Apple's Deal With Intel Won't Rattle IBM

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Hardware

While Apple Computer Inc.'s new embrace of Intel Corp. microprocessors leaves IBM in the cold, the news really isn't bad for Big Blue, which may have found the Apple account more trouble than it was worth.

For one thing, IBM Corp. derived relatively little revenue from making its "Power" brand of chips for Apple's Macintosh computers, which own about 2 percent of the global market.

IBM's future chip plans are focused elsewhere - notably the next generation of video game consoles made by Microsoft Corp., Sony Corp, and Nintendo, Co. IBM's chips also power several kinds of IBM server computers, which account for a huge chunk of the company's hardware revenue.

Both kinds of machines require such high levels of performance that it becomes an expensive and challenging proposition to adapt their chips for personal computers, especially mobile devices that present stricter energy and cooling requirements.

So while winning Apple's business gives Intel some bragging rights, ceasing to make chips for Macs will let IBM focus on markets it believes can be much bigger.

"It's never a happy time when you lose a customer, no matter how large they are, but Apple's impact on the PC market is marginal at best these days," said Charles King, principal analyst at Pund-IT Research. "It will have more of a PR impact than a financial impact."

Added SG Cowen Co. analyst Steve Weber: "This move will likely have indiscernible impact."

IBM shares were down 67 cents, 0.9 percent, at $75.12 in afternoon trading on the New York Stock Exchange.

IBM declined to comment on Apple's announcement Monday other than to release a statement reiterating its chip strategy. "IBM is aggressively moving the Power architecture beyond the PC," the statement said.

While most computer companies long ago abandoned chip manufacturing to industry-standard suppliers such as Intel and Advanced Micro Devices Inc., IBM has stayed with it as part of a broader strategy to distinguish the company as an innovative, high-end tech provider. That desire to focus on top-tier markets motivated the recent spinoff of IBM's PC business to China's Lenovo Group Ltd.

With IBM's internal chip needs falling short of the company's manufacturing capacity - and demand from outside companies such as Apple only tepid - IBM's microelectronics division lost $252 million in 2003, the last year in which IBM released detailed figures. The segment grew at a paltry 0.6 percent in 2004, while IBM's overall sales jumped 8.3 percent to $96 billion.

But IBM's long-term microprocessing bet lies in a new breed of chips, code-named Cell, being developed with Sony and Toshiba Corp. Promising blazing speeds and the ability to carry out 10 sets of computing instructions at once, Cell is due to come out next year.

Hopes for Cell are so high that Sony, which plans to use Cell chips in the next generation of PlayStation game consoles, has invested $325 million in improvements to IBM's semiconductor plant in East Fishkill, N.Y.

IBM's production of chips for Apple accounted for only about 2 percent of Fishkill's capacity.

Associated Press