinder landing on Mars.

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    24 acorn smart housing project oakland california Learning to read just got a little bit easier for 9 -year-old Frank Martin, thanks to IBM’s participation in an award-winning program designed to address issues like youth literacy and adult job training. Acorn’s 293 families each get an IBM Network Station “thin client” computer and high-speed links to the Internet. And because challenges like these can’t be addressed with information technology alone, IBM is also supplying educational consulting and customized courseware.

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    25 information security practice amsterdam the netherlands Nanette (top left window), Han (center) and Daniel (top right) are on the wanted list. Our customers pay them and their teams of industry specialists and “ethical hackers” to exploit business vulnerabilities and attack computer systems in order to stress-test company defenses and evaluate risks. As security moves to the top of customers’ agendas, with growing requirements to protect against theft, industrial espionage and fraud, IBM’s information security practice is doubling its revenue annually.

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    26 Power4 chip testing yorktown heights new york IBM’s top-of-the-line RS/ 6000 and AS/ 400 servers will sport a powerful – and identical – new brain in 2001 . The Power4 will be IBM’s first commercially available “gigaprocessor” – a chip with an internal clock speed of a billion cycles per second. It will feature improved bandwidth, as well as IBM invented technologies like copper interconnect and silicon-on-insulator.

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    27 e-business consulting rio de janeiro brazil With Internet use in Latin America growing faster than anywhere else in the world, Glauciene Bentes and the e-business consulting team in Brazil don’t lack for opportunity. They have partnered with 24 companies that, using IBM technology, have developed some of the most innovative e-business sites in the country – from a virtual supermarket based in Minas Gerais to Boa Compra, a mega-boutique hosting 200 online shops.

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    Kevin Wilson Director of Technology YourLives.com Christine Herron Founder, Chairman and CEO Mercury2, Inc. internet startup incubator palo alto california In the lonely Web years before billion-dollar IPO s, most NetGen startups needed an angel. So why not a well-heeled angel in blue? IBM is partnering with Internet service provider Conxion to provide up to $ 1 million in technology and services to selected Internet startups. The price? Nada. At the end of six months, the startups can buy or lease the equipment or walk away altogether.

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    29 Mark Cahsens CEO ebuddies.com Shane McRann Bigelow President and Chief Revolutionary E-Pair.com Christian Buckley CEO QOSES David Allen Business Development ebuddies.com

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    30 network processor burlington vermont Meet the post- PC processor – faster, more adaptable and more upgradable. Specialized chips like these are needed in advanced communications equipment to manage applications like streaming audio and video at speeds far beyond the reach of traditional microprocessors. Here, chips etched on 8 -inch wafers await final “dicing,” or cutting into hundreds of thumbnail-size processors.

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    national center for atmospheric research boulder colorado As industrial pollutants continue to alter global chemistry in barely understood ways, predicting long-term climate changes could be key to preserving life on our planet. At the U.S. National Center for Atmospheric Research, scientists are improving our odds with an IBM RS/ 6000 SP supercomputer that can calculate the interactions of thousands of variables (like ocean temperature, precipitation and ozone depletion) over extended periods of time. In this simulation, white areas of cloud cover float over warmer surface temperatures shown in red and yellow, and cooler areas in blue-green. planetRx.com anywhere Since December, customers with handheld computers have been able to go to PlanetRx.com to order over-the-counter medications and other health and beauty products. IBM provides RS/ 6000 SP and Netfinity servers, DB2 Universal Database and WebSphere software, as well as the technology that translates information from Web format to one used on handheld computers, such as this IBM WorkPad.

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    det norske veritas bergen norway Why would anyone wear a computer? If you’re an inspector for this Norwegian company that monitors the safety of large ships, it’s because you need to access computer drawings, verbally enter evaluations and submit digital reports – even while your hands are busy wearing gloves or toting a wrench. This IBM prototype of a wearable PC features a tiny, headset-mounted display, IBM’s Microdrive storage device, and ViaVoice speech recognition software – all in a belt-mounted package that weighs less than a pound.

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    34 alphaWorks www.alphaworks.ibm.com developerWorks www.ibm.com/ developer silicon valley How do you fire up an entrepreneurial culture inside a giant corporation? One way: tap right into the dot-com creativity of Silicon Valley to launch two hot Web portals aimed at the people creating the code. alphaWorks is a collection of developers, marketers, writers and MBAs whose average tenure with IBM is all of two years. Its mission: offer access to new IBM software technologies early on, incorporate feedback, then speed them to market months or years faster than the traditional product development process. developerWorks is an online watering hole where a world of more than 10 million software developers can find visible proof of IBM’s commitment to cross-platform development in the form of open, standard tools for building Linux, XML and Java applications.

