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We’ve been away for a few days celebrating Fallon’s fifth birthday in Orlando where the preferred destination has shifted from Disney to Universal Studios, source of all things Harry Potter. While we were away, IBM celebrated its 100th birthday by claiming, among other things, to have invented the personal computer, soiling the legacy of Ed Roberts and pissing-off all real geeks in the process. Here’s a video in which you’ll see IBM’s VP of Innovation innovating his way to this completely bogus claim at the 2:37 milepost.

This sin shall not go unpunished.

Among his milestones IBM’s VP of Innovation completely forgets to mention the company having helped automate the Third Reich.

And while IBM was celebrating other noteworthy achievements, a reader pointed out to me what he thought was an IBM data breach:

“My wife and I are Health Net customers. A month or so ago we received a letter from Health Net saying that their contractor, IBM, had been hacked and that our medical records including SS# had been stolen… You can imagine how I feel about it. I’m in favor of the bin Laden treatment for the hackers and serious bitch slapping for everyone else concerned, from the pointy haired managers to the OS pukes who have refused to create secure systems despite knowing how to do it. The people who have resisted IPv6, which provides authentication, over the last decade are another good target for serious bitch slapping. Someone said that the primary reason the computer industry advances is ridicule of second rate technology. Ridicule of insecure systems and networks is desperately needed.”

To be fair to Big Blue, it appears their system wasn’t hacked in the manner we’ve been discussing lately and IPv6 had nothing to do with it. Rather, in March IBM discovered nine disk drives were physically missing from the Health Net data center it runs in Rancho Cordova, CA. The drives contained personal and health data on 1.9 million of Health Net’s six million customers.

We’ve grown so unsensitized to these data losses that 1.9 million doesn’t seem a very big number anymore. And this particular data loss, since it doesn’t involve some invisible hand reaching through the wire, seems somehow less invasive. That surely must have been the way Health Net felt about it, given this particularly callous sentence from their press release about the loss: “While the investigation continues, Health Net has made the decision out of an abundance of caution to notify the individuals whose information is on the drives.”

Doesn’t this imply that Health Net believes that informing us of the loss of our medical data is optional?

Time for all you HIPAA lawyers out there to tell us what right we have to know when our personal health data has been stolen. Was Health Net just trying to spin this story in a smarmy direction or do they actually have no obligation to tell us?

As for IBM, this loss happened on their watch so what did they do about it? HealthNet outsourced its IT to IBM. IBM outsourcing involves a long check list of things to do to each server to lock it down and make it easier to support. IBM techs install support tools like antivirus and backup. Since they inherit network and application designs from the customer, IBM doesn’t guarantee they are hack proof.

Did you know that? I didn’t.

IBM tries to find problems, I’m told, bring them to everyone’s attention and they try to fix them. Sometimes a problem can’t be fixed or won’t be fixed in which case IBM writes a “risk letter” documenting Big Blue’s concerns and the business risks to the customer.

That’s what is supposed to happen. What really happens is usually a bit different. These days most IBM contracts are under funded to the point of being irresponsible. There may not be time or funding to do basics like securing the servers. With offshoring on top of outsourcing, very inexperienced people in foreign locations are doing much of the support work remotely.

But you can’t blame the physical theft of nine disk drives in Rancho Cordova on an entry-level support guy in Pakistan. This story appeared in Computerworld back in March and then quickly disappeared. I’d like to know what the Hell happened? Wouldn’t you?

As far as I can tell IBM never said a word on the subject.

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Next month an IBM computer called Watson will go head-to-head against the top two human Jeopardy champs for a prize worth $1 million. Whether Watson wins or not, what I wonder about this contest that was four years and untold millions of dollars in the making is how it squares with the image I’ve presented here over the last several years of a penny-pinching, greedy, avaricious, and not particularly smart IBM? The answer is simple: IBM has a split personality.

IBM values research and development. The research organizations like the one behind this Jeopardy stunt still share in a specific percentage of IBM’s gross sales. That’s how IBM keeps coming up with the amazing technologies we read about in Scientific American and Wired. Those divisions have not been looted and continue to operate.

So we can expect many noteworthy research innovations from IBM in coming years as well as more publicity blitzes like this Jeopardy thing that are substitutes for actual marketing because they involve no real products.

