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Bloomberg's version of the short:

Stan Druckenmiller, who has one of the best track records in the hedge-fund industry over the past three decades, said he’s betting against the shares of International Business Machines Corp. (IBM) because the company’s business will be replaced by technology such as cloud computing.

“It’s one of the more higher-probability shorts I have seen in years,” Druckenmiller, 60, said in an interview with Bloomberg TV’s Stephanie Ruhle at the Robin Hood Investors Conference in New York today. “IBM is old technology being replaced by cloud technology.”

http://www.bloomberg.com/news/2013-11-22/druckenmiller-short...

jkm929
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Stan Druckenmiller, who has one of the best track records in the hedge-fund industry over the past three decades, said he’s betting against the shares of International Business Machines Corp. (IBM) because the company’s business will be replaced by technology such as cloud computing.

Where is the magic of cloud computing? What is actually in the cloud? A large number of (possibly stripped down) personal computers that do not compute much but request and consume compute power from other computers in the cloud (call them clients), and a smaller number of really serious heavy-duty servers of various kinds. Some, perhaps, to do word processing, some to do graphical (still and moving) image processing, some for information searching, some for data storage, and so on. Right? And who is especially well-qualified to provide such machines? And has been doing so since the mid 1960s?

I think I am with Mr. Buffett on this one.
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No. of Recommendations: 40
“IBM is old technology"

No doubt about it.

IBM was old technology in 2003 selling for $88

IBM was old technology in 1993 selling for $12.

Its old technology today selling for $180.

IBM's customers are not teenagers on Snap Chat, ADDing they're way to the next best thing. They're not people begging Google to sell them more ads.

IBM's customers are businesses, and they want reliability. The joke goes that when a Website goes down you have a bad day, but when a mainframe goes down the world stops spinning on its axis. This stuff is the lifeblood of the businesses it serves. Further, moving off of IBM systems is 1) complex and 2) risky.

Not saying there will be zero attrition or that the Cloud won't impede growth, but people have no idea how entrenched this stuff is. There are IBM systems that make things run that people have no idea about it, and the code was written in the 1960s. This is sticky stuff.

Majority of IBM's customers do not fundamentally care about a beauty pageant of latest and greatest technology, they want something that works. "No one ever got fired for buying IBM" is an important part of the moat.

15 years ago Sun invented Java. That was supposed to kill IBM. There were tons of startups too. IBM went with a "we support it last, we support it best" model. You know what? All those other guys are gone now and IBM has a massive Java Websphere business. People will always outsprint IBM, whether its Sun or Google or Apple. But IBM is running a marathon.

On top of all that, half of IBM's revenue is services. They compete with Accenture et al for big outsourcing deals. How is Google or the Cloud a threat there? They're not.

-gunnar
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I think Buffett was just jealous of Prem Watsa. "I can do tech, too", said the Watsa of the Midwest.

These guys need a dramatic failure once in awhile to remind them about the circle of competence thing.

Dtm
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Is this a new short position for Drunkenmiller? Or is he getting desperate, so he is going public?
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These guys need a dramatic failure once in awhile to remind them about the circle of competence thing.

See! Railroad, tech, what's next?
Niggling doubt: Buffett is insanely rational. Inhumanly so. Probably enjoys considering his opponent's viewpoints thoroughly before crushing them in his own mind thanks to his grasp of numbers and years of experience, not to mention the 160 IQ. Never mind the "aw shucks" homely crap. I don't know if Watsa can match that edge. If he does then it is indeed Watsa:BBRY::Buffett:IBM.
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thanks to his grasp of numbers and years of experience, not to mention the 160 IQ.

I know what my IQ was when I took the Cattell IQ test when I applied to MENSA. I qualified, but later decided not to join.

Does anyone really know what IQ Mr. Buffet has, and what IQ test was used? The reason the test matters is that at the time, the Stanford-Binet IQ test measured mine at 130 or so where the Cattell one that MENSA used at the time scored me at 152, Since then (almost 50 years ago) I have had three wisdom teeth removed, so my IQ must now be about 12 points lower. ;-) It certainly seems lower to me. I do not know if my friends notice, because theirs are probably slipping too.

https://en.wikipedia.org/wiki/Fluid_and_crystallized_intelli...

But when all is said and done, I have no doubt Mr. Buffett's IQ is well over 100, but does it matter? I think his grasp of what makes the businesses in his circle of competence tick, that the radius of his circle of competence increases with time and experience, that he is very well disciplined in his business decisions, all matter more. But I have no idea if he is a genius as measured by IQ tests or not. And I do not think that IQ scores matter very much.
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No. of Recommendations: 30
Who will be right?

Maybe both.
Will there be a day within a year/two/three that IBM shares are trading a lot lower?
Sure, why not? That's usually true if said of any stock on any day.
A short seller today might make a good return closing the position then.

But will IBM be a double or better for Berkshire sooner or later?
Sure, why not? Earnings per share are doing fine and rising faster than inflation.
Even if they are about to enter their twilight, it would probably
take a long time for such an ocean liner to coast to a stop.
More like a fleet, really, as bits could sink without denting the whole.
If earnings fall off a whole lot more than they did in the last big
economic crisis then I'll agree that the worries are valid.
(oh yeah...earnings kept rising every quarter through the credit crunch...)

Mr Buffett can and does make mistakes, sometimes big ones, but I'm at
least pretty darned sure that he's pretty darned sure about this one.
It's hard to think of who else would win first place among the last
few billion humans born for best understanding of how a business
earns its money from its position in the market place, and he
did spend 50 years reading annual reports and thinking about it
before making his move.

Jim
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I have no doubt Mr. Buffett's IQ is well over 100, but does it matter?

Nope. Talk about IQ reminds me of the World's Strongest Man contest. What is "strength" you ask? Why, it's the stuff that the contest measures! But we all know there are many dimensions to strength; there is no correct definition without referring to specific tasks. Imagine how much trickier it is with intelligence, when the brain has many billions of neurons, compared to the mere hundreds of muscles in the body.
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Valuewalk implies that he is also long Amazon which, to me at least, is an
even more surprising bet. I am not sure if AMZN is going to be profitable
enough to justify the current price even if it manages to displace IBM
completely in the cloud sector. A long AMZN / short IBM strategy needs
everything to work out just right to work in the long term. In the short
term, momentum undeniably benefits AMZN so it might work out okay but you
couldn't get me to undertake such a trade without a gun to my head.

(Heavily long IBM ATM/OTM 2015 and 2016 LEAPS (6% of my portfolio and
controlling stock amounting to 35% of my portfolio's value) - definitely
not the safest trade I have ever made but I think the risk/reward outlook
is quite good for it at least at the 2016 time frame.)
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(Heavily long IBM ATM/OTM 2015 and 2016 LEAPS...

OTM and ATM?
You got brass!

I think my $150s are aggressive.
Didn't stop me from buying a lot, of course...hope springs eternal.

Jim
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But when all is said and done, I have no doubt Mr. Buffett's IQ is well over 100, but does it matter?

