Two years ago, analysts were calling on IBM to exit the microchip business after production problems and lower-than-expected orders led to losses of more than $1 billion since 2002 at the division.
Today IBM sees a profitable future in microprocessors as it finds new markets for its "Cell" chip, found in Sony Corp PlayStations, Toshiba TVs, and other devices and computers.
Besides gaming, the high-powered Cell, which IBM calls a "supercomputer on a chip," is seen powering devices in a range of industries including medical, aerospace and automotive technologies. Analysts expect Sony to sell 80 million to 100 million PlayStation 3 video consoles by 2010.
"It's very much in their favour to keep that division going and then expand that to other consumer devices," said Richard Doherty, research director at Envisioneering Group, a market researcher in Seaford, New York. "We see black ink ahead for the chip division."
In the first deal for the Cell chip beyond consumer electronics, International Business Machines Corp in June agreed to license the processor to military equipment maker Mercury Computer Systems Inc. The chip could power magnetic resonance imaging scanners in medicine and missile systems and sonar for military uses.
Other potential applications include heart pacemakers and weather forecasting, Doherty said. IBM in March said it planned to help customers embed the Cell chip in electronics that require intense graphic or video processing, among other functions. Cell is also seen by analysts as offering competition in consumer electronic mass markets that Intel Corp, the world's top chipmaker, also covets.
Unlike other processors, Cell "takes for granted that there are other chips around it," Doherty said. "You divide the tasks up and get it done that much faster. It's the difference between a barn-raising and building a house on your own."
Cell, which IBM developed with Sony and Toshiba Corp, will likely boost profit at a unit that dragged down earnings at IBM in 2002 and 2003. In 2003, the business was hobbled by production problems at a new $3 billion microchip factory in East Fishkill, New York, contributing to a $252 million loss at the microelectronics unit. That followed a $1.06 billion operating loss at the division in 2002.
IBM's decision to pump billions of dollars into its chip efforts also came at an unlucky time.
The Armonk, New York-based company in 2000 announced plans for a $5 billion expansion in its chipmaking efforts, just as a global downturn in semiconductors began in the fourth quarter of 2000. The division started to lose money and IBM subsequently closed some older chip-making plants, shed jobs and sold some businesses as semiconductor demand waned.
Along with Sony and Toshiba, IBM spent about $400 million developing the Cell technology. After those investments and a rebound in the industry, by 2004, the unit swung to a $2.27 billion operating profit.
And the expansion in Cell technology comes as it prepares for the loss of a long-time customer, Apple Computer Inc, which in June said it would switch to Intel processors for its Macintosh computers starting next year.
But IBM has also won a contract to supply PowerPC microprocessors for Microsoft Corp's next-generation video game console, the Xbox 360, which goes on sale in North America on November 22. That deal will likely generate far more revenue for IBM than Apple did, analysts said.
"We've been really working on 'What is the next big thing?' for the last five years," said Lisa Su, vice president of technology development at IBM's Systems and Technology Group. Cell "is an overall architecture that we think is able to take advantage of changes in the industry."