Interview With IBM's Chairman and CEO Sam Palmisano

VARBusiness magazine and CRN sat down recently with IBM Chairman and Chief Executive Samuel Palmisano. Here's what he said about himself, his company and his partners.

March 1, 2004

32 Min Read
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When VARBusiness magazine and CRN sat down recently with IBM Chairman and Chief Executive Samuel Palmisano, the interview came with a strange twist, which was revealed part way through the conversation. It seems the chairman of the board viewed this not only as an interview with two long time computer industry journalists but as an opportunity to do some probing of his own. Palmisano is not the only top executive to employ such a tactic. Cisco's John Chambers has the same technique turning the interviewer into the interviewee.

Palmisano hasn't changed much in the years since he ran the company's PC division to his rise to the top. He still dons the same oversized horn-rimmed glasses and dark striped suite he has worn for years along with his trademark laugh. He seems comfortable in the splendid setting of IBM's corporate office, replete with wood-lined walls, glass-doors and library-like quietness. As we wait for Palmisano, who is running a bit late after an important customer meeting, he bursts in larger than life, looking fit and chiding us for not calling on him more often. Our response is one that makes him laugh: "It just isn't easy getting on the schedule of the IBM chairman is it?" Palmisano's private conference room has a credenza featuring a photo of him and Linux Torvalds shoulder to shoulder, and some mementos.

The first question we have to ask is, how does he juggle the traveling with all the requests for his time? And how does he leave himself time to think? With that, Palmisano dives in. As you will find in this interview, Palmisano wanted to address a number of issues and interrupting him -- or even gently steering the conversation -- is next to impossible. So you quickly come to the conclusion that if the chairman of IBM wants to talk, the best thing to do is sit back, shut up and listen. After all, such opportunities do not come up all that often. Our conversation with Palmisano took place at IBM's Armonk, N.Y., headquarters with VARBusiness Editorial Director Robert C. DeMarzo and CMP Channel Group president Robert Faletra, who oversees, among other properties, CRN and VARBusiness.

The demands of being chairman of a an $89 billion company seem overwhelming. How do you manage? Are you left with any time to think?

Palmisano: If you say you think you live on an airplane, you are too old to sleep, you can't sleep anymore, or since you don't sleep as much, you take the time to reflect. The other great thing is that we are a tech company but if it were not for the technology, there is no way any of us could do what we do. There is this thing called Edge, CEO Edge that we have. It is an information system. We could roll the business up daily, but to me it does not make any sense. This place is pretty big. Other people need to look at daily information. Between Edge, I could look at the command pipeline by sector, by industry, by industry within a geography, iSeries demand, or services pipeline for VCS. Any dimension as it progresses through the sell cycle, supply commitment against its manufacturer, right, and then obviously what ships and what bills. This whole pipeline has been automated and the way it has been done is that nobody has to enter any data differently. Just the way they work it's an on-demand business. As they work it goes into the system so as the sales person participates in its cadence, it is in the system and all of these things are naturally in the system.It seems about the only thing your on-demand systems doesn't tell you is which partner made the sale.
Palmisano: So, you know, well I don't have that level of granularity, but (Global Business Partner Michael) Borman and those guys can. I can look at it by channel, I can't get into it by partner -- whether it is Avnet or whomever. We have demand flows by channel, we have fulfillment flows by channel, I can go IBM.com for channel, obviously--we call it face to face--the direct sales force of the channel. We go by the integrated channel with demand. I can tell you who is in the pipeline for integrators, ISVs, etc. So, I got all that. Not to bore you with that. Then I can take that and then I have this thing called Same Time which is instant message. This is all on our intranet. I can make a Same Time note and I can ping the data so I can be on a plane, I can be anywhere, you know.

I am sure your managers must appreciate that feature
Palmisano: When they get this little blip on their screen and I say 'Hey, your order tracks are supposed to be at A and you are at B. Just send me a note on the correct information.' If you think about it, we talk about a flexible on-demand business; we have a long way to continue to make IBM an on-demand business. I mean a long way to go.

So this on-demand technology you use actually helps Sam Palmisano manage his time better?
Palmisano: But this is what you talk about [in terms of] freeing up time using all this stuff. Because if I did not use it, I would have to be in meetings, I could not be with the clients. I mean they added up last year, just clients, not business partners, not government officials and not CEO conferences, not like a speech to 20 or 30 CEOs. Just individual one-on-one meetings. I did 164 last year--individual one-on-one CEO meetings.

