How Does IBM Make Money? Business Model Explained!

International Business Machines Corporation (IBM) is an American multinational technology and consulting company headquartered in Armonk, New York. IBM manufactures and markets computer hardware and software, and provides infrastructure, Internet hosting, and consulting services in a variety of computer-related areas, from mainframe computers to nanotechnology.

The company was founded in 1911 as the Computing Tabulating Recording Corporation and resulted from the merger of four companies: the Tabulating Machine Company, the International Time Recording Company, the Computing Scale Corporation, and the Bundy Manufacturing Company.

CTR adopted the name International Business Machines in 1924, using a name previously intended for a subsidiary of CTR in Canada and later in South America.

In 2011, Fortune magazine ranked IBM as the 18th company in the United States by size, 5th, and 7th by profit. 6 Globally, Forbes ranked the company as the 31st largest company out of 200 countries in 2011 (with professions including scientists, engineers, consultants, and sales experts).

IBM holds more patents than any other technology company in the United States and has twelve research labs.

Employees known as “IBMers” have been awarded five Nobel Prizes, four Turing Awards, nine National Medals of Technology, and five National Medals of Science.

Among the famous inventions of IBM are the ATM, the floppy disk, the hard disk, the magnetic stripe, the relational model, the UPC bar code format, the airline reservation system SABER, the dynamic memory RAM, and the Watson artificial intelligence system.

Overview of IBM’s Financials

The IBM (FY) 2021 fiscal year ended Dec. 31, 2021, according to financial results released in late January. In the previous year, the company generated a net income of $5.7 billion, up 2.7%. Revenue increased 3.9% to $57.3 billion. During the year, the company generated a gross profit of $31.5 billion, an increase of 2.0%. In FY 2020, the gross profit margin decreased from 55.9% to 54.9%.

According to IBM’s annual report, the company’s financial results were driven by growth in several key areas, including technology and consulting. COVID -19 pandemic has created an uncertain business environment, the company said.

As a result of the pandemic, IBM customers realized they needed to modernize their businesses. With its hybrid cloud and AI solutions, the company is helping companies digitally transform their businesses.

How Does IBM Make Money?

The company operates in four business segments: Software, Consulting, Infrastructure, and Financing. 

Software

The IBM Software segment helps customers manage their data needs and automate and secure their systems by leveraging IBM’s software solutions and its hybrid cloud platform. All of IBM’s software offerings are included in this segment except for those in the Infrastructure segment.

Software generated $24.1 billion in revenue in FY 2021, up 5.3% year over year. It accounted for more than 42% of total revenue across all four segments.5 Segment gross profit increased 5.9% to $19.0 billion and accounted for 59% of total revenue across all segments.

Consulting

IBM’s Consulting segment helps its customers implement new technologies and transform their businesses. In addition to designing and building hybrid cloud architectures to optimize workflows and business processes, this segment works with IBM customers to develop products and solutions that support them in the digital transformation of their business.

The consulting segment generated revenue of $17.8 billion in the FY 2020 period, an increase of 9.8%. More than 31% of total revenue was generated by the consulting segment. This segment accounted for approximately 16% of the total gross profit of all four segments in FY 2021, an increase of 4.9%.

Infrastructure

Hybrid cloud solutions are offered by IBM in the area of infrastructure. The company provides its customers with infrastructure platforms that help them meet the new demands associated with hybrid multi-cloud and AI workloads in enterprises. 

In addition to hardware, it offers high-performance servers, storage solutions, and cloud infrastructure-as-a-service (IaaS). The segment’s activities also include the refurbishment and resale of used equipment.

Infrastructure revenue decreased 2.4% to $14.2 billion in FY 2021, accounting for nearly 25% of total revenue across all four segments. Gross profit was $7.8 billion, down 6.1% from the prior year. This segment accounted for around 24% of total gross profit.

Financing

IBM’s Financing segment offers clients IT systems, software, and services. The segment typically provides financing for products and services that are critical to the business operations of the client and that support IBM’s hybrid cloud platform and artificial intelligence strategy.

In the Financing segment, revenue was $774 million, down 20.6% from FY 2020. More than 1% of total revenue was derived from this segment. During the year, the segment’s gross profit decreased by 39.7% to $245 million, constituting nearly 1% of the total gross profit for all four segments.

IBM’s Recent Developments

IBM released a statement on Russia’s invasion of Ukraine on March 3, 2022. According to the message, the company has stopped selling technology in Russia as a result of the crisis.

Earlier this year, IBM announced that it had acquired Neudesic, a cloud services consultancy specializing in the Microsoft Azure cloud platform. The company said that the acquisition will help it expand its hybrid multi-cloud services offerings and support its ongoing hybrid cloud and artificial intelligence strategies. There are no details on the transaction’s financial aspects.

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IBM’s Corporate Culture

IBM is often described as a sales-oriented company. Traditionally, many of the top executives and managers were selected from the ranks of salespeople. In addition, top and middle management supported salespeople who were in the process of closing a sale to important customers.

Over time, the company became more technical. In 2003, about 178,000 of IBM’s 320,000 employees were in technical roles, including 38,000 in software.

In the past, the work uniform of IBM employees was a blue suit with a white shirt and dark tie, hence the nickname Big Blue (“The Blue Giant”).

In the 1990s, under Louis V. Gerstner, Jr, IBM relaxed its dress code and today is no different from other large technology companies. As for labor relations, IBM has traditionally resisted unionization. However, some of its employees outside the United States are represented by unions.

Today, IBM’s corporate culture is a major champion of the open-source movement. The company also invests billions of dollars in GNU /Linux-based software and services through the IBM Linux Technology Center, where about 300 employees from IBM work on the Linux kernel.

IBM has also released code under various open-source licenses, such as the cross-platform Eclipse framework, the International Components for Unicode (ICU) license, and the Apache Derby relational database management system based on the Java programming language. However, IBM’s involvement in the open-source movement has caused the company some problems.

In July 2020, the existence of an agreement between IESA and the company IBM to train specialists in data science, artificial intelligence, and cybersecurity was announced.

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