As for the rest of IBM, the product teams are small and still enjoy some level of autonomy and power. They have many constraints in their jobs — limited funding and the fact anyone in the company can veto their plans — but they still get stuff done.

It is the really big IBM teams like strategic outsourcing that are under constant change, constant threat (of resource action), under constant pressure, horribly over-managed, and badly managed. They are under attack from three sides — ridiculous budget constraints; very troubled contracts; and a sales organization that can and will sell anything at any price, no matter how much it damages the company.

So IBM will continue to roll out new hardware and try to get top money for it. IBM will continue to sell lots of software, but put very little money back into that business. IBM will continue to loot and damage its services business. The effects on the services business are now beginning to show up in the quarterly reports. It will take years, though, for the collateral damage to become apparent. By then the executives who did the damage will be long gone.

IBM’s competitive advantage over HP and Sun was IBM had a services business. Then HP bought EDS. Sun was swallowed by Oracle. While IBM understands it needs a services business it is mismanaging and damaging it. In doing so IBM is not only hurting one part of its company, it is souring its relationship with customers. An upset customer will be inclined to not only drop its services business with IBM, but also its hardware and software business too. In time IBM’s services business will become a detriment to the company.

And that’s IBM’s real jeopardy.

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I have worked from home since the first time InfoWorld fired me in 1994. When you work at home you live at work, which is precisely why telecommuting has been so embraced by non-smokestack industries that love the low office rents and longer working hours. But the tide may be turning against working at home for some larger companies. Lockheed-Martin, for example, effectively banned the practice recently, sucking nearly all the company’s telecommuters back into the office. IBM, too, is rethinking its work-at-home strategy.

Lockheed earlier this year told its managers they all had to work from plant sites, then followed that by canceling any telecommuting services paid for by the company. In theory workers can still telecommute on an occasional basis, but only on their own dime and only if they score a three or above on L-M’s five-step performance review.

As a defense contractor Lockheed-Martin may be a special case, not so much for the security reasons one might imagine in the wake of Wikileaks, but rather because defense plants tend to be owned not by the contractor but by the government. In today’s austerity it could be that Uncle Sam wants his share of the savings from all that staying home. If Lockheed wants the Feds to cover that light bill there had better be some bodies being lighted. This is pure speculation on my part, though informed by a small role I played 30 years ago in a battle between Stanford University and the Office of Naval Research over billing for indirect costs of research, which is very similar and equally byzantine.

IBM, too, is pulling back somewhat from telecommuting, though Big Blue has no government-owned facilities for those workers sucked back into the mother ship. IBM literally has more workers than desks.

At IBM’s new delivery centers like Dubuque, IA, Boulder, CO, and Columbia MO they now want all the IBMers to work in the office, in sight of management.

Teams are usually more efficient when people can work together. Part-time telecommuting often works best. Then IBM decided everyone would telecommute followed by making the teams geographically dispersed. Now people can work together for years without ever meeting in person.

IBM went too far with telecommuting. In their haste to close offices they made mistakes, distributing teams that had been more efficient working physically together. In this case efficiency often means that oxymoron bureaucrafic efficiency.  When something was needed fast at IBM they used to be able to fill out the paperwork and hand carry it to the group, eventually finding someone who could handle the problem on the spot. Now all requests go into a big queue in the sky and nobody knows who will handle it, or from what country. There is no longer a way to push urgent matters through faster, no way to get them solved by the right expert, either. Worse still, requests can be rejected and deleted from the queue without notice. In a very bureaucratic company like IBM, just buying something may need 4-6 approvals with a queue for each. Telecommuting inadvertently turned the complex into the nearly impossible.

Luckily for IBM, somebody has apparently noticed this snafu. Now the pendulum is swinging the other way, though IBM has found a way to screw-up that, too. The new system features low cost delivery centers with terribly inexperienced teams of workers. IBM can’t seem to hold onto what is good. They throw out both the good and the bad for the sake of change.

Which brings us back to Lockheed-Martin and that performance evaluation of three or better needed to qualify for telecommuting. Suddenly there are a lot of Lockheed managers getting ratings in the two range for the first time in their careers. This is a subliminal effect since employees often don’t share their ratings with co-workers, but it is definitely happening. What’s interesting (and sad) about this is what it means for any future Lockheed layoffs. Next time the lower third is cut off, at least some wouldn’t be in that third had it not been for this telecommuting decision.

