<p>At the end of last year my founding partner dropped a quite outstanding post - The Importance of Software at IBM. In it Stephen analysed IBM's 2011 financial results through the lens he has been using for most of the year (the end of the age of Software-only business models). It should surprise nobody that Software is a higher margin business than Services, but it is still striking that by September 2015 fully 50% of IBM's profit is expected to come from Software, especially given it currently only accounts for around 25% of total revenue.</p><p>In answer to the larger question of how important software is to IBM, it's clear that SWG [Software] is core to the business moving forward. Its unique-to-IBM ability to extract outsized profits is the foundation upon which the company's profit growth depends. Strengths, however, can also represent weaknesses if they open doors to disruption.</p><p>In IBM's case, it's important to consider the wider market context. Across a wide variety of software segments, the evidence suggests that the realizable margins attached to software are in decline. From collaboration software to middleware to databases, margin oriented revenue models are under attack from volume focused alternatives. The precise competitive mechanisms may vary cloud, open source, SaaS but the result is a more competitive pricing market for software. While demand for software is more or less inelastic, credible free or low cost options almost inevitably lower the realizable revenues for software. The resulting lower margins are perfectly acceptable for volume based businesses, but much less for those built upon high margins such as IBM.</p><p>Stephen, as is his wont, ends on cautionary note, but my take on his analysis is slightly different I think IBM still has plenty of room to improve its margins by the simple expedient of building better products using better design. IBM definitely isn't selling "just software" it invented end to end stacks, and it knows how to move money and cost around these stacks better than anyone. The current grand reintegration of everything suits IBM pretty well. While Oracle is losing money on hardware, IBM is not. They key to margin, and so winning, is packaging.</p><p><a href="http://www.enterpriseirregulars.com/57195/on-the-importance-of-design-at-ibm-love-and-margins/">Keep reading...</a></p>