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    36 e-business testing center gaithersburg maryland Enough fiber-optic cabling to stretch from Washington, D.C., to Los Angeles and back again; more than 10 billion instructions per second of processor capability; more than 40 terabytes of disk storage. It takes that kind of computing muscle to model customers’ technology infrastructures, then stress-test them to see if they can handle day-to-day operations (or even the possibility of runaway success). That’s why more than 500 customers have come to this IBM Testing Center – the largest such test bed in the world – to put their systems through the paces.

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    37 ford motor company accelerated solution center dearborn michigan Ford’s Accelerated Solution Center is a novel experiment that welds IBM and Ford programmers into tightly integrated teams to speed the development of e-business applications. Ford contributes automotive expertise and IBM brings its e-business knowledge. Part of a $ 300 million services agreement, the approach has slashed Ford’s software development time in half and cut costs by 30 percent.

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    38 quantum mirage almaden research center san jose california It looks like a freeze-frame of a technicolor raindrop, taken milliseconds after impact — but it could someday lead to extraordinarily small computing devices a few nanometers (billionths of a meter) across. In February, three scientists at IBM’s Almaden Research Center discovered a fundamental new way of communicating information on an atomic scale using a “quantum mirage.” This scientific achievement, which projects information about one atom to a spot where no such atom exists, may make data transfer in nanoscale electronic circuits possible, enabling ever smaller, but more powerful, computers. To demonstrate the effect, the research team used a Scanning Tunneling Microscope (a Nobel-prize winning IBM invention) to create a “quantum corral,” the ring of yellow atoms partially visible here. When a cobalt atom (the tall magenta peak on the right) is placed at one focus of the ellipse, a smaller mirage appears at the other focus (the lower left magenta spot).

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    e-business is here. We’re never going back.

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    40 your guide the abc’s of Having unleashed the e-business revolution, we at IBM take seriously our responsibility to help people understand it all. Here’s a brief guide to help you sort through the vocabulary, history and unique culture of all things “e.” the “lingo” B2B (adj.) e-line (n.) infomediary (n.) As in “Business-to-Business,” the biggest You’re said to be “above the e-line” if A service – usually a Web site – that and most lucrative e-business marketplace you operate on the Net. You’re below it brings together the latest information – pegged by industry consultant Gartner if you actually have physical stores, and prices from a variety of suppliers, Group at nearly $ 4 trillion by 2003 , manufacturing facilities, distribution and delivers them online to buyers. Quickly compared to estimates of $ 380 billion centers, etc. Since most enterprises are evolves into an “e-marketplace” (see for B2C (Business-to-Consumer). somewhere in between, we prefer the “A Brief History of e”). For example, the notion of an e-zone. Interestingly, travel infomediary SciQuest (www.sciquest.com) clicks-and-mortar (adj.) through the zone is two-way – witness created an e-marketplace where Also “clicks-and-bricks.” A heretofore AO L’s planned merger with Time Warner researchers in the life sciences industry traditional (bricks-and-mortar) enterprise (a dot-com moving down through the zone comparison shop for lab products with just that “gets” the value of e-business and to add physical operations and assets). a mouse click before placing an order. integrates its online and offline operations, (Not to be confused with the less-appealing creating benefits for each. For example, incubator (n.) “infodromedary,” an e-commerce site that a customer who buys something from your A startup nest – that is, a business or may go for days without being updated.) online store might have the option of project that provides financing, technology, returning it either by visiting the physical office space and marketing muscle to NetGen (adj.) storefront or by requesting a prepaid fledgling e-businesses, sometimes in Short for “Network Generation.” Applies to shipping label from the Web site. exchange for equity in the new company. companies born during the explosive growth IB M’s involvement in incubator programs, of the Internet and the Web. Easily recognized such as our joint venture with Silicon Valley – until lately (see “clicks-and-mortar”) – Bank and Internet service provider by names emblazoned with the insignias of Conxion, helps these NetGen companies the networked world – the ubiquitous “dot” get to market, and gives us an excellent and the mysterious “com.” early-detection system to spot technology trends and market directions.