Management is cocking the pistol for workers they don’t like then allowing the next layoff to pull the trigger.

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For the past 2-3 years I have been a pain to IBM, correctly pointing-out a number of policies and actions by the computer giant that have shown a pattern of disrespect to employees and customers alike. I can’t argue with IBM’s financial performance but I can argue that this performance has come at a cost that is too high for the people of IBM and even for IBM customers, which is why my 2010 prediction for Big Blue is Customers in Revolt.

Top management at IBM has nearly always come from the sales side of the business and it is that sales side that has been outdoing itself quarter after quarter helping IBM earnings to grow even in a recession. It doesn’t hurt, of course, that lots of IBM revenue comes from its international operations and has benefited from a weak dollar. But a fair amount of this success — at least on the services side — comes from very aggressively bidding for work.

But what happens if your bid is too low to actually make money for the company? At IBM, ironically, that’s not a problem for the sales people. It is a problem for the people charged with actually performing the services.

According to IBM customers I have spoken to, the company seems unable to create a solution and put a price to it that anyone would accept so the sales organization appears to sell almost anything at whatever price they can get. They collect their commission and move on to the next deal, leaving behind a mess for the service organization to deal with.

Dealing in this case means cutting costs to the point where the contract is profitable even if not truly fulfilled. Because there is such a big disconnect between the price of the contract and the cost needed to deliver it, crazy things are done, starting with offshoring on a massive scale.

While offshoring is not intrinsically bad, it leaves almost nobody working in the data centers, which are necessarily back in the U.S. When the server folks are thousands of miles from the equipment, how does the equipment get installed? Who does the hands-on work? If a machine breaks, how long does it take to get someone there to fix it?  IBM customers are learning the rueful answers to these questions.

IBM is also building several new “global delivery centers.” One of these is in Dubuque, Iowa. Why Dubuque? It is my understanding that IBM hopes to reduce its labor costs and one way to do this is by choosing remote locations like Dubuque with few locals who could qualify to be IBM techs or engineers. Experienced IBMers being downsized in places like New York won’t move to Dubuque, so they can be replaced with cheaper (and younger) labor. Dubuque’s lack of native talent means IBM can staff the centers with mostly foreign H1-B personnel, again so they can pay them less and have no long-term benefits exposure.

I find it difficult to see how customers benefit from these global delivery centers.

But wait, there’s more! The offshoring, the spin off of network work to AT&T, the “global centers,” the new internal processes are not much compared to the latest IBM ploy I’ve heard about — the use of used equipment. To save money on its outsourcing contracts, I have been told that IBM is refurbishing old equipment and substituting it for new. The customer pays a service/lease rate for new, but in the IBM data center what’s actually in the rack is used hardware. Since IBM holds the title and lease and customers never visit the data centers anyway, the customers don’t know.

Only I guess now they do know.

If I was an IBM customer leasing hardware that was represented as new I’d darned well want to verify that’s the case. Send somebody to the data center and check serial numbers. What can it hurt? You might save some money on the contract or score some new equipment or both. It’s worth a shot.

Corporate America will tolerate a lot of this kind of behavior, but there are limits, especially when deadlines are consistently missed and deliverables fail to perform as promised. That’s why I predict troubles for IBM in 2010 with customer satisfaction.

Take a look at that contract, Mr. or Ms. CFO (not the CIO — he or she sometimes can’t be trusted in these things), verify the number of machines and bodies that are supposed to be involved. If IBM is using only half the promised labor or half the promised hardware (or both) then raise some Hell.

Remember, it’s your money.

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Judging from the 70+ reader comments, many from present or former IBM employees, my last column about the arrest of IBM Sr. VP Bob Moffat on insider trading charges hit a nerve.  In a few hours I’ll be posting another column on a completely different topic, but I can’t let this one go without making one more observation.  It has been almost a week since Moffat was arrested and in that time, as far as I can tell, IBM has made no comment on the case to the press or even to its own employees.