Are those engagements happening on a global basis?
Palmisano: It's worldwide. It's split 50-50. You've got business split 60 percent non-US and 40 percent U.S. Literally, it almost splits -- it's like 54/46 non-US, but it's about 50/50. Which I just asked the guys to add it up the other day to see. I was spending a lot of time engaged with clients and partners and it turns out that probably it was a lot. I mean we will continue to do that, but in an environment where there was so much economic uncertainty, I felt that the best thing all of us could do was to talk about how to help businesses become on-demand businesses was to get out there and help them do it. We will all learn what it is. We will all learn what it means to them, we had our view of it, but what it meant to them and how they would take advantage of it. So, doing this, and it was not just me, I mean we encouraged the worldwide leaders to do the same thing, to go out and work on creating these quiet references. They created 400 to 500 of them in a year. So, we made some progress vs. other guys who are talking about their 'We want to reference [some accounts] but we'll get into that later.'Speaking of those "other guys" can you talk about IBM's competition, especially HP?

Palmisano: The technical transition [for HP] is huge. Remember, they were going to have a seamless architecture based on X86 and they were going to integrate Tandem VAX, HP/UX, and they were going to integrate on a common platform and it was going to be great. Remember the acquisition, the synergies of the acquisition. You guys know better than I. I just read the speeches. So, that that was the whole thing. And then what happens? You now introduce breakpoints because you had a break point between an architecture of the low end. To really get to the high-end server performance, we're going to have to get 64-bit. To assume at some point that is Intel/Microsoft statement, they get a break point to really compete with us with the Regattas, the Squadron vs the Superdome--and there's another break point. So now they have three break points, but it is not just that they have three breakpoints in the line, they have to integrate into those three break points VAX, Tandem HP/UX, all this stuff. So it is not a trivial R&D effort.

There are many stories circulating in the channel about market share shifting from HP to IBM and your server business seems to be growing. How much do you attribute to partner efforts?
Palmisano: Yes, when you look at IBM server and storage share, we have gained five points of share in server. I'm using IDC data. Because there is always different data, there is always different numbers. It is always around 5. We have our own view of the number. It is about 4.5 in storage, but clearly, when the partners say it is shifting to us and as you know in this business, it is the partners. All of our business here goes through the partners. So, we can't be gaining that much share without the partners helping us. In fact, we really appreciate their help there. It would be impossible for us to be that effective without them, so that works very well.

Sounds like you are getting some HP VARs to carry the IBM line?
Palmisano: I think there are a few hundred HP partners actually carrying our lines where they were not before. So, a large number have moved over to IBM that were not IBM partners historically. That has also helped that more and more people now are representing us in the marketplace.

Some integrators tell us they would like to expand their offerings but capital constraints prevent them from moving as quickly as they would like. Can IBM help finance their efforts?
Palmisano: [Mike] Borman can tell you that. I asked Mike about it-- since 200 companies had come over, he just wanted have a little stability for a while. You want to make sure that the guys that are with you, you are keeping competitive and they are making good money. You don't want to have too many partners. In a way, it is good to have some competition so your partners can do well. So, it is a balancing act between too many and too little. It is always a fine line. The most effective thing for us is that our partners are doing well financially. The best partner for us is a very profitable partner. Because then they can afford to invest.

And so why is that important? Well, it is very important when you go through what is happening in the industry. As you know, I'm not going to take you through what you've heard me say a thousand times in the last couple of years, but on-demand is an industry shift. People try to get it confused with the marketing program or adaptive architectures or EDC, but it is not. It is an industry shift. It is the client driving more productivity and revenue growth. To do that, depending on where you are positioned as the partner, you are going to have to invest money like we do in IBM. We spent another $800 million this year to get our skills up to do it, right? That's just internal. So, they [partners] are going to have to invest because as you talk about things like horizontal integration, which requires a different infrastructure and the skills to do an open infrastructure, all those sorts of things are skills and so it is very important for us that partners are doing well financially so that they can afford to invest. That is very important. If they can't afford to invest --and this industry moves so fast-- that is not a healthy relationship.Where do you expect partners to invest? At the high-end of the channel where there is an early play for on-demand?
Palmisano: See, I don't look at it that way. I tell you why. The business problem is the same. And I know and understand that this is probably true. When people think of IBM--they think of large enterprise. I mean our SMB business, as you know is going great. It's all partners, as you guys know. We put in a territorial model that is all dependent on partners and that business gained a bunch of share last year. So we see momentum going into this year and that is a worldwide statement. That is not just because the U.S. economy is getting better. But, the point of it is that the business problem that people are trying to solve is identical. What that is is that they are trying to integrate CRM systems with ERP. They want to integrate that because they want to get the productivity to drive the revenue growth. The money frees up investment to go get revenue growth. That is what we are doing. We are freeing up the money to go invest. So that is what every business is doing. Size has nothing to do with it. Size is just a dimension of the problem. It is more complicated for us because we are in 165 countries. It is more simple if you are in four states. The problem is the same. It is identical. I am not going to argue that it is easier for the smaller guys than the big. The opportunity is the same.