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    41 a brief history of e [ t h e n —> now ] client/ server —> Internet In the mists of time (less than a decade ago), the information technology industry made a big promise. It was called client/server – and it described seamless connections and communication among all kinds of disparate computing platforms. It didn’t happen. The promise of “any client to any server” proved to be far more costly and difficult to implement than anyone expected. Then, along came the Internet and its open communications protocols. Almost before we noticed, the long-awaited promise of any-to-any connectivity materialized – not just among computers, but also among the people and the enterprises that use them. big iron —> strong iron How big are mainframes these days? Smaller than you might think, and far more powerful than just a few years ago. Recast in the Net world as enterprise servers, they are about the size of a refrigerator, but nearly profit (n.,v.) 30 times more powerful —as measured in MIPS (millions of instructions The market valuations of many dot-coms per second) —than just five years ago. And enterprises turning into notwithstanding, still a valid measure of e-businesses are finding more value for these powerful servers than ever business success. before, using them both to host existing systems and applications, and to integrate those with their new online offerings for customers, stickiness (n.; from sticky, adj.) suppliers and employees. In the Web world, sticky is good. A sticky site is one that attracts and keeps hard drives —> microdrives users. To make a site stickier, its creators IBM makes, and sells, a lot of hard disk drives, many to our competitors may add personalization elements, in the PC market. (We’re flattered that they want to pay us for better online communities and discussion areas, hardware.) We’ve also been shipping our tiny-but-powerful 340 -megabyte user feedback, and extensive links. Microdrive to such customers as Kodak, Samsung, Hitachi and other leaders in the consumer electronics field. Just a little over an inch square, the vortal (n.) Microdrive can hold 1,000 digital compressed photos, six hours of CD-quality Vertical portal. It provides all the features music, or the equivalent of 300 novels. of a “portal” (a Web site for a general audience, with its own content and links trading hours —> friction-free markets to other sites – like Yahoo!), but for a The closing bell says it’s time for people to go home. But their money wants specific audience, such as expectant to hang out and play some more. Pure demand, unhindered by distance or parents, fly fishers, or steelmakers and time differences, can set prices on the Web while we sleep, and sellers don’t their customers. Software developers, need to wait for a phone call or a fax to hear from the market. Online broker- for example, go to sites like IBM’s ages and computerized exchanges already do big business in after-hours developerWorks (www.ibm.com/developer) trading, and other marketplaces – for parts, supplies, services, you name it – to find resources, code and tools, and to are starting to follow suit. swap ideas within a like-minded community. e-businesses —> e-marketplaces wallet (n.) Today, the company. Tomorrow, the industry. Once a business e-enables its A small software program that resides operations, it can find itself in new terrain, where all its competitors and on your computer or a server, allowing you customers are also operating as e-businesses. At that point, “buy, sell, trade to e-shop till you drop. The wallet usually online” doesn’t apply just to stocks and bonds, but to every transaction in consists of encryption software that can which an enterprise engages. Airlines and hotels are already auctioning hold your already-submitted payment off unsold seats and rooms via Web sites; universities are accepting online information (such as credit card or online bids for tuition to fulfill their enrollment targets. And consolidators and account), a digital certificate to identify infomediaries are bringing all parties together, with up-to-the-minute bids, and protect you, and even the address prices and availability information. Markets become more liquid and efficient, where you’d like your purchase sent. and obstacles like time and geography become so… 20 th century. Wallets speed the process and eliminate buyer frustration, thereby increasing sales.

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    1999: the highlights our portfolio services In 1999 , IB M extended its lead as the world’s largest And in the most explosive segment of the marketplace – provider of I/T services. Revenue grew 11 percent; e-business services – revenue increased 60 percent, customers committed to more than $ 38 billion in new to more than $ 3 billion. Factor in all the other services contracts, and the backlog of engagements (work we’ll revenue that can be attributed to e-business – from do and be paid for this year and into the future) grew consulting, business intelligence and strategic outsourcing 18 percent to more than $ 60 billion. – and our e-business services revenue easily doubles. number of signed strategic outsourcing contracts valued at more than $ 100 million services revenue —[ excluding maintenance, $ in billions 46 27.0 23.7 38 19.5 26 16.2 24 12.7 ’96 ’97 ’98 ’99 ’95 ’96 ’97 ’98 ’99 enterprise and personal systems Customers ordered record server processing capacity > Most important, we came on strong in three in 1999 . We also took some major steps toward building for strategic segments: the future, introducing new high-performance servers and UNIX : RS/ 6000 S80 acquiring two companies with strategic technologies. Debuted in September as the world’s fastest Sequent Computer Systems strengthens the high end of our e-business UNIX server. Customers purchased as Web server line, while Whistle Communications’ elegant many S80s in its first three months as Sun shipped “thin server” technology is a key feature of our e-business of its competitive product in its first 18 months. offering for smaller enterprises. Among the other high points: High-end storage : Shark > Added hundreds of ISV applications to our platforms. Shipped more than 1,000 units within the first > Made the industry’s most sweeping commitment to drive 100 days of its introduction, and penetrated half of the Linux operating system across all our server lines. the Fortune Global 100. > Increased share of the 500 most powerful supercomputers Intel-based servers : Netfinity in the world by 36 percent, establishing IBM as the leader Increased shipments by more than 30 percent in high-performance computing in 1999 . and gained market share. > Replaced Compaq in 1999 as the # 2 mobile PC vendor in the world. ThinkPad unit volumes grew 50 percent faster than the industry.