Why no comment?  I’ve been wondering that aloud for the last day or two, asking my friends and almost anyone I meet why IBM would be so foolish not to at least issue a press release on the arrest?  After all, the company supposedly cooperated with the SEC investigation.  They should have known the arrest was coming.  Why weren’t they ready with at least some statement reaffirming corporate values or possibly distancing themselves from Moffat?

Doesn’t IBM management owe that to its 398,000 employees?

They removed Moffat’s bio from the IBM web site, but that’s all.

Lack of comment suggests Big Blue doesn’t know what to say.  Perhaps the company is paralyzed. Maybe there is disagreement in the executive ranks about how to handle the problem.  Maybe Moffat, himself, was the guy who would have helped craft any response but now he’s unavailable.  Beats me.

But it doesn’t smell good.

My Mom, who is 85 and, like me, doesn’t own any IBM shares, may have put it to me the best.

“My guess is that this isn’t over,” she predicted.  “IBM could declare him innocent until proven guilty or they could write him off, but the fact they have said nothing at all means there are probably more shoes to fall. They could announce an investigation to ferret out others who made the same mistakes, whether those others exist or not.  And that’s what they would have done, had all the remaining guilt lay below Moffat’s level. But it probably doesn’t. I’d look upstream.”

Mom is a clever girl.

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I have no idea whether IBM senior vice-president Bob Moffat is guilty of insider trading or not, though that’s what he was arrested for yesterday.  What I do know is that Moffat’s job since 2005 has been as the architect of IBM’s project called LEAN, which is intended to adjust Big Blue’s global labor force to maximize profitability. I’ve written quite a bit about LEAN, much to the consternation of IBM, characterizing it in large part as a way to replace expensive older American workers with younger and cheaper workers in India and Argentina while cleverly dodging U.S. age discrimination and possibly other civil rights laws.  Whatever the legality of LEAN it is downright mean and shows little respect for the people who made IBM what it is today.

What does it say, then, when the architect of LEAN is arrested for alleged insider trading?

The good news, I guess, is that he was caught. The rest of the news is bad.  If Moffat is guilty as charged then it shows serious ethical and moral lapses at the very top of IBM (Moffat has been mentioned as a possible successor to IBM CEO Sam Palmisano). Even if he is proved innocent Moffat is still guilty of poor judgment in his choice of friends and of being a blabbermouth.  Since Moffat is being charged, in part, with insider trading of IBM’s own shares, then LEAN itself should probably come under some scrutiny as a possible tool for generating insider profits.

Worst of all, this might well turn out to be yet another example of parasitic management using the power of the corporation entirely for self-enrichment.  There is no insider tide that raises all boats.  There is no insider trickling down, except perhaps in the manner of honor among thieves.  Moffat and his gardener may have benefitted, the latter by getting to mow twice per week instead of once, but the rest of us — and certainly the 398,000 other people who work at IBM — are no better off for his alleged actions.

So Moffat is guilty or he’s stupid, neither of which says much for IBM.

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The heyday of Artificial Intelligence (AI) was in the 1970s and 1980s.  Here was the logical evolution of office and industrial automation that would put an expert into every computer and by doing so both replace and augment employees, changing forever the world of work.  Only it turned out not to function that way because we underestimated the effort involved.  It was easy to imagine putting intelligence into a computer but very difficult to do so in practice.  There wasn’t enough processing power available for one thing, nor were there even enough experts, since it seemed to require having one on-hand to keep the machine in tune. Now IBM appears to have a plan to do it all again, though with a twist.  And this time, thanks to Moore’s Law and high costs for employee health care and pensions, it might even work.  God help us.

Today’s computers are smaller and thousands of times more powerful than the ones we worked with during the AI boom, but the problem is still one of programming — getting knowledge into the system in an efficient and usable manner.  For that matter, it is hard to envision computers other than robots performing many of these workplace functions, and robots aren’t ready. The better solution then, according to a just-published IBM patent filing (US29228426A1), might be to find a way to suck knowledge out of the experts then inject it into younger, stronger, cheaper employees, possibly even in other countries.

IBM’s proposed Platform for Capturing Knowledge describes how to use an imersive gaming environment to transfer expert knowledge held by employees “aged 50 and older” to 18-25 year-old trainees who find manuals “difficult to read and understand.”