So then IBM needs a broad set of diversified partners. Right or wrong?

Palmisano: The question is for the partner is where do you want to play? This is why we think we need all kinds of partners, by the way. We need consultants and integrators, we need value add firms, guys who focus on the infrastructure, we need distributors. We need all of these things because to solve the problem, you are going to solve it in multiple dimensions. It is such a large opportunity that it is a problem that we know we can't solve ourselves. We don't have the capacity to address the market. We can't take our capacity in Global Services, we don't have enough resources on our own to address the market. We are not trying to.

Speaking of IBM Global Services, it seems you want solution providers to partner with your services organization but it is easier said than done.
Palmisano: I know that Doug [Elix, general manager of IBM Global Services] has been working hard at it, and they are really trying to make it better. I read the [CRN] article that you guys wrote about us being a little bureaucratic, but the internal people say the same thing. So it's a consistent thing. I read it and you know, I said, ' This is fair.' I said to my own people the same thing. It is true. Now, I will not defend it. We love to do lots of things to make ourselves a lot more speedy, so I am not in any way going to defend it. There is a lot we can do to be more efficient in how we partner with few constraints and demands on the partners as well as ourselves, probably. I guess the good news is that we are the same for everybody. The bad news is that is cumbersome so we do need to address it. I am not trying to make light of it.So, it's important to get this right?
Palmisano: At the end of the day, one of the reasons we are trying to really work with the partners is because the market is so big that we do believe it is a market shift. I honestly, I think the fact that we are doing better and our partners are doing better is because we are focused on this opportunity area not just the economy getting better. If it was strictly the economy, all boats would be rising equally. So something else is going on. Not all boats in the enterprise space are rising equally. We know we gained share in SMB, in servers and storage, we know we gained share in the middleware [space], we know we are No. 1 in financial services , communications, public sector, we are No. 2 in industrial and No. 2 in SMB. So you know we know all of this so that something has changed other than the economy getting better. Not everyone is doing as well equally. I guess the answer is that there is room for all of us to do well and we are working at it. I think the [IGS business-partner] charter helps and obviously we can improve.

We also ask the partners on the other side and I think they have a set of responsibilities, too. Clearly, they have to invest in their skills. I know that varies if you are an ISV or a consultant, integrator or what have you, so I will keep the tie level. They need to make some investments on their skills to capture the opportunity. I mean there is no doubt about it because if you don't have skill in this game, if you are going to transform the infrastructure to be much more open and therefore on-demand like, you have to get your skills up.

If they don't have the deep pockets that a large corporation has, they have to get a return on that investment pretty quickly.
Palmisano: Right. It seems that on-demand, people don't understand what it is. Now they want to know how do I fit into it? That being the case, where should they invest first and where do you think you can get the fastest return on that investment?

To me, it depends on where they are. That is why that's hard to answer, generically. You incrementally gain off of your base, so if they are an ISV in an application space, I think it straight forward in the sense that if you are heavy into ERP, you understand that you are going to have to link your back office to the front-end sales systems. So there is a whole level of opportunity to extend beyond ERP into sales force CRM kinds of things. So you incrementalize there because the client wants to integrate. It is the same thing we are doing. The reason I can talk to you about Edge, because we run this thing end app. I could never have done this in the past. I could not have looked at this thing horizontally if we had not done this. Small businesses would kill for what I have and nobody enters [data], it all bubbles up in the work that people do. So you create a portal in which makes a wonderful opportunity around creating portals into the systems vs. having to switch from one CRM system to another ERP system. You know, to integrate that and put a portal in, depending on what the client needs -- it's a terrific opportunity, but you have to fit in the spaces. Either side of CRM or ERP. Go back to the infrastructure -- if you are an infrastructure player, the ability to get into the horizontal application space is difficult. However, all businesses want to consolidate to get the savings. Both of these things have put paybacks in the actual budget cycle. Either one of these areas will pay back for the client within a budget year and I think will therefore generate income for the partner within a fiscal year. Because the pay backs are fast.