Of course it matters. He always says that one does not need a super high IQ to do well with investments but doing well and replicating the record of Berkshire Hathaway are two very different things.

The reason a sky high IQ alone does not ensure investment success is because many such people do not have the temperament to be successful despite the intelligence. Therefore, it is very likely that someone with a 120 IQ and having the right investing temperament will outperform someone with a 160 IQ and a horrible investing temperament.

When you get a 160+ IQ AND the ideal investing temperament, you get the very extreme results demonstrated by Warren Buffett over the past sixty years. He has the ideal investing temperament BUT also a unique ability to remember facts and figures spanning decades and to put the data in a useful context.

For those of us who have to constantly refer to spreadsheets and annual reports to recall specific facts and figures, just think how much better we would be if all of that data already resided in our brains ready for instant recall and placed into a useful context. The reason Buffett has never found a computer useful is not because he's some elderly old fashioned Luddite sitting in Omaha with an aversion for technology. It is because he does not NEED the damn computer, excel spreadsheets, etc that the rest of us rely on every single day!
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Not saying there will be zero attrition or that the Cloud won't impede growth, but people have no idea how entrenched this stuff is. There are IBM systems that make things run that people have no idea about it, and the code was written in the 1960s. This is sticky stuff.

People who have never seen the guts of a corporate IT system are at a fundamental disadvantage when evaluating these types of companies because the level of stickiness that exists is just phenomenal and beyond belief to most people. In many cases, the same code has been running for decades and the people who wrote it are long gone. Defined business processes critical to the operations of a business may reside in legacy systems that few in an organization even understand. Therefore, it is not so easy to simply jump to new technology because the logic behind existing systems may be so poorly understood and documented that a jump to a new system would entail significant business risk. Most CEOs regard IT as a back office function, not as a source of potential differentiation or competitive advantage. CIOs get the call when systems are broken and system migrations go poorly but usually just a quick slap on the back when things go well. In other words, there is often an asymmetry between the risks and rewards of a major systems renovation tilting the default toward inaction.

This is not to say that systems upgrades are impossible or that ancient code will last forever, only that the period of transition is longer and more drawn out than most people appreciate. The cloud is real and has benefits, but also poses certain security risks as well as execution risks as legacy systems are migrated. Furthermore, robust clouds are not running on a bunch of crappy commodity PC hardware. I'm a bit removed in terms of years from the industry but I doubt that much has seriously changed in terms of human nature or the challenges of systems migrations. We have healthcare.gov as a wonderful example of how difficult it is to stitch together multiple legacy systems in a coherent manner - even in a situation that is unbelievably mission critical for the President who controls resources far in excess of the typical CEO yet stands powerless to fix the mess.
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"Therefore, it is not so easy to simply jump to new technology because the logic behind existing systems may be so poorly understood and documented that a jump to a new system would entail significant business risk. Most CEOs regard IT as a back office function, not as a source of potential differentiation or competitive advantage. CIOs get the call when systems are broken and system migrations go poorly but usually just a quick slap on the back when things go well. In other words, there is often an asymmetry between the risks and rewards of a major systems renovation tilting the default toward inaction."

This.

Also, while the gradual move to the cloud will definitely hurt certain segments of IBM (mainly the big mainframe hardware segment), there are certain segments of IBM that will benefit from companies moving into the cloud (the consulting and software segments). I am not saying the benefiting segments will completely offset the declining ones (they probably won't), but it isn't like the whole company is likely to go extinct.
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"They compete with Accenture"

Our boss drank the koolaid and paid Acenture big $ for consulting services and "market analysis." All they did was come talk to us guys and gals in the trenches and repackage what we told them. I give them a big zero.
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Also, while the gradual move to the cloud will definitely hurt certain segments of IBM (mainly the big mainframe hardware segment), there are certain segments of IBM that will benefit from companies moving into the cloud (the consulting and software segments). I am not saying the benefiting segments will completely offset the declining ones (they probably won't), but it isn't like the whole company is likely to go extinct.

I do not get this.

While the clients in the cloud will surely be pipsqueak machines, such as minimal PC type machines (of whatever type, even cell phones, glorified washing machines, and the like (remember all those available IP addressed under IPv6), some other machines will have to be more than a bunch more PC type machines. 30 years ago, it was already practical to run a UNIX server capable of serving hundreds or even a thousand or so users on an Ahmdal or large System/360 class machine. It is surely possible to do the same today. Nowadays, you might not do it quite that way, but by using large numbers of virtual machines on such a system might be a better way to do it. But some tasks really are better off running on mainframes. Big database management systems for example. I have run IBM's DB2 relational database management system on an 8 GByte RAM PC and it works fine, but for people who really need something like that, they probably have need of handling 1000s of users working on the same database (think of the IRS, the bureau of the census, the FBI, some parts of the national weather service). They are not going to put in 1 million larger PCs to do all that work, surely not for those requiring multi-user concurrent access to large databases, and there is a real lot of that going on. I bet even a "small" outfit like L.L.Bean's catalog service with on-line real-time inventory and ordering (by them from their suppliers) would more likely need to be run on a main-frame. Now the main frame might well be somewhere in the cloud, but IMAO, there will be more of those main frames in the cloud than the average home-user might suspect.
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They are not going to put in 1 million larger PCs to do all that work, surely not for those requiring multi-user concurrent access to large databases, and there is a real lot of that going on. I bet even a "small" outfit like L.L.Bean's catalog service with on-line real-time inventory and ordering (by them from their suppliers) would more likely need to be run on a main-frame. Now the main frame might well be somewhere in the cloud, but IMAO, there will be more of those main frames in the cloud than the average home-user might suspect.


I don't know what the answer is, but I strongly suspect that Buffett invested in IBM, not because he had any conviction about whether it was going to be mainframes or PC servers doing the work, or whether it would be centralized or distributed, or whether this would take place in the cloud or on a company's own servers, but rather, that it would be IBM that would be helping companies make these decisions, set them up, maintain them, choose software, etc. More and more, they are the consultant, not the supplier, and this is the sticky part of their business. If you've outsourced a lot of your IT intelligence to IBM, then you are very unlikely to ever change, just like you are unlikely to change accountants.

The fact that IBM actually makes some of these components (mainframes, some software) does make the investment decision a little more complicated, because these parts of their business ARE vulnerable. And also because the client wants the best hardware and software, and consulting a company like IBM that makes some of those components puts them in a conflict of interest.

So if you are investing in IBM because you believe that its Watson computers are going to be successful against Google, I think you are barking up the wrong tree. And if you are dissing the investment because you think the cloud makes IBM's mainframes vulnerable, you may be missing the general idea.

Regards, DTM
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While the clients in the cloud will surely be pipsqueak machines, such as minimal PC type machines (of whatever type, even cell phones, glorified washing machines, and the like (remember all those available IP addressed under IPv6), some other machines will have to be more than a bunch more PC type machines.