IBM also discusses how its invention could be made available for customers’ use in return for “payment from the customer(s) under a subscription and/or fee agreement.”

What we’re talking about, then, is a possible revolution in workplace training, one where a lifetime of experience would ideally be sucked from the mind of an experienced worker to be injected into a trainee and then the older worker discarded.

There are several thoughts that came to mind as I read this patent application. Could IBM really be serious about such a plan? Then I imagined how enthusiastically the idea must have been received at IBM intergalactic HQ in Armonk.  What a great idea! Transfer knowledge from old to young, American to Argentinian, or even just hold it in machine storage for later use, disposing of the expert in the meantime.

To see it this way you have to understand one recent IBM mindset, which is that culturally IBM does not believe in job specialization.  Anyone can manage anything.  Anyone should be able to perform any job.  For a company whose motto used to be “think,” IBM is trying to reduce it to “do as instructed.”

This patent is a natural extension of that culture.  Though part of being an expert is the ability to figure out new stuff and master it.  But when you get rid of the real experts, who is going to figure out the new stuff?That doesn’t automatically fall out of this computer gaming scenario, which teaches functions and techniques, not intuition or actual experience.

Then I thought about that moment late in the tenure of IBM CEO John Opel when someone came up with the bright idea of urging companies that leased IBM mainframes to buy them, creating a huge revenue bubble that grew the company to more than 400,000 employees, setting it up for its 1990s crash.  Converting the leases was not, in itself, a bad idea. What was bad was assuming that such huge, essentially one-time, revenue would continue perpetually, which is exactly how IBM saw it.  Really.  Isn’t this the same thing, only now they are converting employees into some more disposable form? What happens when there are no more experts to convert?

IBM’s greatest threat is its ability to stifle innovation.  The way the company is off-shoring jobs and minimizing the value of its support workers demonstrates this.  The threat will be when a group of smart folks in China or India realize how things could be done better, then starts taking work away from IBM.  They will have access to an army of IBM foreign workers, too, who will bring customer contacts with them.

On the other hand, this application is also typical of an IBM patent.  There are many aspects to implementing such a training process — data gathering, information management, software, hardware, etc. — and IBM has patented every part.  So if anyone makes a something similar, IBM could sue.  If you create gaming software to teach almost anything to almost anyone, this patent may trump you.

In the end it may not matter then whether IBM runs out of experts or not.  Just so long as they don’t run out of lawyers.

I, Cringely readers from the Boston area who want to see if I reflect light in person can run that controlled experiment next Thursday, September 17th, when I speak to the Society for Information Management’s Boston Chapter.  Here’s the link. My topic is Consumerization of IT: Is Corporate IT about to Lose Control Again? The answer of course is “yes,” but the devil is in the details. Please attend if you can.

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Readers have lately been asking me to write about IBM.  It seems the BBC has been on the case somewhat over imposed changes to Big Blue’s UK pension scheme.  These mirror similar — though more draconian — changes imposed on IBM’s U.S. workers a couple years ago.  Alas, this just seems to be a trend we’ll be seeing more and more of.  The problem isn’t in IBM per se, it’s in the distorted reward structure perceived by most public companies.

Two years ago when I covered IBM’s yet-to-be-announced layoffs in some detail it sent the company into a tizzy of denial.  Why?  “Because you were right,” said a source who still works at IBM.  “You called them on the big changes they were planning to make, forcing the company to issue denials then drag those changes out over a couple years where they’d intended to impose them all at once. They never thought one blogger could have that much impact.”

Explain that to my kids, who think I type for a living.

What happened two years ago was IBM deciding to move most of its jobs offshore to save money after a sobering look at the life cycle cost of its U.S, workers. If you look at the total future cost of an American employee for the next 15 years — it is a pretty big number.  Then add the double digit inflation cost of U.S. health care and that number becomes bigger still.  The only way companies like IBM see themselves being able to continue to operate is by cutting retirement benefits and/or shipping jobs off shore.  In IBM’s case they are doing both.

This is at the heart of the current health care debate, because the cost of medical care is killing U.S. jobs.

The IBM USA pension plan was nuked a couple years ago.  Many U.S. workers got less than 15 cents on the dollar for the present value of the pension they would have received.  Retirement health care benefits for IBM workers are now down to the equivalent of about 18 months of present coverage. This trend is not limited to IBM.  How many auto workers have just lost pension and retirement benefits?