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    43 software IBM middleware, a key component in building current oem and next-generation e-business solutions, grew in Overall, OEM hardware revenues —from sales of double digits and faster than the industry. Our strategic components and finished products to other high-tech e-business middleware products on UNIX, Windows NT companies —increased 15 percent to $ 7.8 billion last year. and other fast-growing platforms grew significantly: That does not include the vast majority of revenues from five major OEM contracts signed in 1999, which are forecast to deliver $ 30 billion over five to seven years. revenue growth industry rate (’98/ ’99) growth rate > Shipped more than 2 million copper chips since their introduction in 1998 . Tivoli Systems Management: 34% 20 % > Led the industry with more than 40 percent Business Integration of the mobile hard disk drive (HDD) market. Software (MQ Series): 96% 53 % Introduced the industry’s highest-capacity mobile HDD at 25 gigabytes. Database Products: 56% 16 % OE M storage revenue — [ $ in billions Web Application Servers: 59% 25 % 4.3 4.1 2.7 > 40 percent of the top 100 retailers in the 1.9 1.5 world use IBM’s WebSphere Commerce Suite to drive their e-tail sites. > IBM has an unmatched collection of professionals devoted to advancing open Internet standards ’95 ’96 ’97 ’98 ’99 and applications —more than 500 XML, 600 Linux, and 4,000 Java professionals worldwide. number of custom microchip designs for customers 184 Lotus Notes seats —[ in millions 158 56 77 64 34 32 20 9.3 ’95 ’96 ’97 ’98 ’99 4.5 ’95 ’96 ’97 ’98 ’99

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    44 1 9 9 9 highlights research and development At our core, we are a technology company. In 1999 , For the seventh consecutive year, IBM’s technical community the industry's greatest foundry of technical innovation led the world in U.S. patent awards, with 2,756 – 900 more achieved breakthroughs ranging from new world records than the second-place finisher. Our intellectual property in magnetic storage densities to the creation of transistors portfolio earns IBM more than $ 1 billion in licensing royalties, made of organic materials. These transistors could in addition to securing our technical leadership now and lead to products like flat-panel computer displays that for years to come. In fact, one-third of the technologies we you can fold and put in your pocket. patented in 1999 are already in the marketplace. research and development investments — [ $ in billions total number of patents 5.6 5.8 2,658 2,756 5.3 5.5 5.2 1,867 1,724 1,383 ’95 ’96 ’97 ’98 ’99 ’95 ’96 ’97 ’98 ’99 pervasive computing Pervasive computing is the inevitable In 1998 , pervasive computing was will allow passengers to check in from extension of the networked world. largely a strategic vision. In 1999 , that their mobile phones. It describes a mosaic of computing vision became reality. Last year, IBM Of these engagements, more than that extends beyond traditional signed nearly 250 pervasive computing- 60 percent were signed in the last four computers and PC s to include related contracts, with more than 100 months of the year, demonstrating that an array of small computing devices customers, for revenue in excess of a our customers are now starting to like handheld computers and quarter of a billion dollars. We are make investments in extending their intelligent cell phones, as well as helping Vodafone AirTouch – to build e-businesses to the universe of new lots of everyday things – from and run a global Internet portal that computing devices – like cell phones household appliances to clothes will allow its customers to use a variety and palmtop organizers – which and machine tools —all containing of wireless devices to access content already outsell personal computers a little embedded computing and and services over the Net. For Swissair three to one. networking capability. we are developing an application that