There are really many forces at work here and many permutations regarding what it means for an IT system to migrate "to the cloud":

* An established small to mid size company might decide to migrate its on-premise proprietary system to some type of standardized/metered cloud based system managed by a third party with the hardware itself owned by the third party and minimal modifications made to the software. In this case, the company will likely have to adapt its existing workflows and processes based on the standardized software or operate within whatever the limits are for customization/configuration of a standardized system. The cloud based system could be either dedicated or shared, both in terms of hardware and software. The motive for such a migration would be to reduce the cost of IT personnel and, possibly, to standardize a business process in a more efficient manner.

* A start up with NO existing systems would likely decide to establish its important systems in a cloud based solution operated by a third party since there are no legacy issues to deal with and cost is likely to be a major consideration. Customizations to software would likely be minimal - the motivation would be to not have to hire IT staff to begin with and to not have to make up front investments in hardware.

* A large established enterprise most likely has an on-premise system with either proprietary or heavily customized commercial software that has been in place for years or decades and incorporates long established business processes. Such a business might establish either a private cloud or look to a third party provider and in either case would almost certainly have both dedicated software and hardware installed with some degree of customization even if business processes can be simplified or standardized (which is hard to do). The main motivation here is to lower IT costs and possibly simplify outdated processes. Heavy use of consultants/experts would be needed to make this happen initially and probably to monitor and maintain the system after installation especially if in house IT staff is cut as part of the cost saving process.

Note that in most cases, a natural constituency exists to oppose moving systems to a third party operated cloud: The IT department. Even in cases where some IT staff is retained, the CIO sees his empire shrink and the relative importance of his function diminish over time, replaced by expert consultants in many cases.

I agree that the opportunities for trusted consultants to step in and guide the process exists and IBM is likely well positioned in this regard.

IBM definitely deserves some attention at this point given Buffett's clear endorsement and the relative underperformance of the stock recently. The overall valuation seems attractive as well.
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I find one part of the whole "Cloud will kill IBM" subject kind of amusing.

Who invested remote processing data centres with shared processing power charged on a metered basis and only dumb clients locally?
Well, IBM.

That's not to say they won't get their lunch money stolen by some young
whippersnapper on many contracts, but if so it's not because they're late to the party.
Unless 1958 was "late".

Jim
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Who invested remote processing data centres with shared processing power charged on a metered basis and only dumb clients locally?
Well, IBM.


I used to work with an older guy who made those type of comments and endured much ridicule from younger people but he was basically correct. He liked to compare the early low functionality web clients (back in the late '90s) with the dumb terminals of the 1960s and 1970s.
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IBM commercial for Enterprise support of Cloud...

http://www.ibm.com/smarterplanet/us/en/smarter-enterprise/pe...
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'Cool?' Did you say 'cool?' 'Cool' is the reason my grandson has to have new basketball shoes every month. 'Cool' is the reason my granddaughter's hair is green, and her boyfriend has a bolt through his nose. I don't like 'cool.' 'Cool' costs me money.
- IBM Commercial
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As others have mentioned, cloud computing, is nothing novel. Basically you are renting space. I checked into it to see if it made more sense than a VPN I currently have set up. Basically all you are doing is moving the function of the server you use for a VPN to somewhere else in Tinbucktu. The lure is suppose to be they worry about the maintenance and security (supposedly)and the ability to share software.

You can do the same thing on your own server and back it up somewhere else, in addition to one's own PC.

I thought it might be more cost effective because one of the locations on the VPN is not near high speed internet and I pay a fortune for a T1, which is old school, but does the job better than satellite or wireless in regard to upload speed, which is very important in a VPN.

Besides not liking having all my files, God knows where being managed by God knows who, the cloud was as EXPENSIVE, if not more so than paying for that T1 line.

That being said, I wonder how many of these guys who have shorted something and are getting squeezed make these pronouncements to save their shirts and/or will have it as part of their portfolio in 6 months, then proclaiming it is a strong buy.
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I've seen that IBM commercial. It struck me as pretty good.

https://www.youtube.com/watch?v=ZEc-jLXnWNA
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As I get older, I am increasingly certain that I don't understand almost anything about how businesses function, technology, and how everything works. Seeing how healthcare.gov was such a spectacular failure actually made me momentarily feel better, as I could think to myself, "nobody understands this crap....it's all too complicated."
..but reading these posts about the cloud by people who clearly have expert knowledge and opinions about the future of IT in business, makes me want to give up trying to understand anything new.

I just want to watch TV, take an occasional walk around the neighborhood, then take a nap.

I think it's time to get a money manager. I can't do it anymore.
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makes me want to give up trying to understand anything new.

[laugh] Your parents probably said the same thing when the eight-tracks came out, you went with cassettes, CPM-based desk computers started showing up, you bought an Atari, and upstart computer companies began building computers that DIDN'T take up an entire floor.

Then they bought things they understood (hopefully a share of BRK-A), and did quite well.

Bob
RYR Home fool
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As I get older, I am increasingly certain that I don't understand almost anything about how businesses function, technology, and how everything works. Seeing how healthcare.gov was such a spectacular failure actually made me momentarily feel better, as I could think to myself, "nobody understands this crap....it's all too complicated."
..but reading these posts about the cloud by people who clearly have expert knowledge and opinions about the future of IT in business, makes me want to give up trying to understand anything new.

I just want to watch TV, take an occasional walk around the neighborhood, then take a nap.

I think it's time to get a money manager. I can't do it anymore.
________________________________________

Well, not that I don't feel the same way you do, but this cloud hype has more to do with "whippersnappers" getting in your face and making you think it is some cutting edge technology, which in reality is really using old technology....main frames. They are just trying to make you think you can do away with your own IT personnel.

Commentary to this artile pretty much sums it up.

Yet another “Mainframe is dead” article based on the “cloud”.

The Mainframe has “died” at least 50 times in the last 50 years, yet there are more of them than ever right now. What will these “Cloud” systems run on? It will take more processing power than my little obsolete Android phone. Oh, that’s right, it will be on someone elses mainframe.

Get real, the “Cloud” is just a network connection to another computer on the network. There will still be a powerful computer on the other end, whether in the next room, or the next continent. True, the power of the mainframes of 50 years ago now resides in my shirt pocket, but, the amount of power I want has increased vastly too. No, mainframes aren’t going away. They are just changing forms, and getting easier to connect to.

Still, it remains true that if you want the data that defines and continues your business, you will want to have physical control over the storage and distribution of it, and that means physical control over the machine that runs the processes. In short, a Mainframe.

Less sensitive information may be more cheaply run on someone elses machine, but those who believe that this can run ALL their business will have an expensive lesson to learn.

The old adage is still true. Good, Cheap, Fast, pick any two.


http://www.markshuttleworth.com/archives/814

When one enters "a cloud" it really will be no different than in the "old days" when there were no PCs at your desk. You just had a monitor that was hooked up to a big computer.

I think we need a fly swatter more than a money manager.
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I find one part of the whole "Cloud will kill IBM" subject kind of amusing.

