IBM eyes SMB prize

Maybe IBM has a strategy in place to penetrate the SMB market, maybe it doesn't. But one thing's for sure: A battle with Microsoft for control of that space isn't going to happen.

IBM's decision to increase its presence in the small and medium-sized business (SMB) market was hardly an epiphany, but when word came down from upper management to aggressively target the largely untapped market dominated by Microsoft, it became like religion at IBM.

In the past year, Big Blue has invested $500 million to develop relationships with business partners and independent software vendors (ISVs), something that it considers key to penetrating the midmarket. It has also brought to market dozens of products, including a broad line of Express products as well as financial incentives, all with the intention of luring SMBs into the IBM fold.

"We saw, as other people have seen, the spending shift in the SMB marketplace, which was largely underserved and [is] now growing rapidly," said Mark Ouellette, vice president of worldwide SMB software sales at IBM. "Like the services industry, there were a lot of players, but not one dominate player. There's a huge opportunity there. The decision was made predicated on that more than anything else."

Tapping an untapped market

According to industry research, the SMB market is the fastest-growing segment of the IT market, and it's growing faster than the IT market as a whole. In fact, according to a recent report on the growth of SMBs in the U.S., between 60% and 70% of firms in the U.S. are classified as small and medium-sized businesses, and they're responsible for three-fourths of all new jobs. In addition, Framingham, Mass.-based research firm International Data Corp. reports that 54% of IT spending in North America in 2003 will be by customers that have fewer than 1,000 employees.

From a technology perspective, the sales potential is huge. Whereas enterprise companies overbought during the Y2K boom and now sit on excess inventory, the SMBs are playing technology catch-up. Until now, SMBs have not been traditionally seen as computer-savvy. But now, even relatively small businesses, such as doctor's offices, are installing technology like wireless networks.

"It's a huge economic driver for the U.S.," said Charles King, research director of the Sageza Group Inc., in Mountain View, Calif.

"IBM is seeing more and more opportunities there," he said. "They're starting to tailor some of their enterprise-class systems and offer them cheap enough so that [SMBs] can afford them. A few years ago, it would have been out of reach."

It's not that the SMB space is new to IBM. After all, the iSeries has played in that market for years. But according to Ouellette, this is the first time IBM has emphasized a strategy to this extent company-wide.

"We didn't neglect SMBs," he said. "But this is the first time in recent memory where we've committed to a single integrated management strategy across the entire product line. We've dedicated a lot of resources in an integrated fashion."

"IBM's been a big player in the SMB space with an emphasis on the 'M' with its iSeries," said Gordon Haff, an analyst with Nashua, N.H.-based Illuminata. "But now, IBM is expanding downward -- as is just about everyone else."

SMB connection

Sure, IBM has the will, but does it have the way?

Despite all the noise, not everyone agrees that IBM can succeed in penetrating the SMB market.

Ouellette said IBM has already proved it can work in the SMB space through its partners. To date, one-third of IBM's total revenue is now from midmarket partners, and three-fourths of its SMB software revenue is generated by business partners.

"Feedback from partners and users has been very, very good," Ouellette said. "We are also seeing a good early return on our Express portfolio."

But critics say IBM is too entrenched in the enterprise and is clueless when it comes to meeting the needs of the SMB space. (Read the The Volume Manager, "Can IBM really do SMB?" in tomorrow's Search400.com news line up.)

Wayne Kernochan, an analyst with the Aberdeen Group in Boston, said that, although that position is a bit exaggerated, he does question whether IBM has the strategy in place currently to attract SMB customers.

"I think that if IBM can use its resources effectively, it can give SMB customers more of a warm and fuzzy feeling than Oracle or Microsoft can. But they don't yet have the strategy in place to be a major player, not completely," he said.

Kernochan said IBM is not yet tuned in to the needs of the SMB and, as a result, its product offerings fall short.

"What I'd like to see is IBM coming out with vertical applications, such as financial or health care, bundled in a low-cost infrastructure software specially tuned for zero administration," he said. "They're not doing that yet -- at least they're not perceived as doing that yet."

But King said he doesn't buy the argument that IBM will be unable to adapt to the SMB market, since the company has spent more than four years demonstrating that it can play successfully anywhere it wants to.

"I think IBM's strategy of providing offerings like WebSphere and DB2 as development environments and opportunities for ISVs is workable in the SMB space," he said, "though the penetration of the company's Express offerings will be the key to that."

And despite the hype the competition between IBM and Microsoft gets, experts say they're not pure rivals. In fact, experts don't envision either player as being dominant in the SMB space.

"While Windows has a huge influence among SMBs on the desktop, they are merely one player on the back end and not invincible," King said.

According to Haff, the idea that IBM is in competition with Microsoft is not really accurate -- they are and they aren't. It's complex, he said.

Microsoft threat

"Microsoft is competing with iSeries and, of course, with Linux," he said. "But there are Intel servers being sold with Windows, too. IBM is both a competitor and a partner with Microsoft."

But Haff is quick to point out that IBM is the one vendor that is "hitting on all cylinders -- from one end to the other." He said IBM's product lines are doing well. It services organization is top-notch, there are good economies of scale, and it's really out in front with Linux.

"I think even at the end of the day, they have a winning strategy going forward," Haff said. "The solution that Microsoft or even Dell can deliver in that space is a much narrower set than what IBM can deliver with Sun being in between those two groups."

The dominant players in the market are yet to be determined, and the battle will wage on. While Microsoft has the greatest market penetration in terms of operating systems, the line is not drawn so clearly among hardware vendors.

King said the real opportunity for IBM lies in how successfully it can work with its ISVs, which have a huge penetration in the SMB market.

"If IBM treats its SMB ISVs well (and the company has a history of dealing even-handedly with ISVs), they could do very well in the SMB market over time," King said.

FOR MORE INFORMATION

Let us know what you think about the story; e-mail: Kate Evans-Correia, Senior News Editor

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