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    45 our transformation Last year, we made important progress toward our goal of transforming IBM into a premier e-business. e- ca re for customers Sales of products and services over ibm.com averaged QU ESTION S A N D P ROB L E M S RESOLVE D VIA IB M .COM $ 40 million a day for the full year, and $ 50 million a day in the fourth quarter. 1998: 14 million 1999: 42 million IBM e-procurement COST AVOIDA N CE web purchases — [ $ in billions e-commerce revenues — [ $ in billions 1998: $ 300 million 14.8 1999: $ 750 million 13.0 supply cha in ma na gement On-time delivery improved by up to 95 percent, and the time from order entry to delivery for some products has been reduced to two days. distributed lea rning 3.3 1.8 More than 25 percent of internal training was 0.27 delivered via distributed learning to nearly 135,000 0.0 employees, producing cost avoidance and productivity ’97 ’98 ’99 ’97 ’98 ’99 gains of more than $ 200 million. e- care for business partners Partners generated more than half of all IBM e-commerce revenues. More than 14,000 partners used ibm.com to access product and marketing information. 21 st century alliances To ensure that we will participate in the explosive growth of e-business services – projected to represent nearly 60 percent of the total e-business opportunity by 2003 – we’re striking alliances with hundreds of Internet service providers, application service providers, independent software developers and professional services firms such as Web integrators. More than 850 Web integrators – like USW eb/ CKS, Razorfish, US Interactive, Rare Medium and Viant – signed on with us in 1999 . Among independent software providers, we established much stronger relationships with SAP, Siebel Systems and i2 Technologies for enterprise resource planning, customer relationship management, and supply chain management solutions.

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    46 c orporate initiatives U.S. President Bill Clinton and IBM Chairman Lou Gerstner National Education Summit IBM Executive Education Center Palisades, New York September 1999

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    47 “The time for analysis and evaluation has passed” With those eight words in his address at the 1999 even more – volunteering more than 4 million hours National Education Summit, IBM Chairman and of their own time to local causes. CEO Lou Gerstner crystallized why there is no We are a company with a commitment to a going back on the issue of world-class standards as culture of inclusion, one that draws on the talents the catalyst for reform in America’s public schools. of a workforce as broad and diverse as the markets The 1999 Summit was the second national we serve in more than 160 countries worldwide. conference in three years on the issue of raising In 1999, the number of minority executives in the United academic performance and student achievement States increased by 31 percent. Women executives in K-12 public education in America. Both were held across IBM increased by 27 percent, and in March of at IBM’s Executive Conference Center in Palisades, this year the company was recognized by highly New York, and both were co-chaired by Gerstner. regarded Catalyst, Inc. for its leadership in advancing Driving high-quality public education is just the careers of women throughout our workforce. one manifestation of IBM’s long-standing commit- Hosting the 1999 National Education Summit ment to the communities that sustain our operations is completely consistent with the commitment to and our families. Through a $ 40 million grant community leadership. Nobody – at least none of the program called Reinventing Education, we apply realists – believes the transition from low standards advanced information technologies and the to high standards will be easy, or that it will be made expertise of some of our top technologists to without painful consequences in the short term, as improve learning. In recent years, the program schools step up and end practices like social promotion. has expanded to include schools in seven Yet when the Summit adjourned, governors other countries, including a 1999 grant in the from across the United States —along with business United Kingdom. leaders, educators and representatives of both major While education is our most visible philanthropic teachers’ unions —had done two things: reaffirmed endeavor, we’re far from single-minded about our their commitment to high academic standards as the responsibilities as a good corporate citizen. In starting point for reform; and committed to execute the U.S . portion of the largest-ever survey on the a specific set of priorities – with deadlines – to move role of business in society, consumers identified schools toward the goal of dramatically improved IBM as the company that best exemplifies effective student achievement. corporate citizenship. “We can’t cut and run when some students In 1999 , IBM dedicated more than $ 116 million can’t meet the standards. We have to redouble our to programs that assist people in need. Individual efforts and provide the help they need,” Gerstner IBM employees added another $ 25 million through said. “We have to have some faith in our children matching grants and donations to nonprofit organi- and our teachers. They’ll deliver. It’s up to us to zations and educational institutions. And they gave give them the chance.”

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    company mission At IBM, we strive to lead in the creation, development and manufacture of the industry’s most advanced information technologies, including computer systems, software, networking systems, storage devices and microelectronics. We translate these advanced technologies into value for our customers through our professional solutions and services businesses worldwide.

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