Who invested remote processing data centres with shared processing power charged on a metered basis and only dumb clients locally?
Well, IBM.

That's not to say they won't get their lunch money stolen by some young
whippersnapper on many contracts, but if so it's not because they're late to the party.
Unless 1958 was "late".

Jim
__________________________


if you want to offer a particular cloud service to thousands of users you could do it with a network of thousands of PCs and small servers or you could do it with a mainframe.

"That's it," says Nebuloni. "If you have a lot of users and a particular purpose, you might want a mainframe. They scale."

As CTO of cloud computing at IBM UK, Steve Strutt knows all about making the argument in favour of cloud computing on mainframes. "The great thing about cloud computing is that it is scalable," he says. And for him that means that if you want to run cloud services on small servers that is fine, but if you want to roll it out to thousands of users you can do that as well....

There is one fundamental reason that mainframes will not go away any time soon: many of the companies that use them in mission critical applications. Mainframes represent a major expense and at the same time they are often running mission critical applications — big applications — that are important, often vital, to the financial health of a company.

The business risk and cost of migration means the return on investment on decommissioning these systems is just not there.

Finding staff with the skills to run and maintain these big beasts is one of the biggest problems as the baby boomers, who started their careers when the mainframe was young, begin to retire. But now some companies are training a new generation of mainframe engineers to continue the work.


http://www.zdnet.com/with-the-world-embracing-cloud-computin...

So the question holders of IBM need to ask themselves is (since they, IBM, don't really do PCs) is:

What kinds of servers are they going to manufacture, large or small (or both) and how good are they as compared to their competition and do they have the work force they need to maintain them?

http://www.techrepublic.com/blog/european-technology/hunting...
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I wrote: What kinds of servers are they going to manufacture, large or small (or both) and how good are they as compared to their competition and do they have the work force they need to maintain them?
_______________

To answer my own question, for I really don't know, it seems they are able to integrate all manner of technology and operating systems into a cloud that they design and manage.

http://www-935.ibm.com/services/us/en/it-services/private-mo...

Hum. I guess it depends on how much it cost and if they know how to deal with that "last mile" in a cost efficient manner, in places where wireless bandwidth is limited.
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I think it's time to get a money manager. I can't do it anymore.

A good solution might be to hire a cheap money manager operating out of Omaha who works for almost nothing and has a pretty good track record!
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A good solution might be to hire a cheap money manager operating out of Omaha who works for almost nothing and has a pretty good track record!
---------------------

Yeah Ravi, you have a profoundly valid point

It's almost like "The Wizad of Oz"' where after Dorothy has all these adventures and is exposed to strange dangers, she concludes, ..." if I ever go looking for my heart's desire again, I won't look any further than my own backyard."

I've had millions of dollars sitting in cash for the past year, that used to be in BRK, waiting for some great opportunity...actually I'm finding out that I wouldn't recognize the opportunity when it arrives anyway.


So yeah, there's no place like home
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Thinking some more about IBM, I think I will go back even farther in the past than Time Sharing on IBM/360 machines of the 1960s or so.

There are some things I think of that IBM did way back when, probably after Herman Hollerith.

1.) They made card punches, gang punches, ans sorting machines that sorted punched cards. They made calculators that could be programmed with plugboards to do routine business calculations. But so did Remington Rand. Why did IBM become famous and make more money? They had the best salesmen in the world, and they sold or leased the equipment better than the competition. How? It was not that they took the CEO of the prospective customer golfing, bought his wife fur coats, etc. It was because they took the trouble to understand the customer's business better than the customer himself, so the equipment they offered solved the real problems the customer had. The creation of "the cloud" does not change this.

2.) When it became useful, in the late 1940s, to make stored program machines, now known as computers, this fit right in. IBM appeared to be a computer manufacturer, but they did not see themselves as such. They so themselves as providing the customer with solutions to problems. And if they had to manufacture hardware and programs for the hardware to help the customer, they did so. They did not perceive their customers wanting hardware, they perceived that their customers wanted solutions to problems. So they did not sell hardware, they leased it. This had several benefits both for the customers and for IBM. The benefit for the customer was that the customer did not have to cough up $4 million for a 5000 vacuum tube IBM 704 with about 100K bytes of RAM, but could pay $500/hour to lease one. The benefit for IBM was that they had the capital so they could afford to lease their machines. That was a big moat because the competition could not afford to lease their stuff, so they had to sell it. (Later some customers and the economics changed and eventually IBM was forced to optionally sell their machines, which they did.)

3.) IBM never made the best computers. They did not make crummy ones either. They always tried to be second best. Let the competition be at the bleeding edge, running up development expenses trying the newest ideas. IBM could then copy (I do not mean patent infringement) the best ideas and use them, but they were almost always behind the time. The defense department and the aircraft industries often bought state of the art machines. I assume the NSA did and does too. From the point of view of scientific computation, the Burrough 5500 (and later) series machines were much better. So were the Control Data machines such as the 6600. But most people never even heard of them. What they did was provide good value (in terms of solving the customer's problems because they understood the business of the customer better than the customer sometimes did) for the money.

4.) To me, cloud computing is just the tipping of the balance, one more time, between where the user is and where the compute power is. At first there was a computer in a room with a bunch of people running it. And people in offices nearby preparing programs for it, and clerks punching the programs and data into cards. One person at a time could use the machine.

Later, they found ways to time-share them so you could operate the machine from a (not very) remote location with a Teletype machine. To do that effectively required large storage on the computer and that started to be possible in the late 1950s. And when modems became available, you could be as far away as you could afford the telephone bill, and you could get sometimes 30 characters a second through it. So a bunch of users could share a single computer. That worked for a while. A benefit of that setup was that all the hardware types could be located around the computer, and the users were protected from dealing with that. When hardware or operating system stuff needed changing, the team of trained people did it. The users were not concerned.

There were issues, and dealing with the bureaucracy of the computer center became annoying. Around that time, mini-computers such as those made by Digital Equipment Corporation and Computer Control Company , which typically cost under a $1 million and often under $100,000 came out, and people could sometimes get their own and share them with a dozen or two people. But then you needed support people around each mini computer or group of mini computers.
You had, by then, already little clouds with a mini-computer in it and remote teletype class terminals clustered around them.

When personal computers came out, starting with Xerox-PARC, then Apple, then IBM, and even Sun Microsystems, everyone wanted their own. And many got them. They may have been more fun, but management of all those computes was a severe headache. No two computers had the same version of the same software, no one did the backups anymore, you could not be sure if security fixes were put in, and so on. But by 1980 or so the all started getting hooked together with the ARPA net, if you could get a connection to it, that is.

So we got pretty much to the current situation a few years ago, which works pretty well, but has headaches and security problems too. So now they are going to put larger machines into the Internet, or some such network, and name it a cloud.

It is deja-vu all over again.
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My impression is that services, outsourcing, whatever you want to call it is the main thing for IBM nowadays. Hardware is less and less important.

