IBM cuts prices to win contract

IBM, the world’s biggest computer maker, said it won one of its biggest server-computer contracts this year by charging less than Hewlett-Packard Co.

“IBM didn’t compete on price” in the past, said John Lally, product management chief at Interland Inc., an Atlanta- based company that hosts websites for other companies. “They were really focused on technical specifications.”

Interland now buys about 300 IBM servers a month at prices he declined to cite. Chief Executive Sam Palmisano, former head of IBM’s server and storage business, ordered development of a new server chip and backed the Linux operating system as an alternative to Microsoft Corp’s Windows.

The redesigned servers will help IBM report a sales gain of 11% and profit of $1.02 a share, up from 76 cents a year earlier, according to the average estimate from a Thomson Financial survey of analysts.

Armonk, New York-based IBM also cut development costs by combining rival server development teams, allowing the company to offer competitive prices, said Richard Partridge, an analyst with D.H. Brown & Associates in Port Chester, New York.

IBM’s shares have gained 20% this year.

Before the changes, IBM lost market share for five straight years. The company has since climbed to No 1 in the server market, industry researchers IDC and Gartner Group Inc. said.

IBM’s server business has stayed profitable as competitors such as Hewlett-Packard and Sun Microsystems Inc have lost money.

“Buyers have indicated for some time that, all things being equal, they would prefer to reduce the number of vendors,” said Marty Shagrin, who helps manage $50 billion for KeyCorp’s Victory Capital Management Inc. in Cleveland, including about 2.9 million IBM shares.

Third-quarter sales probably rose to $21.9 billion from $19.8 billion.

Server computers distribute files to office workers or web pages on the internet. IBM began selling servers in the 1960s and produced key innovations such as using several small computers instead of one big one to solve large problems, known as parallel processing.

The company builds servers for prices from about $1,900 for stereo receiver-size blade servers to millions of dollars for the Z990, nicknamed T-Rex, that runs global operations for companies.

IBM’s systems business, which sells servers and storage networks, had pretax income from continuing operations of $591 million in the first two quarters.

Hewlett-Packard’s enterprise business, which includes servers, has had a $160 million loss. Sun Microsystems, another server maker, has had losses in three of the past five quarters.

Systems-group sales at IBM will rise about 7.7% this year to about $14 billion, analysts said.

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