ROI probably tells only one side of the story in selling this to customers.
Palmisano: On the other side, it is about consolidation and if you look what is coming down the line, and you see the platforms today where you can run Linux with an iSeries, you can run Linux on PowerPC [platforms], you can run Windows, OS/400. You can run all of these operating environments vs. hard wire them. Do it physically within in the software. My only point is that to the partner, it is a consolidation play. So, you go in, you take all that stuff and even small business have several [severs] while large companies have thousands. It depends on where they are positioned, and they all want the savings associated with it. Understand that the biggest issue is the labor -- not just strictly the hardware. The more images, the more people.So what you are talking about are projects involving business and technology integration.
Palmisano: Right. My only point is that there is tremendous opportunity if they are positioned in that space. So, I gave you a long answer because it depends where you are positioned as to where you should invest.

So what are the customers telling you?
Palmisano: We just did a CEO survey of 500 CEOs around the world (mid-large, not small). The entire focus in 2004 shifted to" "I know I have to move to... And if I need to move to growth, I need to be able to drive these kinds of initiatives that yield productivity, because that is how I'm going to fund the investments and to do this." They don't call it horizontal integration. They say that they have to connect these things and my business. We call it horizontal integration. They use their own words. It is interesting because a lot of them say that they don't know if they have the capability themselves. They need to find a partner--a set of partners to help.

It sounds as if you are encouraged about IT spending and the outlook for this year.
Palmisano: From a partner perspective, the reason I would say it's encouraging is because it is demand. The client is shifting out to invest again, therefore spending is up so they [partners] are selling more into a market opportunity. I mean, we began to see it in the third quarter last year. We began to see [business] people start releasing money for projects again. It clearly showed up in Q4. Our results were more than seasonal. Because the seasonal projection, we would not have had-- if you took our usual third and fourth quarter--you know, we would not have had the fourth quarter we had if spending had not shifted. You know with all of the seasonal trends and so we had a strong close and you know, we are encouraged by what we saw.

It sounds like what you are saying is you are still a technology company. What do partners push now? Do they need to be able to push their understanding of business processes look more at this kind of horizontal approach you are talking about?

Palmisano: Let me tell you what's going on and I think it will make some sense. If you think about what it really happening in this industry, it is going back to the past. Right, it is re-integrating. Which is one reason why we put systems and technology back together again.IBM recently announced it was combining its chip making and hardware systems divisions under one group. And so, if you say why is it reintegrating, and why did IBM software now organize themselves around industry segments not by brand anymore. If you go through what we just did in the last 30 days, it is a statement of what is happening in the marketplace.

So how has IBM responded organizationally to the changes?
Palmisano: We are not driving this reintegration because I woke up in the middle of the night and said let's reintegrate this place. It's a big complicated thing. The simpler thing is to run it like you'd run a big GE. All the things separate do very, very well and add them all up. But that is not what the market wants. It is the easier thing, but it is just not what the client wants and the client is forcing this integration. So it will make a lot of sense when I say they are forcing the integration. The technology is also driving the integration. But they [the customer] are forcing the integration because they realized they did all of these things in pieces. You know, point solutions. You were supposed to be able to take the best storage, the best operating system, the best application, the best hardware platform, they were supposed to slap it all together themselves or use a partner.

So what happened?
Palmisano: It was supposed to be less than this other thing that was integrated and optimized. It did not work -- it cost them more money. Then what happens is you go into a downturn. Do you guys remember two years ago at ParnterWorld when I stood up and got torched for this. Not by the media but by the financial sector, the analysts. I said that I know everyone thinks the industry is going to come back in the second half of 2001 (please check) but we are not going to plan for that. We are not going to plan for that because we think it is going to be a couple year run and it will be a tough, white-knuckled fight for competition and we want our partners with us. I know you guys were in the second row or something. And oh, by the way, that is what it is going to be about because this thing is re-integrating. And when it re-integrates, people are going to want value around the solution and therefore standards are going to become more important. You know, it's like I said at LinuxWorld, Linux is ready for the enterprise. And they said, what the heck is he talking about? Guess what, they are so ready for the enterprise that we get sued everyday. So, something has changed.

So why should partners care about this reintegration?
Palmisano: Obviously, something changed, right. Something changed. Anyway, the point of this is that the world changed. My only point is that when you say OK, it is a long way of saying that why is this important to the partners.