My concern is that they provide a rubbish service at an amazingly high price - whether that's generally true, or just a perception in isolated cases I don't know, but my suspicion is that they're trading on their size and name, not on quality of service or value for money. It's easy enough to find horror stories using google, but that's probably true of any large company so perhaps that doesn't say much.

SA
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As is so often the case with Buffett investment decisions, maybe we are way, way overthinking this. Maybe he just put together the pieces of what was happening around him, at Berkshire’s disparate subsidiaries, and saw a mosaic taking shape. Maybe he didn’t really have to have profound insights into complex tech directions. He just had to listen to pitches that were coming to him from his own managers, and look at the economics of their decisions.

Remember decades ago when he listened to his managers about how they were opting to pay premium, highly marked-up prices to Pinkerton rather than continuing to use their own minimum wage security people? That particular outsourcing case made sense to his business managers, but here was Pinkerton – at the time the dominant quality provider - charging and getting out-size margins from him. He read the cues and bought the whole company.

Before we go further, let’s take a moment and listen to two IBM endorsement spots by an IT exec at BNSF:
http://www.youtube.com/watch?v=rCyFIr08_jU
http://www.youtube.com/watch?v=zkpHrOhLg6k

This BNSF exec also participated on an IBM client customer conference call to which supposedly about 1,000 IBM clients listened in. BNSF has been characterized as a ‘living laboratory’ for IBM. Perhaps not coincidentally, just over a decade ago BNSF outsourced a substantial portion of its IT operations to IBM. IBM offered jobs to over a hundred of BNSF’s IT staffers to stay on site at BNSF, as IBM employees. That initial 10-year contract was set to expire just around the time that Buffett started acquiring IBM stock. Maybe that was when IBM came more prominently onto Buffett’s radar.

Back around the time of the BNSF conversion, American Express also announced that it had contracted with IBM Global Services to manage many of its own IT functions. IBM offered employment to 2,000 Amex IT staffers, to stay on site as IBM employees after the switch.

In 2008 MidAmerican selected IBM as its provider for data management and archiving, and credited IBM – specifically IBM’s Data Growth Solutions - with enabling MidAmerican to integrate customer records smoothly through its several large acquisitions, merging hundreds of thousands of customer records and histories for MidAmerican. http://www-01.ibm.com/software/success/cssdb.nsf/CS/LWIS-7D9...

Back in 2002 Walmart issued an edict that all of its suppliers, regardless of size, would have to have systems capabilities that were compatible with its own IBM-partnered web-based inventory management system. It recommended all non-compliant suppliers contact IBM for help. Back sometime around then, Fruit of the Loom installed IBM’s Informix Inventory Systems, and is still using it.

Both McLane’s and Netjets elected to go with IBM’s WebSphere offering when it became available a few years ago, and again, this was just prior to Buffett’s IBM purchase.

Who knows what other IBM offerings Berkshire’s various subs have committed to, and for what duration? Maybe, like Pinkerton, Buffett just looked at what services his managers were eagerly buying, calculated the mark-up that this provider was commanding (and getting ), extrapolated that out from not only Berkshire subs, but some of their industry competitors, and decided that he might as well be on the receiving end of those markups.

And just how hefty are those markups?

IBM embarked on this ‘services’ shift just over a decade ago (discussed in their 2002 annual report). By 2003 IBM’s revenue was $89B, about 35% of which was hardware related. For the recent trailing twelve months, ten years later, revenue was only just over $100B. 14% of TTM revenue was hardware.

TTM gross margins, however, were almost 50%, compared to 37% in 2003. Net profit margins (after tax) for the recent TTM were an impressive 17%, up from 8.5% in 2003. Translating that into dollars, net income was more than double ($16B now, vs $7.6B back then). Looking at it from another perspective, almost the entire revenue increase over the decade, paltry as it may have seemed overall, flowed through to the bottom line. That’s an impressive deceleration and redirection of a business.

With IBM’s share buybacks over the decade, outstanding shares were reduced from 1.7B to 1.1B. As a result, earnings per share are up from $4.32 to over $14 now. Dividends are up from $0.63 to $3.60 per share; by comparison the stock price has approximately doubled.

But back to those markups. Let’s apply Charlie’s ‘always invert’ (and I’m going to take some license and over-simplify a bit). In a largely service business, 50% gross margins mean that overall, IBM is marking up service employees billings to about double their actual salaries. To the extent that Berkshire subs (and similar customers) are willing to pay this, they are apparently recognizing a hefty value-add for IBM’s services.

When we see press releases of company decisions to go with IBM for services, we also often see that the reporting company also considered Accenture. Arch-rival Accenture, however, is realizing gross margins of 30%. Accenture (formerly Andersen Consulting, Arthur Andersen’s consulting spin-off) apparently can only manage to mark up salaries by 45 cents per consultant payroll dollar, versus IBM’s $1 per consulting payroll dollar. (I’m assuming Accenture manages their staff’s time about as well as IBM does, meaning their percentage of consultants’ time that is billable is at competitive levels).

In any case, that billing premium is an impressive value add for IBM. Now I’m taking some liberties here – IBM is not pure services – it is saddled with that 14% segment of lower-margin hardware, but they are also probably helped by their strong software mix. But then again, as with IBM’s businesses with Berkshire, their proprietary software offering and related service are probably highly entwined. I’d argue that it’s ok to look at that company total.

In any case, IBM (which, by the way includes its PriceWaterhouseConsulting business, which has always gone head-to-head with Accenture) has a higher perceived value-add in its billed dollar. Its customers are willing to pay a nice premium for IBM.

Again, we might guess that Buffett is probably hearing pretty specific feedback regarding IBM from the various far-flung corners of the Berkshire empire – and considering that he has some idea of Berkshire’s total corporate tab with IBM, and by extension, just how much his businesses alone are funding IBM’s bottom line, and what might be in Berkshire's IBM 'wish-list' pipeline – he can come to as an informed decision about IBM’s potential as anyone. And maybe that includes the many tech-knowledgeable pundits who are now wondering what he possibly could be thinking.
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Outstanding, Michael.

Todd
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It's almost like "The Wizad of Oz"' where after Dorothy has all these adventures and is exposed to strange dangers, she concludes, ..." if I ever go looking for my heart's desire again, I won't look any further than my own backyard."

In my opinion, it is going to be very hard to beat Berkshire's returns going forward and those returns are going to exceed the S&P 500 by several percentage points. I feel like I have a very good shot at beating the S&P 500 and a decent shot at beating Berkshire's returns by focusing on areas that Berkshire cannot but this is nothing close to being a slam dunk. I wouldn't be terribly surprised in five years if Berkshire itself has returned more than my overall portfolio (which, of course, includes lots of Berkshire). But I think that there's probably a ~60-70% chance that my portfolio will do better.
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But back to those markups. Let’s apply Charlie’s ‘always invert’ (and I’m going to take some license and over-simplify a bit). In a largely service business, 50% gross margins mean that overall, IBM is marking up service employees billings to about double their actual salaries. To the extent that Berkshire subs (and similar customers) are willing to pay this, they are apparently recognizing a hefty value-add for IBM’s services.

