January 30, 2002

Palmisano rides the penguin (into the IBM corner office)

Author: JT Smith

- By Jack Bryar -

If people were worried about the influence of private companies on the Open Source movement, they should become petrified. As of today, the largest Open Source company in the world does $85 billion in sales and has a workforce almost as large as the
population of Cincinnati, Ohio. Sam Palmisano is taking over at IBM and he's riding in
on a lot of promises about how Big Blue and Linux can make billions
together.

This week Lou Gerstner finally announced what everyone has known for
months: Palmisano will take over as CEO of Big Blue in five weeks.
Following the news, IBM stock tanked by nearly four dollars.

It shouldn't have. For the change in leadership occurred some time
ago. Samuel J. Palmisano has been the power at IBM for more than 18
months. Palmisano has been the in-house geek-in-a-suit who has driven IBM's
embrace of Linux for the last two years. In many ways, Linux was the platform
Palmisano ran on to get his new job.

Now 50 years old, Palmisano is an IBM lifer, having joined the
company right out of college. He was quickly identified as management material,
and was on the company's short list of would-be CEOs as far back as
back in 1993. Unfortunately, at the time, the company was hemorrhaging. It
lost $8 billion in 1993. The board of directors wanted a finance guy, a
seasoned suit who could calm the investment community and who might be able to
tame the factional infighting that had completely balkanized the company
into a series of fiefdoms. So, for the time being, the job was handed off to
RJR's Lou Gerstner.

No fool, Gerstner quickly used Palmisano as a sounding board and
confidant (he had been the assistant to former IBM CEO John Akers). In return,
Gerstner gave Palmisano a job -- and a big one at that. He was told to revitalize
ISSC, IBM's old consulting and services unit.

Given that IBM's products were incredibly difficult to manage, most
IBM customers didn't need much encouragement to buy services to help
them cope. Palmisano grew the consulting and services business back to the
dominating force it had been years before. After growing the business by
approximately 30%, the renamed IBM Global Services unit was the biggest division in
the company. While running the division, Palmisano had become aware of the
potential for Linux to become a truly "disruptive" force, possibly the
next big thing in IT.

Like nearly everyone in the technology business, he watched Red Hat
and VA Linux launch explosive IPOs. Red Hat promised big profits bundling
services with Linux. VA (now VA Software, NewsForge's corporate parent) hoped to do the same by combining Linux and server equipment.

IBM veterans like Irving Wladawsky-Berger became Linux evangelists,
arguing that if Linux was the future of the market, IBM could enter it
with some unique strengths.

Unlike Red Hat, IBM Global Services had a stable of marquee clients.
It had a global reputation that it didn't have to build from the ground
up. It had a sales force who could talk about operating systems and IT
issues from a business solutions perspective rather than just babble
about technology. If there was a Linux-based services business to be had,
IBM was positioned to dominate.

IBM's hardware business was both an opportunity and a challenge. Unlike VA, IBM already made its own equipment, with a range of product that reached from the desktop to the server farm. What Linux gave IBM was something that its hardware division desperately needed -- a standard platform, on the cheap. As Palmisano admitted in 1991, the cost of development on IBM's varied hardware platforms was becoming non-competitive. By extending Linux to run on some of IBM's oldest and most proprietary
hardware platforms, IBM might be able to revitalize a server business that was
becoming a costly embarrassment.

Palmisano brought
together Wladawsky-Berger
and an assortment of "old blue" hardware
and software veterans to take a hard look at the potential for Linux.
Wladawsky-Berger's Linux strategy was a high-profile, high-risk option that quickly
evolved into Palmisano's final examination for the corner office job. In
January 2000, Palmisano wrote, "we will embrace Linux" and declared that
the company would extend much of its proprietary software to run on
Linux. The memo generated speculation that Palmisano wanted to extend Linux to
re-inject some excitement into its motley assortment of midrange server
platforms, such as the RS6000 and AS400.

Last year, when other vendors were beginning to shy away from their
earlier enthusiasm for Linux, Palmisano continued to champion the
platform, more aggressively than ever. Last year he acted as
keynote speaker of LinuxWorld
, joking that "when I looked over
at the Penguin and saw he was wearing a [IBM-style] blue tie," he
knew that IBM and Linux were ready to do business together.

They have.

Linux was the bridge that allowed the company to redevelop and
reposition its server line into a force to be reckoned with, gathering market
share even as the global market for servers declined. The company has
promised billions of dollars to further develop Linux products and services. To date, the
company has spent tens of millions in marketing and advertising Linux equipment
and services. It has engaged its R&D arm to find new ways to extend
the code base and apply it to a bewildering array of new products.

Today, the extent to which IBM has gone to embed Linux cannot be
over estimated. IBM hasn't put Linux into a toaster or refrigerator yet,
but it has put it into
a watch
. It experimented with Linux-based cash registers. It is showing a Linux-based vending machine at this week's LinuxWorld Conference and Expo. Today, Linux is at the center
of the company's newest mainframe
. More is coming soon.

It is far from certain whether IBM will be able to generate big
profits from Linux. The company has missed its most recent revenue projections.
Both the services unit and the hardware division slowed sharply, pushing total revenue down by more than 10%. However, Palmisano has ridden the Linux wave this far, and it is unlikely that the company will back off, at least in the short term. So, for now, one of the biggest companies in the world is a Linux company. It could get interesting.

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