A few years ago Congress was considering legislation that would separate pensions from companies so the company could not spend or lose it.  We sure blew that one.

This downward trend is continuing. IBM — like nearly all its competitors — is shipping-in workers from India to staff many new projects.  The work could be done as well — perhaps better — by the U.S. workers who were not long ago laid-off.  There is something really wrong when a company will lay off its U.S. workers and then import Indian workers to do the same work on-shore.

Now some of IBM’s American workers are being asked to consider taking jobs in Bangalore and other foreign outposts. This program creates new expatriots, giving each a one-way plane ticket.  Pay will be in local currency, possibly at local pay scales.  IBM is being very elusive about these details.  But it is clear that the transported workers will be off U.S. benefits.

But as I say, IBM is merely one example of how messed up things have become for U.S. companies.

During the recession IBM has done extremely well financially with profits better than forecast every quarter. They did this by relentlessly watching their money.  Not only do they look at the numbers for the next quarter, but for the next several years.

The automotive industry on the other hand has ignored the long term in their business planning.  As a result most car companies were completely blindsided by the recession.

IBM has watched the growing costs of maintaining its U.S. work force.  For years they have been cutting staff and moving work offshore.  The U.S. auto industry on the other hand was dependent on future car sales to cover obligations made in the past. IBM planned ahead and started shifting the business out of the U.S.  Other firms did nothing and have suffered horribly.

What this means is that we should expect more of the same in all industries. Benefits will decrease and jobs will depart.

The new reality at IBM is that if you’re brilliant, work really hard, and earn a world-class degree from a U.S. university, IBM may well have a job for you at one of its U.S. research sites working as a “complementary worker.” But don’t expect that job to last for long. Be prepared to ship out to India or China as a “long-term supplemental worker” after you’ve soaked up knowledge for 13 months.

Newsweek recently reported that IBM, HP, Accenture, and others are finding it profitable to detach from the United States (even patenting the process).

“IBM is one of the multinationals that propelled America to the apex of its power, and it is now emblematic of the process of creative destruction pushing America to a new, less dominant, and less comfortable position,” Newsweek said.

This is the HR equivalent of a neutron bomb, which kills people but leaves structures unscathed. So all these companies will be leaner and meaner — mean enough that there may be nobody left to buy their products.

It comes back to the common perception that the sole function of public companies and their CEOs is to “maximize shareholder value” — a phrase that is interpreted to mean “maximize next quarter’s earnings-per-share.” This philosophy works beautifully with the slightly less than four year average tenure of a U.S. public company CEO.  Long before the effects of these bad decisions can show the CEO has bailed, descending beneath his golden parachute toward some retirement heaven.

Where did this cult of shareholder value maximization come from?  And who says that’s the prime directive and nothing else ought to matter?  Not me. In fact it is bad policy both for the companies and for our society in general.  Here’s a good explanation of this phenomenon and what’s wrong with it.

Companies like IBM that take this position are hurting America.  The kids graduating from college now are the first American generation that is likely to do less well financially than their parents.  My kids will do less well than me.  One reason for this is that we’re eliminating high paying jobs and replacing them with lower-paying service jobs.  IBM towns like Rochester, Minnesota and Armonk, New York thrived economically because Big Blue pumped money into the local economy by creating high-paying tech jobs.  What happens to the local economy when those jobs are exported? It declines, perhaps permanently. That decline does not have to be inevitable unless we make it so.

Companies and countries follow certain life cycles, but we do ourselves and our culture a disservice by thinking those curves aren’t affected by the corporate decisions we make.

If we’re going to be analytical, let’s at least do it correctly.

So Oracle ends up owning Sun Microsystems.  I couldn’t believe it at first, thinking somehow that it was all just a ploy to get IBM to pull out the Big Checkbook.  And while the deal may have begun with that thought glowing in the mind of Jonathan Schwartz, it ends with the heart of Sun moving a few miles up 101 to where it will certainly die.

IBM doesn’t want Sun and is gleeful with the idea of Oracle taking over, as you’ll learn if you read the internal IBM memo copied below.  Big Blue does a very good job here of explaining its thinking and most of it makes sense.  No white knight.