When we see press releases of company decisions to go with IBM for services, we also often see that the reporting company also considered Accenture. Arch-rival Accenture, however, is realizing gross margins of 30%.


Although I am impressed with IBM's transformation in the past 10 years, I have to disagree with some of your thesis.

From the 2012 10-K (Segment Details) , IBM's Global Services is compromised of two segments which combine for 56.6% of revenue. Global Technology earns a 36.6% gross margin and Global Business Services generates a 30% gross margin.

As a comparison, IBM's Global Services in 2002 made up 44.8% of revenue and earned a 26.3% gross margin.

Software for IBM in 2012 earns more than an 88% gross margin. Software drives IBM's overall gross margin to near fifty percent.

Accenture's services business and IBM's services business earn similar gross margins. As much as I enjoy a good ol' serving of Munger inversion soup, I think IBM's service business is less special and more soup-from-a-can than suggested.

Of course, IBM consultants are going to recommend and utilize IBM software for their clients. $marter Planet indeed.

ET
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My concern is that they provide a rubbish service at an amazingly high price - whether that's generally true, or just a perception in isolated cases I don't know, but my suspicion is that they're trading on their size and name, not on quality of service or value for money.

Regardless of how sticky IBM's services might be, if they provide "rubbish" for too long the moat will erode. Given how IBM is involved in so many large enterprises, "horror stories" wouldn't surprise me at all. The nature of large IT projects is that they almost always end up being more complicated and expensive than planned and the vendor is always a convenient party to blame.

IBM has a number of attributes that I find very interesting at the moment including a reasonable valuation, very negative market sentiment, lack of participating in what is looking like an increasingly frothy bull market, and perhaps best of all a very clear Buffett endorsement. Back when Berkshire's IBM investment was first made public, I went back through a number of annual reports. I need to revisit those reports and do some more work on this.
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As much as I enjoy a good ol' serving of Munger inversion soup, I think IBM's service business is less special and more soup-from-a-can than suggested. Of course, IBM consultants are going to recommend and utilize IBM software for their clients. $marter Planet indeed.

***********************************

I pretty much expected someone would raise the 'margin component breakout' point, which is why I couched my comments with that caveat: But then again, as with IBM’s businesses with Berkshire, their proprietary software offering and related service are probably highly entwined. I’d argue that it’s ok to look at that company total. But as you point out, there can be some debate there.

When looking at the Berkshire businesses – and the markup IBM is getting from Buffet’s businesses overall – which is the real point of the discussion from a Berkshire point of view, we don’t have the luxury of complete information. Not only don’t we have a wild guess at even Berkshire’s total spending with IBM, but we don’t have a breakout of the (customized) software versus related services of the Berkshire installations. We just don’t know what the invoices look like.

From a Buffett point of view – as both a client and as a potential IBM investor - we would be interested in the composite mark-up. With the absence of detail, I’d guess it’s the IBM company-average of almost 50%. We (Berkshire’s BNSF and IBM’s other clients) are paying for a high-value, high-margin total business solution, not average-value consultants selling high-margin packaged software. IBM can bill the job in whatever fashion is palatable to the customer, but at the end of the day it’s a 50% (on average) margin job.

We can disagree on presentation, but the bottom line is the same. Presumably as significant owners, we can recover our share of those margins (or at least our share of the after-overhead, after-tax 17% remainder).

Stepping back, though, what seems remarkable to me is that with no centralized IT coordination, so many disparate subsidiaries came to similar conclusions. For example that both NetJets and McLane's would both elect to install WebSphere, presumably for it's transportation-related capabilities, both at the same time when it came out. Or that so many subs independently elected IBM solutions relative to their own business. My guess is that the capital-allocator-in-chief didn't miss the messages he was getting.
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When we see press releases of company decisions to go with IBM for services, we also often see that the reporting company also considered Accenture. Arch-rival Accenture, however, is realizing gross margins of 30%. Accenture (formerly Andersen Consulting, Arthur Andersen’s consulting spin-off) apparently can only manage to mark up salaries by 45 cents per consultant payroll dollar, versus IBM’s $1 per consulting payroll dollar. (I’m assuming Accenture manages their staff’s time about as well as IBM does, meaning their percentage of consultants’ time that is billable is at competitive levels).

In any case, that billing premium is an impressive value add for IBM. Now I’m taking some liberties here – IBM is not pure services – it is saddled with that 14% segment of lower-margin hardware, but they are also probably helped by their strong software mix. But then again, as with IBM’s businesses with Berkshire, their proprietary software offering and related service are probably highly entwined. I’d argue that it’s ok to look at that company total.

In any case, IBM (which, by the way includes its PriceWaterhouseConsulting business, which has always gone head-to-head with Accenture) has a higher perceived value-add in its billed dollar. Its customers are willing to pay a nice premium for IBM.

____________

Maybe this is why. A bit dated (a year) but may be related.

AT&T and IBM Create Breakthrough Global Cloud Service for Businesses
Innovative Technology and Private Networking Are Combined to Create Highly-Secure Shared Cloud


All of the Fortune 1000 companies are currently customers of AT&T.
http://www.att.com/gen/press-room?pid=23425&cdvn=news&am...

Be funny as heck if IBM took over the Obamacare debacle. Why a Canadian company who coincidentally has a cozy relationship with Obama's chief of staff's son-in-law is something nobody talks about too much.
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As is so often the case with Buffett investment decisions, maybe we are way, way overthinking this. Maybe he just put together the pieces of what was happening around him, at Berkshire’s disparate subsidiaries, and saw a mosaic taking shape. Maybe he didn’t really have to have profound insights into complex tech directions. He just had to listen to pitches that were coming to him from his own managers, and look at the economics of their decisions.

I think highly of my grandfather for his scientific achievements, not because of his investment prowess. I do not think he overthought his investment decisions, but he made a good one related to this. In the 1930s, he became more and more oppressed by the amount of paperwork he had to do, both in his job, and because of government regulations. He wondered what to do about it because it was beginning to affect more and more people, businesses, and so on. He wanted to invest in a company that could help with this, and he elected to make a substantial (for him) investment in IBM. He never sold it, but when he died in 1953, he left it to his wife. By then it was worth quite a lot and as she later needed money, it worked out very well for her.
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No. of Recommendations: 21
When looking at the Berkshire businesses – and the markup IBM is getting from Buffet’s businesses overall – which is the real point of the discussion from a Berkshire point of view, we don’t have the luxury of complete information. Not only don’t we have a wild guess at even Berkshire’s total spending with IBM, but we don’t have a breakout of the (customized) software versus related services of the Berkshire installations. We just don’t know what the invoices look like.