It is important to the partners because that is what demand is. If the clients are forced into integration -- if IBM was going to take software to 15 different brands (which is even more when you add up all of the different areas, e-commerce, WebSphere) and then take the sales force and say no guys you are going to orient yourselves by customer set and you split the whole thing up in the air which we just did in the 4th quarter and then take the systems group which is having a great year by the way, the technology group was turning around and shoving together. OK, because it is re-integrating. You have to exploit the capabilities of the technology in the software and not just in the hardware. Because that is what is happening. You guys, if you want to get really tech into the deep side of thing, you could say why is IA-64 struggling. Believe me, this is the root of it. It is the integration. I am talking compilers, IO, not applications... My point, though, is that this integration is what's going to drive spending. But my only point is that as this world changes and reintegrates, huge opportunity. They want the world to re-integrate.So then the world changes, [general law] of economics, and everybody needs to understand, this was an economic shift that occurred. We've been in a low-growth environment, not just our industry, which has been flat or down, but the world economies.

And in this environment, so the stimulus that happened to drive this thinking change was the economics, which it always is. The technology just facilitates it. So as this thing economically shifted, companies want to re-integrate. That's why we kept saying a year now, a year and a half ago, when we went to this thing in New York, that on demand is about really being the focus around productivity which will drive industry expansion.

And standards will facilitate it. Because we all want the market to expand. And our partners, we want to expand. We want the envelope of growth to go compete in. It's good for all of us, right?

We think the partners with us can win more business. Some think they can win their business aligning with H-P. That's commerce. I'd like them all to think our way, but I got it.

Some like proprietary, we like open. But that's OK. We'll go compete on our open view; they'll go compete on their proprietary view. I mean, partners will go pick a proprietary approach; we think they should be committed to open standards. But you know, that's OK. Like I said, it's life.So this is why it's so important. So if you're the partner, and I gave you a long-winded answer, but I know you can't...and you can't write it this simply; I'll try to say it at PartnerWorld.

But if you're the partner, you've got to think about where you are. That's why it's hard to give a specific, because they're all different. And by the way, we like that, because there's so many areas to address the opportunity, we don't want them all the same.

Other companies want them all the same. And they want them all the same because that's easy to deal with.

So is this an opportunity that can drive both services and product?
Palmisano: Product side, because it's spending. Because on the services side or the applications side, re-integration has a fast ROI.

If you can connect, if you can do what Moffat did, we saved $11.4 billion in two years. And you say, well, how do you know that's real? Well, we took all this share and our margins went up. Something happened. How do you take all this share, pricing in an industry with over capacity, get share gain and margin expansion?So I guess we did something...something happened. This wasn't, you know, it's not a good speech. It showed up in the earnings. We ended up with $7.6 billion of cash on the balance sheet after we bought companies and bought $4 billion of stock.

Something was more efficient in inventory management, ladies and gentlemen. It wasn't Sam giving a speech. [LAUGHTER] Where did the money come from! Why?

Small in services? Didn't IBM Global Services produce some $42.6 billion in sales last year?
Palmisano: The world thinks we're big only because we're two times the other guy [EDS].We're very small. We're only nine percent share, 9.5 or 9.7. We're not even relevant in this space. But [we seem big] because everybody else is like 5 [percent]. I think a reasonable share position is like 15. Everything else [in market share] we had in the 20s or 30s. This is our smallest share business. We'd like it be more like our other businesses.

But back to ease of doing business. Is IBM almost too big for it to be easy to business with?
Palmisano: No. My point is that we dealt with the partners in the way IBM dealt with itself. So it wasn't inconsistent. Then we said, no, no, the market's re-integrating, the clients are re-integrating. So we have to deal with the partners differently. We need to re-integrate. We can't give them 30 versions of our terms and conditions sliced and diced. And so what we need to do strategically is establish a relationship with the partner and IBM and make it a lot easier to do business.

So what kind of changes does that portend?
Palmisano: Software is now going to be solving client problems not going to market by WebSphere, database, Lotus, Rational, etc. but by industry set. Services has been half industry and half, they call it line of business, but it's product line--BCS, integration, outsourcing--it's always industry. And the hardware also. I mean, Bill Zeitler's team [IBM's hardware group] is also looking at how you bring it all together. So strategically when we talk about re-integrating, we need to get to an environment strategically where the partner can pick the capabilities from IBM, whatever they happen to be.So, are you getting there?
Palmisano: Transitioning. It's easier, quite honestly guys, for me to transition IBM and get people focused this way than to transition [the entire partner ecosystem], because I'm dealing with my own economics.

