Published July 17 2008
IBM Studies Cocoa, Eye for $6 Billion `Secret Sauce' (Update2)
By Melita Marie Garza
July 17 (Bloomberg) -- International Business Machines Corp. credits its No. 2 spot on the Dow Jones Industrial Average this year to more than 3,000 workers like Michael C. Pitman.
He's not an Internet wizard or a supercomputer designer. He spends his time studying how the light receptor works in the human eye.
One of the last corporations to still emphasize basic research, IBM attributes part of the stock's 17 percent gain this year to expanding the development budget when competitors like Bell Labs fell behind. IBM spent $6.2 billion in 2007, 30 percent more than it did in 2002, on projects with little discernable impact on the company's day-to-day work. Instead, its scientists are tracing migratory patterns of humans and studying the DNA of cocoa trees.
``Research is IBM's secret sauce, the special house dressing that allows all the divisions to stay competitive,'' said Richard Doherty, research director at Seaford, New York-based technology analyst Envisioneering Group Inc.
Chief Executive Officer Sam Palmisano is following in the tracks of Lou Gerstner, who overhauled research strategy while he ran IBM from 1993 to 2002. Now scientists, not just sales staff, meet with customers. IBM, the biggest computer-services company, today has more than 75 development centers worldwide.
IBM today may report a 10 percent increase in second-quarter profit, the fourth period in five when the Armonk, New York-based company's earnings grew at least that fast, according to the average estimates in a Bloomberg survey of analysts.
IBM's research budget, which includes the science projects and development of new products like server computers, grew by $1.4 billion from 2002 to 2007. In 2007, for the 15th straight year, IBM won the most U.S. patents of any company, 3,148. R&D totaled 6.2 percent of sales in 2007.
Xerox Corp., whose Palo Alto Research Center in California developed the graphical user interface, spent $912 million on research last year -- about the same as it did in 2002, according to its annual reports. That's 5.3 percent of sales.
Hewlett-Packard Co., the world's largest personal-computer maker and No. 10 on the patent list, said in March it would fund fewer projects. It spent $3.6 billion on research in 2007, a little more than in 2002, or about 3.5 percent of sales.
The former Bell Telephone Laboratories, which developed the transistor, were absorbed into Alcatel-Lucent SA in 2006. Research spending for the two companies combined was $4.3 billion in 2007, a 6.5 percent decrease from 2002, or 17 percent of sales as orders slipped.
``Their heyday seems to be over,'' Jonathan Eunice, an analyst with Nashua, New Hampshire-based researcher Illuminata Inc., said of Bell and Xerox PARC. ``What IBM did was it figured out how to get value out of the R&D process.''
IBM, which trails only Wal-Mart Stores Inc. in Dow members this year, rose 58 cents to $126.52 at 4 p.m. in New York Stock Exchange composite trading. The Dow average has declined 14 percent in 2008.
At Thomas J. Watson Research Center in Yorktown Heights, New York, one of IBM's eight major labs, Ted van Kessel and Bob Sandstrom stood in the sunshine on a June day. Like children burning leaves with a magnifying glass, they focused 230 watts of sunlight through a lens onto a solar cell 1 centimeter square.
The cell converted the energy into 70 watts of usable electricity, about five times what a cell that size typically generates. The trick lies in cooling the tiny square as it absorbs enough heat to melt stainless steel.
IBM doesn't plan to make or sell solar panels. It intends to license the technology to a solar-power company or form a partnership with a utility. Sales of solar cells totaled $20.3 billion last year and could triple in the next decade, according to Clean Edge Inc., a Portland, Oregon-based research firm.
Last year, IBM got about 10 percent of profit -- almost $1 billion -- from licensing its technology.
Elsewhere at the lab, Pitman, an expert in biomolecular dynamics, and Ajay Royyuru, senior manager for IBM's computational biology program, led a three-dimensional tour through the light detector of the human eye.
On three 48-square-foot screens, Pitman projected a blue, green, red and white model of rhodopsin, the membrane protein responsible for dim-light vision. Pitman and a team of scientists created the simulation using IBM's Blue Gene supercomputer.
Working with the National Institutes of Health and university researchers, IBM showed for the first time that a significant amount of water resides in the protein structure during light detection in the eye. Understanding the make-up of the protein is critical to drug development in a market worth tens of billions of dollars.
``As we develop faster and faster supercomputers, it's not always clear how to use them most effectively, and this is one example of how use them to advance drug discovery,'' said Pitman, who has worked at IBM for 12 years.
Blue Gene, the world's second-fastest computer, is also helping IBM study the genetic code of cocoa trees. The project, announced in June, is part of a $10 million, five-year investment by candy maker Mars Inc. to save the world's chocolate supply. The maker of M&M candies and Snickers bars seeks to identify the plants best able to withstand blights.
IBM teamed with the National Geographic Society on a five- year, $40 million project to collect at least 100,000 DNA samples from indigenous groups to trace the roots of the human family tree.
``Our investments in research enable IBM to see and develop the right technologies,'' said Mark Dean, vice president of systems in IBM Research.