From a Buffett point of view – as both a client and as a potential IBM investor - we would be interested in the composite mark-up. With the absence of detail, I’d guess it’s the IBM company-average of almost 50%. We (Berkshire’s BNSF and IBM’s other clients) are paying for a high-value, high-margin total business solution, not average-value consultants selling high-margin packaged software. IBM can bill the job in whatever fashion is palatable to the customer, but at the end of the day it’s a 50% (on average) margin job.

We can disagree on presentation, but the bottom line is the same. Presumably as significant owners, we can recover our share of those margins (or at least our share of the after-overhead, after-tax 17% remainder).


The bottom line is not the same. We don't need to be a Berkshire CEO to understand that IBM doesn't get a 2X markup on its services business compared to 45% for Accenture as you argued. They have a lot of other customers besides Berkshire, and IBM's pricing is widely known. The ultra high margin software businesses they have in large part acquired should be compared to other software business, where IBM's relative margins don't show any obvious competitive edge. IBM selling both lower margin services and higher margin software to many of the same clients doesn't tell you much of anything about the relative competitive advantage of each or both of those businesses versus Accenture. If Accenture bought Computer Associates its margins would jump up too, but that P&L averaging gives roughly no information on whether it successfully increased its moat or customer entrenchment. When you outsource your entire IT department to IBM, or run layers of systems atop a mainframe base that would require a ton of risk and switching costs to disrupt, you have some stickiness. But the pricing in the BPO and IT services industry is not widely disparate among the big players, and buying a bunch of higher margin software businesses will increase your margins even if it doesn't widen your moat. HP's combined services plus software margins also went up as it started making software acquisitions, including to a couple of Berkshire owned companies, but its increased "composite" markup didn't seem to be an indicator of its improving competitive position. This of course could happen from the right set of acquisitions, but you can't tell that from merely comparing IBM's Apples to Accenture's Oranges.
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If Accenture bought Computer Associates its margins would jump up too, but that P&L averaging gives roughly no information on whether it successfully increased its moat or customer entrenchment. When you outsource your entire IT department to IBM, or run layers of systems atop a mainframe base that would require a ton of risk and switching costs to disrupt, you have some stickiness. But the pricing in the BPO and IT services industry is not widely disparate among the big players, and buying a bunch of higher margin software businesses will increase your margins even if it doesn't widen your moat. HP's combined services plus software margins also went up as it started making software acquisitions, including to a couple of Berkshire owned companies, but its increased "composite" markup didn't seem to be an indicator of its improving competitive position. This of course could happen from the right set of acquisitions, but you can't tell that from merely comparing IBM's Apples to Accenture's Oranges.

-----------------------

Yes, I’ll admit that my post was a rather cheap shot at Accenture. I know better and should be ashamed of myself.

Perhaps a better comparison to IBM would be the composite Accenture/Oracle/HP. But the underlying points as to why Buffett may be attracted to IBM, as an investment, versus these competitors remain the same. His managers at quite a few of his largest subs are paying up – at (as far as we can estimate) healthy 50% or so gross margins to do business with IBM. Also, as far as we can tell, the selection is not primarily one of price, but of suitability. And the selection is IBM. If Accenture bought CA their ‘bid’ margins would theoretically be higher, but these would only be realized if they actually got the nod. So in Berkshire’s case, why haven’t they?

Let’s look at apparent ‘stickiness’ and competitive position. We can assume from all we see and hear that BNSF is a died-in-the-wool rolling advertisement for IBM. Large Walmart suppliers, in Berkshire’s case the Fruit of the Loom example, apparently had (and still have) reason for an IBM bias. From what we read about MidAmerican, McLane’s, Netjets, etc, their respective IBM decisions were also based primarily on suitability.

Individually, these types of decisions may not mean much. Collectively, who knows, but we do know that Buffett decided to buy a big chunk of the company as all this was happening. Maybe the BNSF IT guy just caught Buffett in the elevator or something. Then again, maybe we don’t know half of the Berkshire IBM-selection story. Whether or not there is some moat that we bystanders can pin-point, at the end of the day, Berkshire managers have been making IBM purchase decision and coincidentally or not, Buffett has purchased a chunk of IBM.
---------------

Shifting gears, in support of IBM stock-price bears here, we might revisit the Berkshire 2011 Annual Report:

Let’s use IBM as an example. As all business observers know, CEOs Lou Gerstner and Sam Palmisano did a superb job in moving IBM from near-bankruptcy twenty years ago to its prominence today. Their operational accomplishments were truly extraordinary.

But their financial management was equally brilliant, particularly in recent years as the company’s financial flexibility improved. Indeed, I can think of no major company that has had better financial management, a skill that has materially increased the gains enjoyed by IBM shareholders. The company has used debt wisely, made value-adding acquisitions almost exclusively for cash and aggressively repurchased its own stock.

Today, IBM has 1.16 billion shares outstanding, of which we own about 63.9 million or 5.5%. Naturally, what happens to the company’s earnings over the next five years is of enormous importance to us. Beyond that, the company will likely spend $50 billion or so in those years to repurchase shares. Our quiz for the day: What should a long-term shareholder, such as Berkshire, cheer for during that period?

I won’t keep you in suspense. We should wish for IBM’s stock price to languish throughout the five years. Let’s do the math. If IBM’s stock price averages, say, $200 during the period, the company will acquire 250 million shares for its $50 billion. There would consequently be 910 million shares outstanding, and we would own about 7% of the company. If the stock conversely sells for an average of $300 during the five-year period, IBM will acquire only 167 million shares. That would leave about 990 million shares outstanding after five years, of which we would own 6.5%.

If IBM were to earn, say, $20 billion in the fifth year, our share of those earnings would be a full $100 million greater under the “disappointing” scenario of a lower stock price than they would have been at the higher price. At some later point our shares would be worth perhaps $1 billion more than if the “high-price” repurchase scenario had taken place.

The logic is simple: If you are going to be a net buyer of stocks in the future, either directly with your own money or indirectly (through your ownership of a company that is repurchasing shares), you are hurt when stocks rise……

In the end, the success of our IBM investment will be determined primarily by its future earnings. But an important secondary factor will be how many shares the company purchases with the substantial sums it is likely to devote to this activity. And if repurchases ever reduce the IBM shares outstanding to 63.9 million, I will abandon my famed frugality and give Berkshire employees a paid holiday.
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Ultimately IBM is a company that makes a lot of money because most companies, big and small, are technologically illiterate. As a result, they quite reasonably look to outsource the increasingly important work to an "expert". Unfortunately, to some extent, it takes one to know one so they decide to go with the brand and reputation of a company like IBM.

The real threat to IBM isn't cloud computing, it's that companies will eventually become tech literate to the point that they can solve their own problems without the help of someone like IBM. It's hard to say how likely that is. In the short term it seems incredibly unlikely. In the longer term I'm not sure. One the one hand there just aren't that many people in the world with the skills necessary. On the other, the benefits are likely huge and market based economies tend to be very good at allocating resources given time.

