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IBM abandoning hardware that helped it soar

Computing giant IBM became one of the most iconic companies in the United States largely thanks to its groundbreaking hardware, securing a torrent of patents that spanned the tech world, from big servers to tiny chips.

But after 10 straight quarters of sagging sales, the 103-year-old tech titan on Monday announced an unusual step: It will pay a Silicon Valley upstart $1.5 billion to take over the semiconductor business it helped pioneer.

It was the legacy giant's latest attempt at sending its crumbling hardware business the way of one of its many inventions, the floppy disk, while refocusing on new tech goldmines such as data analysis and cloud computing.

But pushing away from its traditional bread and butter, those namesake "business machines," has already stuck IBM with big growing pains. The firm's disappointing results, including a 4 percent drop in third-quarter revenue, "point to the unprecedented pace of change in our industry," IBM chief executive Ginni Rometty said Monday. "We have got to reinvent ourselves."

In doing so, IBM is following the playbook of much of U.S. tech's old guard. To conquer modern computing's biggest growth industries, legacy tech giants are beating a hasty retreat from the hardware that made them household names.

Hewlett-Packard said this month it would split its growing enterprise division from its traditional lifeblood of printers and ink. And Microsoft has turned away from its slow-selling device division and toward software services and cloud computing.

"They have made a practice of shedding unproductive parts of their business," Joseph Foresi, an analyst with Janney Montgomery Scott, said of IBM. "Hardware has become commoditized. The new technologies, like cloud, have become more favorable and have a better backdrop. It's a necessary evil."

But analysts said shedding the old moneymakers and thriving solely off the treasures of new industries may prove harder than it seems. "While the newer strategic areas are seeing significant growth," Wells Fargo Securities analysts wrote of IBM Monday, "the traditional businesses are still declining at a faster pace. The results are disappointing."

In a world where everyone can carry a computer in a pocket, the downfall of tech titans' hardware offerings can seem hard to believe.

The firms are finding that hardware manufacturing, with its razor-thin profit margins, is more a drag on their earnings. Newer, nimbler worldwide competitors are increasingly able to build hardware such as semiconductor chips cheaply and at high volume, undercutting what they can sell.

IBM has refocused on cloud computing, consulting and business services that, for instance, help companies understand their growing gobs of data.

Growth has even slowed in those businesses. IBM on Monday abandoned its five-year "roadmap" toward higher profits, a goal it pitched for 2015 that it now said it would be unable to meet. IBM shares fell 7.1 percent, to $169.10, the lowest since 2011.

In the 1980s, the company's products were so unquestionably dependable that, as the saying went, "nobody ever got fired for buying IBM." And the firm known as "Big Blue" has accomplished an impressive series of remakings: In 2012, the company received the most patents in the United States for the 20th year in a row.

Many of IBM's biggest decisions lately have focused on where it should cut back. The firm has, as Rometty said, "taken significant actions to exit nonstrategic elements of the business," selling divisions that build personal computers, disk drives and servers. In January, IBM said it had struck a deal to sell a key server business to Lenovo Group, a Chinese computer giant, for $2.3 billion.

IBM will offload its chip-making operations to Globalfoundries, a contract chip manufacturer in Santa Clara, Calif., which will continue to make processors for IBM systems.

HP, the tech giant behind a generation of printers and desktop computers, announced this month it would split in two, separating its legacy hardware from its enterprise business of networking and cloud computing. Chief executive Meg Whitman said the split would help HP "aggressively go after the opportunities created by a rapidly changing market."

Microsoft, the behemoth that once touted hardware and device expansion as its biggest next step beyond Windows, has instead aimed heavily at its own cloud services. At an event Monday in San Francisco, the firm said its cloud platform, Azure, was signing up 10,000 new customers a week.

IBM's traditional hardware offerings have struggled to stay afloat. Revenue from the company's systems and technology hardware, including its semiconductor segment, dropped 15 percent in the third quarter. And the firm has lost key contracts it once would have easily clinched, from a 10-year, $600 million contract with the CIA to deals for Sony and Microsoft's new-generation PlayStation 4 and Xbox One.

Some of the drop-off has come as the shifting tech landscape tilts away from IBM's mainstays. Cloud computing, in which rivers of data flow from distant data centers, has undermined the need for businesses to invest heavily in building their own server banks. High-quality servers and computing horsepower can be rented with the swipe of a credit card for pennies an hour, with less fear of overheating or going obsolete.

IBM has pushed heavily to promote what it calls "the world's most complete cloud portfolio," saying in January that it would spend more than $1 billion to build 40 new data centers across five continents.

But IBM's market share for cloud hardware and software lags behind HP and Cisco, according to the Synergy Research Group. Its pay-as-you-go server space business is also dwarfed by Amazon's cloud powerhouse, which has a market share bigger than IBM, Microsoft and Google combined.

Although it will phase out its building of semiconductor chips, IBM said it will spend $3 billion over five years toward researching and developing new chip designs "to lead in the next generation of computing."

It's also turning toward software. In July, IBM and Apple announced they'd partner up to build more than 100 mobile business apps targeting specific industries: Think iPhone apps that could tap data and make calculations for workers like insurance agents and airline pilots. But for tech giants such as IBM and HP, shaking off the advantages they won in yesteryear's markets may not always come easy -- or as they expected. As Martin J. Schroeter, IBM's chief financial officer, told analysts on a conference call, "Some of these fundamental shifts in the industry are happening faster than we planned."

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