But what will Oracle DO with Sun?  Make a lot of trouble for IBM, or try to, I think, but even doing that will be a challenge.  Java is deliberately unprotected by patents and subject to enough industry oversight that Larry Ellison can’t just kill it or somehow make it proprietary overnight.  MySQL could be killed, but for Open Source that just means it would branch and be reborn a day or a week later mostly intact and protected by nerds who would by then be very, very angry.  On a positive side Oracle will undoubtedly make some very useful database appliances and may well come to dominate that as yet non-existent product space.

But for the most part what Oracle will do with Sun is show a quick and dirty profit by slashing and burning at a produgious rate, cutting the plenty of fat (and a fair amount of muscle) still at Sun.  If you read the Oracle press release, the company is quite confident it is going to make a lot of money on this deal starting right away.  How can they be so sure?

It’s easy.  First drop all the bits of Sun that don’t make money.  Then drop all the bits that don’t fit in Oracle’s strategic vision.  Bring the back office entirely into Redwood Shores.  The cut what overhead is left to match the restructured business.  Sell SPARQ to some Asian OEM.  Cut R&D by 80 percent, saving $2.4 billion per year.  I’m guessing sell StorageTek, maybe even to IBM.  And on and on.  Gut Sun and milk what remains.

The plan has to have been on the table since last Fall when Andy Bechtolsheim, the mine canary of Sun’s executive suite, left the company for the second time.  Even then it was clear that the options were a good sale or murder-suicide.

I blame Schwartz, of course, but I don’t blame him, too, because I think he had little choice.  He just wasn’t a lucky guy, it turned out.

So what’s next for Sun?  Nothing, I think.

Here’s the internal IBM memo on the deal:

PPublished on 21 April 2009
News home > Top stories >
Oracle enters a twilight zone

The acquistion of Sun creates opportunities for IBM.
The surprise announcement of the Oracle deal to buy Sun Microsystems creates
some new opportunities for IBM. Since its days as a bright star in the dot-com
era, Sun gradually lost its place in the UNIX server market it once dominated.
How does IBM stand to gain, if and when this transaction closes?
Momentum
First, momentum. According to IDC’s latest report, IBM’s share of the $17 billion
UNIX server market grew to more than 37% in 2008 while Sun’s share fell to 28
percent; since 2000 IBM has gained 19 points of share, while Sun has lost 7
points.
Since 2006, the number of clients that have migrated from Sun to IBM Power
Systems has grown 10% annually to more than 750 clients as of 1Q 2009. IBM’s
Migration Factory has eased the transition for these Sun clients to the Power
platform with its leadership performance and virtualization technologies. In
addition, IBM technologies such as its Infosphere Information Server have enabled
a steady stream of Oracle clients to migrate from Oracle’s high-maintenenace-fee
database to IBM DB2 and Informix data servers. The fact that Oracle and Sun will
share the same address does nothing to change these trends.
Openness
Second, openness. IBM offers every client the greatest choice and best value in
both hardware and software to meet their business needs. IBM will continue to
support Power Systems clients that have chosen Oracle’s middleware or database,
just as we will continue to support the IBM middleware and data server needs of
Sun server clients.
Oracle, after acquiring many software vendors partial to IBM server platforms, has
long promised to protect the compatibility of IBM servers, notably Power; Oracle
clients will continue to demand this compatibility moving forward.
Oracle’s self-serving interpretation of “open” sharply contrasts with IBM’s
championing of Linux and the broad open source community. Despite this, clients
committed to IBM middleware have forced Oracle to maintain long-term
compatibility with IBM software through previous Oracle acquisitions of IBM
Business Partners such as PeopleSoft and Siebel, and this bodes well for Java