Look at Walmart for example. Retail is a rather boring business by most definitions. But I think it's fair to say that what allowed Walmart to become the largest retailer in the US, despite starting against competitors that had far superior economies of scale, was that they were able to utilize technology to manage their supply chain and inventories far better than the competition. One might argue that Amazon is now playing that role and the shoe is on the other foot so to speak.

Technology has the ability to do amazing things but it isn't worth squat if you don't know how to utilize it properly. So for now IBM will likely make boat loads of money selling that dream. The only thing I'd be wary of are upstarts putting the pieces together themselves and eventually killing off all of IBM's customers. That might sound crazy but I bet it's a much higher probability risk than most people would think. In my view the underlying technology of a business is becoming increasingly important and it is unwise and perhaps unsustainable to outsource the understanding of those systems to a third party. It might make sense to outsource certain components but if you don't know how they work together and how you might replace/improve them, I see pain in your future.

---

The actual blurbs from Drunkenmiller are ridiculous. Who knows if they're taken in context or not but they are literally non-sensical. AWS and "Cloud Computing" are not at all related to IBM's service and software business. IBM could very well implement their solutions on AWS if they wanted to... IBM sells cars, AWS is sheet metal. Which is not to say that IBM is a good investment, just that the quotes in the articles are non-sense. It's always possible that he'll be right for the wrong reason. I can see why Buffett would like it but I'm not sure if I do.
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It would come as a huge surprise to me if one of the largest businesses in the U. S. (Berkshire) would not purchase a signficant amount of their IT from one of the largest U. S. IT businesses (IBM). I would not read too much into that. In fact, I assume they also spend a fair amount on Accenture, CA, Oracle, etc.

A question that was not mentioned so far is: How much of IBM's software and services revenues are mainframe related? People put a lower multiple on IBM's hardware business, because it is considered to be in decline. But how about their mainframe related software and services?
A lot of IBM's software products seem to be losing market share, like DB2 losing to Oracle or MSFT SQL Server, Lotus Notes losing to MSFT Exchange. It is common in the software industry that mature/declining products come with higher margins, since they are mostly maintenance streams with less sales, marketing or R&D expenses than a less mature product, which has a higher share of license revenues, which has to be actively sold and kept attractive by R&D.

I doubt the picture in the Berkshire microcosm would be much different, and even if it was, I would doubt it's relevance. It could be due to all kinds of reasons, like for instance, that Berkshire has a tendency of buying proven businesses that have been around for a long time, and in all probability, therefore are more likely to have an established relationship with IBM, as one of the oldest IT companies, than with their younger competition.
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The real threat to IBM isn't cloud computing, it's that companies will eventually become tech literate to the point that they can solve their own problems without the help of someone like IBM. It's hard to say how likely that is. In the short term it seems incredibly unlikely. In the longer term I'm not sure.

I don't view this as a threat. Most companies that are not technology specialists do not and should not have a core competency in technology and are better off delegating the heavy lifting. That's not to say that they should be technologically illiterate. The CIO and IT executives need to know the technology landscape and be able to talk intelligently with the specialists but having in house staff to replace companies like IBM is an expensive proposition and technology is getting more sophisticated all the time, not simpler.
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Ultimately IBM is a company that makes a lot of money because most companies, big and small, are technologically illiterate. As a result, they quite reasonably look to outsource the increasingly important work to an "expert". Unfortunately, to some extent, it takes one to know one so they decide to go with the brand and reputation of a company like IBM.

A long time ago, automobile manufacturers engaged in racing. Not that designing race cars had much to do with designing cars that carried more than a driver. Race cars generally did not need head lights or reverse gears. But automotively illiterate people paid attention to race results and bought their cars accordingly. They also thought they wanted fast cars, even when places had 25 mile per hour speed limits. That is not as true anymore for cars.

I think it's fair to say that what allowed Walmart to become the largest retailer in the US, despite starting against competitors that had far superior economies of scale, was that they were able to utilize technology to manage their supply chain and inventories far better than the competition. One might argue that Amazon is now playing that role and the shoe is on the other foot so to speak.

That seems to be true. In the more recent past than my automobile example, consider Dell computers. They managed using technology to manage their supply chain and inventories much better than their competition. Of course, later, the competition caught up, so Dell no longer have that advantage. Of course, Dell also stopped building the machines to order once they bought them (at least the bottom of the line retail machines) in bulk from China, and this further reduced their popularity. They still make some quality machines at the top of their line (the "Precision" line that can be pretty well customized if you like) but they cost 5x as much as their retail line because they seem to be made in Mexico (more expensive than China). I doubt, but do not know, that they make any machines in USA anymore.

The only thing I'd be wary of are upstarts putting the pieces together themselves and eventually killing off all of IBM's customers.

In late 2003, I wanted a fancy computer (two very fast processors and six high speed SCSI hard drives) and could not find any from anyone. So I put my machine together myself. It cost more than pre-assembled machines. I could use better components that way (except for floppy drives and CD-ROM readers that were only available in the junk category), so it ran until late 2012 when the power supply blew up after the Storm Sandy power interruption ended. But I never made one for anyone else.

I did buy IBM's DB2 relational database management system software once. Fairly expensive and way more capacity than I needed for my desktop, but the other ones for Linux were not much good at the time. Since then, the postgreSQL software quality has gone way up, so I use free software for that on my system now. And some larger enterprises than me (ha!) also are running postgreSQL on Linux or UNIX systems too.

This stuff is for free. So if that were the only factor, IBM might have trouble selling their DB2 software to a new customer. Of course, IBM know all about Linux and I am sure they know all about postgreSQL too, so they just might sell a Linux system with postgreSQL in it to a customer. They are supporters of the Linux system. Hedging their bets.

They are selling the total system, not just hardware and not just software. They can afford to sell systems running free software if that is what they need to do.
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having in house staff to replace companies like IBM is an expensive proposition and technology is getting more sophisticated all the time, not simpler.

Your remark reveals what may be a bigger threat to IBM, though I would bet that they may well overcome that threat.

The ever-increasing complexity is a symptom of a lack of basic understanding at a very fundamental level. For the past several decades, the biggest impediment to designing more capable (hardware and software) systems has been the inability to control complexity of these systems. Many techniques have been available to help with this, but most programming seems to ignore these techniques.

But whoever comes up with a good way to control complexity, and has sufficient commitment from management to put it into practice, should have a huge advantage over the companies that do not. But it will really take a lot of commitment, not just on the management of one company, but on the entire computer science teaching establishment. The problem is that an individual who is studying and researching for his Ph.D. in computer science does so pretty much as an individual, so he gets skills related to an individual project that can be accomplished by one person in a year or two.

Then he gets a job in industry and works with 200 other programmers on a 5-year project. He knows next to nothing about doing work in such an environment, and even if he somehow knows the work David Parnas and others who worked on information-hiding and control-of-complexity, the rest of the team will pretty much be ignorant of the (now old) research and the techniques of applying it.

So controlling the increasing complexity is still a long time off, but it will come. But it is quite possible that IBM will play a large part in putting this into practice. Perhaps they are doing it already.
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