.·. CASE STUDY 5.2 . . . . ·. . . . . .. ,.
IBM is in a fight to keep up with big spending
rivals in the cloud
By Richard Waters In San Francisco
If Wall Street thought IBM was through the worst of its
transition to the cloud, it has had to think again. Five
years into a fundamental recasting of its business, Big
Blue has a fight on its hands – and some of the biggest
and richest companies on the planet are gunning for its
market.
The intensifying battle was on Warren Buffett’s mind
earlier this month when he pointed to IBM’s ‘big strong
competitors’ as the reason his Berkshire Hathaway had
cut its holding in the technology company. That followed
the news that IBM’s profit margins suffered an
unexpected squeeze in the first quarter, feeding worries
among investors that its old-line technology and IT
services businesses – which still account for more than
half its revenues – are coming under greater pressure.
IBM’s revenue declines stretch to 20 consecutive
quarters, and financial analysts have been pushing back
expectations of when it will finally return to growth.
Hopes that it was through the worst of its adjustment for
the cloud had prompted a 50 per cent rebound in its
stock. But over the past three months, it has given up
half of those gains.
At the heart of IBM’s quandary is the rise of the so-called
‘public cloud’ – a new computing architecture that
makes the most efficient use of centralised hardware
resources to lower costs and increase flexibility.
Already a .distant third to Amazon and Microsoft in this
market, IBM is set to fall further behind before the end
of 2017, according to estimates by technology research
firm IDC. Google, though still smaller, saw its revenues
jump by 93 per cent in the second half of last year,
compared with only 21 per cent at IBM.
When it comes to the ‘mega cloud platforms’ that are
becoming dominant in this market, only four global
players – alongside Alibaba inside China-seem likely to
survive, says Frank Gens, an IDC analyst. In a market
where massive scale counts, that puts IBM uncomfortably
close to the borderline.
The need to protect the revenues from its traditional rr
business leaves IBM little choice but to stay the course:
more than 40 per cent of its revenues are exposed to
competition from public cloud services, according to
Steve Milunovich, an analyst at UBS.
‘IBM can’t fail [in the cloud] because it’s so central to
everything they do,’ says Glenn O’Donnell, an analyst at
Forrester Research. ‘It has to work. But it’s going to be
painful for them.’
The company’s response has been to try to play to its
traditional strengths. The big companies and
governments that are its main customers want to link
the public cloud to their existing IT infrastructure, says
David Kenny, IBM’s senior vice-president in charge of
IBM’s Watson and cloud platform.
‘They want it connected to their mainframes, they wan:
it connected to their data centres,’ he says. ‘In terms 0
an enterprise cloud for [these customers], the battle has
only just begun.’
• +o<70 aoogle for IBM can also claun some home field advam,ae…. . d of
one, struggled for years to sell its services to the kin~ re
big tech bu~ers that are natural IBM_ customers ~ 0
ar.
overhauling its cloud computing operations ear1Y las ye
. . d ·s a usefUl But even if IBM’s so-called ‘hybrid’ clou 1 das bli c}oU stopgap, analysts regard the fast-growing P~ c decided.
the main battleground where the future will be
It is ‘the most strategic’ part of the cloud market, says
Mr Gens, and the place ‘where the new software services
are being developed’.
IBM haS been putting the pieces in place for its response,
starting with its 2013 acquisition of SoftLayer, which
operates cloud data centres.
Holger Mueller, an analyst at Constellation Research,
credits the company with moving faster than its rivals
to build a truly global footprint for its cloud services but
he adds that it had not been able to turn this into lasting
advantage. ‘They’re always early – that’s the irony of
IBM,’ he says, pointing out that the risk now is that it
will not be able to match the massive scale of companies
like Amazon and Google.
Watson, the heavily marketed ‘cognitive computing’
service, is the ‘killer app’ that IBM hopes will draw big
companies to use its cloud platform. ‘We have hundreds
of customers on Watson, running customer service,
doing internal discovery, running their supply chains,’
says Mr Kenny.
As more Cl.1$tomers comm.it their corporate data to IBM’s
~loud, the company hopes this will give it an advantage
m developing greater industry expertise. Mr Kelly says
its system has already learned the ‘data structures’ of
fields ranging from oncology to oil exploration, giving it
a head start in building an ‘AI for business’.
Observers carp that IBM has over-promised about
~atson’s capabilities, and contend that the technology
lS best suited mainly to sifting through and identifying
useful information in vast bodies of corporate documents
ra~her than tackling the hardest AI problems. ‘They
P~mt everything with the Watson brush – they should
stick to what it does well,’ says Mr O’Donnell.
But he and other analysts credit IBM, which spends
ne~ly $6 bn a year on research and development, with
haVIng no shortage of cutting edge technology.
Recent ad~ances include the development of a platform
fo~ collectmg and analysing data from the internet of
thm~ based on technology that IBM assumed when it
acqmred Mr Kenny’s company, the Weather Company
two years ago. They also note the company’s efforts t~
make b~ockchain technology a mainstay of business
computmg.
~ut if ~M has the technology, it has struggled to adapt
its busmess to the simple, self-service approach to
delivering cloud services that other companies use. Its
b~siness ~odel, by contrast, was built on complexity,
with a rellance on using teams of consultants to stitch
together its customers’ convoluted IT systems. ‘It’s a
services mentality – they’re a system integrator,’ says Mr
Mueller.
Mr Kenny says that much of his effort had been spent on
overhauling IBM’s approach to cloud services to make
them simpler for developers. Watson, for instance, has
been broken down into a series of ‘m.icroservices’, or
smaller elements, each of which can be accessed through
an API, or computing interface.
‘We had to create a culture within a culture,’ he says,
including developing new metrics to track the
performance of the cloud business. This has also
involved bringing in more workers with what he calls
‘cloud-native skills’ to work alongside ‘long-term
IBMers’. Senior hires include Bob Lord, a former
president of AOL responsible for developing a stronger
digital distribution channel, and Michelle Peluso, a
consumer marketing specialist who was last year named
IBM’s first-ever chief marketing officer.
‘It’s now a hearts and minds thing,’ says Mr O’Donnell,
as IBM tries to shift the perception of its brand and
convince developers that it can move as fast – and
effectively- as consumer services companies that were
born on the internet.
II Source: ~ater~, R._ (2017) l~M is in a fight to keep up with big spending rivals in the cloud Financial Times 24 May.
C The Financial Times Limited 2017. All Rights Reserved. ‘ ‘
