Sink or swim? Why Big Blue should jump the PC ship

IBM and Dell signed a $16bn deal on 4 March, which would see Big Blue supply "storage, microelectronics, networking and display technology for integration into Dell computer systems".

This OEM agreement started the rumour mill turning over. Some industry gossips mooted a merger sometime in the near future.

When the deal was announced, both parties were keen to stress that a full-scale tie-up was out of the question. They also denied that IBM would be supplying services with Dell hardware. The prospect of IBM pulling out of the PC market altogether hadn't even been countenanced, they claimed.

But recent developments suggest that IBM might - and should - get out of the PC market pretty damned quick.

On 25 March, the company announced its latest financial results. It turned over $81bn in its last fiscal year. It made a profit of $6bn.

None too shabby, you might think. However, that $6bn profit would have been $7bn but for its PC division. The billion dollar loss from the one business unit has sent the rumour mill off again.

There's talk of IBM outsourcing its manufacturing operations. That would certainly make sense. It's a well-trodden route among networking specialists, with Cabletron becoming the latest vendor to go this way (see today's video interview with the company's president of EMEA, Joe Solari, for more on this).

But a total withdrawal from the PC game can't be ruled out. IBM blamed the poor performance of its PC division on the Asian crisis and a PC price war at the start of the year. IBM's new partner Dell hasn't suffered so badly in the price war however, and has resisted the business equivalent of Asian 'flu. It made a profit of just under $1.5bn in its last fiscal year.

Today's high-tech industry is all about playing to your strengths. Unisys realised this when it baled out of the PC market early last year. Its finances have looked better ever since. Olivetti also tried the same remedy, and seems to be on its way back to health.

So perhaps IBM should take the medicine, stop making PCs, and forge a closer alliance with Dell. The Unisys model is instructive: it still supplies PCs to its customers, but sources them from HP - a piece of business Dell was allegedly keen to pick up. Supplying IBM could be an excellent solution for both parties.