News
4/21/2009

http://w3.ibm.com/news/w3news/top_stories/2009/04/stgswg_sunoracle.html

technology. Oracle is unlikely to make sweeping changes – it’s the subtle changes
we’ll watch for. MySQL, an open-source competitor to Oracle’s database that was
acquired by Sun last year, should pose an interesting test of Oracle’s openness.
Sun’s billion-dollar acquisition was hurting Oracle. If they kill MySQL they could
alienate the open-source community, which loved Sun. If they keep it, they may
not have the ability to capitalize on it.
Client confidence
Third, client confidence. IBM’s consistent roadmaps and disciplined delivery enable
clients to effectively gauge the long-term value of their investments in systems,
middleware and services. Sun’s much-publicized business problems will not be
erased in the minds of clients by the Oracle acquisition. If anything, significant
questions are raised. For instance, the omission of any mention of SPARC in
yesterday’s statements from Sun and Oracle is certain to make Sun hardware
loyalists very anxious about a future where Oracle is calling the shots.
Earlier this month the latest of a long line of executive departures from Sun was
its lead processor designer who headed development of Sun’s long-promised and
much-delayed next-gen RISC processor, codenamed “Rock.” The future direction
of Solaris in the hands of Oracle is also unknown, while IBM’s substantial
investments in the future of AIX and Linux are ongoing and well known.
Cost advantage
Finally, cost advantage. In today’s economy, clients are looking to reduce the
heavy maintenance costs associated with Oracle database use. IBM hardware and
software technologies together provide a significantly lower total cost of
ownership.
Several Wall Street analyst reports yesterday saw Oracle’s move as defensive in
response to a dwindling ecosystem. Other observers see the Sun deal as an
attempt to emulate IBM’s successful solutions strategy. However, Oracle’s ability
to manage this type of integration is unproven. Oracle’s remains an application-
led play while IBM has a thriving software ecosystem of application developers
and a much different acquisition style.
Whatever changes take place within Oracle and Sun, one thing that remains
unchanged is IBM’s position of strength and our proven ability to win against both
these competitors.
More details on the Oracle-Sun announcement are posted on the Market Insights
Web site .
For more information concerning this article, please contact Smith, Bruce P.
(brucesmi@us.ibm.com).

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I’m not the biggest fan of Sun Microsystems CEO Jonathan Schwartz. Okay, I am not a fan at all. But I have to give the guy credit for keeping up company morale, because when I polled my Sun contacts recently on why they thought IBM might be interested in buying the company, each thought it was because of his or her division.  What charming — if misguided — loyalty.  These people still feel good about their company.

Of course they are wrong to do so.

I know that Sun walked away from the deal, by the way.  I’m not THAT out of touch with the world. I just think that understanding the Sun mindset might help explain that bonehead move.

So here’s the result of my unscientific sampling of a too small group with the question being “Why would IBM want Sun?”  Remember these answers came from inside Sun, itself.  Notice nobody said “servers”:

1) StorageTek. There’s a big market in z/OS storage still and Sun has
been stepping on their nether regions with it ever since they bought
STK. As depressed as Sun’s price has been, I can imagine (with no
numbers to back it) that getting that track back into competition with
the big storage guys could be appealing.

2) Solaris. There are several ways that Solaris really is the best
UNIX derivative around, and AIX just doesn’t have all that big a share
of the market. Open source seems to be winning in general in that
world. AIX shares code with some pieces of AS/400 though, so IBM
really doesn’t want to open the source to AIX. AIX doesn’t do intel
well. Solaris in a nevada-plus version could replace AIX, with Andrew
support added.

3) Sun Labs and Java. Sun is better at looking *cool* than IBM, IBM
wants to buy that. Even further, IBM has made a huge investment in Java that has paid-off in enterprise application success.  Then Big Blue aoke and realized its future in this market was totally cpongtrolled by Sun – a company IBM viewed as being, at best, adolescent.  IBM wants to control its Java destiny.

4) R&D in general.  For all its failings, Sun has continued to spend about $3 billion per year on R&D, which is nearly the adjusted price IBM would be paying.  There has to be some cool stuff in there.

5) Fishworks/Amber Road, Mike Shapiro’s storage appliance. This system is clever but not THAT clever.

6) Services. Hardly. Not even close.

Schwartz and Sun have a pretty high opinion of themselves despite years of losses.  So they walked away from IBM’s last offer.  But don’t expect them to stay away for long.  There simply isn’t another buyer for the whole thing and Sun doesn’t have the patience to cut itself into pieces.

And the real price IBM will be paying is at least $2 billion less than you read in the newspaper, because Sun – like a lot of tech companies – has profits stashed overseas that it has been unable to bring back.

IBM knows how to play that game, too.