What about the transition for partners?
Palmisano: That ecosystem I need to help with. As we say, "This is where we want to go," I've got to make sure as we move them I don't hurt the profit. I shouldn't say "I," but IBM. I think the partners would say, "Yes, it will simplify it. I got it. It makes sense." So strategically, conceptually the world says yes, I just want to take IBM capability and help me create value. But if I say this at Partnerworld, there will be no debate.

But partners will worry about the bumps along the way.
Palmisano: I know, evolving it is the tricky thing. And evolving it around the world, because our partners are global, they're not regional. But I think if we could all of us agree that this is the path we want to go down and then keep working together, because the best way for us to work with the partners as you know is to have an open dialogue and communications [we'll be successful].And we have to be fluid, and in a way we have to trust each other. At the same time, IBM today have very strong points of view. We have a strong point of view around the importance of standards, around the importance of adding value around integrating. We want more people in our ecosystem committed to standards-based computing architectures. Now, I understand that that can run on our stuff, it can run on HP, it can run on Sun. We'll go make sure that we have the best cost points and the best technology.We're committed to standards and we want our partners with us there, on open standards-based architectures. We are going to be biased, right? People that are committed to a proprietary approach, we're not going to have as much interested in helping as those committed to standards. People that want to work with us to get to standards based computing models, we are very open and willing to invest in. People that feel that they've to stay on proprietary approaches, they've made a business decision.But there are proprietary companies that probably want to invest in them, but we're not that proprietary company. We are insisting that guys buy in. Now, you buy in to our standards based approach, we'll [assist partners with] marketing, collateral materials, a lot of the things we've done through the partners and all the programs. We're willing to go leverage our marketing to help the partners.But if you're going to go take a proprietary approach not a standards based approach, then we don't have the same level of interest, because that's another ecosystem.

So you want these guys to commit more to the IBM way of thinking.
Palmisano: No, more to standards. Open standards. It's not an IBM thing; it's an industry thing. We think there's a need for an ecosystem committed around standards. There's clearly a huge ecosystem committed to proprietary approaches, as you know. So all we're saying is we want some counter balance.

Earlier when you were were talking about re-integration at the customer level, it sounds like a mid- .to high-market enterprise sell. What is the message to partners that are in the SMB space?
Palmisano: Well, what do they suggest we should do differently? [Get] more local relationships? Perhaps it's that and communication, understanding the solutions and being easier to do business with.One of the things we tried to do was this territory model, we started with 300, I think it's 277 now, they can do promotional pricing, they create their own ecosystem with partners.I just reviewed the guys in the District of Columbia [they got capital] the other day. They're growing 25 percent a year and they're going to grow 25 percent this year. And they work with probably 60 or 70 local partners. It's not just the big guys. And we did co-marketing together, doing demand creation together, they're passing leads.The territory managers have the capability to promotional price. IBM.com is generating demand, they're passing it. So some places it's working, I just saw one that's working really well. I [hope] you'll give me 10 others that aren't working very well. I mean, I got...the 300, I know that's clearly going to be the case. I think the model is right, and if you think about what the regional guys want, they want the ability to work with us, to be able to be quick on pricing so if there's a competitive situation they are in it.You know, HP is making a big push in the consumer electronics space. Are you planning to jump in?
Palmisano: We are enterprise. We used to be in retail. We were in retail, we were in retail PC. Remember we were an Internet service provider, called IBM GN, the IBM Global Network?We are enterprise. We [make] no bones of what we are, we know what we are. We are the leading company in the enterprise. There's only one sector we're not number one in, that's industrial. And then midsize enterprise, we'll be two. We were three; we'll be two.Why enterprise? It's faster growing than the other segments [including] consumer. Better margins. On our model, it's very straightforward: we want to be able to generate return on invested capital better than the average.We're better than the industry, so put that aside. Better than the S&P 500. The multiple of our stock is at a premium for this year and last year for the first time since 1985. We've got to continue to do it. And that's why we like enterprise, because it generates more shareholder value.Strategically I don't think you can do both. Other companies think you can. They think you can learn in consumer electronics and music downloading and exploit. The business model is so different. I don't know how you do that. I'm not saying it's wrong; I just don't know how you execute it. I do know how you execute enterprise, I do understand how to take share enterprise and win with clients.

Other people have made other choices strategically. I think it's hard to do. It's hard to do.

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