Nonetheless, he admitted that all is not sunny in the services-centric future. In recent months, IBM has had to renegotiate consulting and services contracts, reducing the overall value of the deals. The company has also found itself saddled with excess capacity in services. Furthermore, companies are not fully funding multiyear, major technology projects in the same manner that they used to. Rather than commit to a complete budget up-front, companies will fund a project for six months and, if it goes satisfactorily, fund another six months of work. IBM, Palmisano added, won't be getting out of the PC or chip business anytime soon, something some analysts have recommended for years. Large customers still need PCs, he pointed out. The company's PC and Intel-based server operations, moreover, are crucial laboratories for learning how to remove costs out of other operations. Likewise, the microelectronics business is necessary to enhance the services and storage business. "We are in the business fundamentally to provide differentiation to our storage and server business," he said. IBM will not become a large-scale foundry and manufacture chips for a wide variety of customers, Palmisano said. However, it will sign chip development deals with a dozen or so companies such as Sony that will use IBM's chip facilities. "We are not going to become the next TSMC (Taiwan Semiconductor Manufacturing Co.). We are not going to become the next foundry or the next Intel," the chief executive said. In contrast to his predecessor, the often opaque Lou Gerstner, the jocular Palmisano took the opportunity to throw a few jabs at competitors, although largely anonymously. After Hewlett-Packard acquired Compaq Computer, the combined company became for a time the largest overall server company. "We had the opportunity to buy a PC company in the past," but chose not to, he said. People crowed that the combined company would be No. 1 in the server market, he said. "They were No. 1 for about four weeks. We're back to being No. 1." Without naming Intel, he noted that a large semiconductor company recently announced that its top-end chip contained a flaw and could not be run at 1GHz, a problem that Intel noted with its Itanium chip. "We've got three times the performance at 70 percent of the cost," Palmisano said. IBM is No. 2 in storage, according to market research surveys, but next year the company should be No. 1, he predicted, a swipe at rival EMC. And, as a veiled message to Microsoft, Palmisano touted how corporate leaders are embracing Linux. It's one of the topics that comes up most frequently in meetings, he said. "When CEOs are talking about Linux, the world has changed," he said.
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