Enterprise

IBM Earnings Reflect Just How Difficult Transformation Really Is

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IBM logo on earthscape.
Image Credits: Daniel Voyager (opens in a new window)

The news came out this week that IBM had another bad quarterly report card. Unfortunately for IBM it marked the 10th straight quarter of falling revenue, indicating that maybe something’s not quite right at Big Blue. IBM’s earnings illustrate the challenge they face as they transform themselves into a cloud-centric company.

It could be that it will take some time for that transformation to bear fruit or it could be that it’s just harder for large companies like IBM to make big money in the cloud, a harsh lesson not just for IBM, but also for other big companies like HP, Red Hat, EMC and Cisco who are trying to make similar transformations.

IBM deserves a great deal of credit, however for simply getting to where they are today as they put their cloud business front center. In just a couple of years, they have put together a 3-tiered cloud strategy starting with a catalogue of over 100 SaaS business applications. They also bought Infrastructure as a Service provider SoftLayer last year, then invested big money in building a network of data centers around the world. SoftLayer had 13 data centers when IBM bought them. A billion dollars in investment later, they have 35 with 5 more scheduled to come on board by the end of the year.

Later they released a development platform called Bluemix built on top of SoftLayer, so customers can build their own applications on the IBM cloud platform. They opened an app marketplace earlier this year and hope to change the way they sell software from a team of sales people in blue suits to an online model where people, try and then buy (and it also provides a commercial outlet for Bluemix developers to sell their wares under the IBM brand umbrella). They have continued to develop Watson technology and commercialized it as a cloud platform with IBM and outside parties building a variety of applications on top of it.

They’ve done all of this remarkably quickly

What’s more, the company has made key partnerships with other large enterprise vendors such as SAP and Microsoft. IBM announced that SAP will use Softlayer data centers for SAP HANA in the cloud and Microsoft and IBM have connected around running its traditional enterprise software like WebSphere on Azure in virtual machines, in addition to running Microsoft software on SoftLayer. IBM is clearly doing whatever it can to move the company to become a cloud platform play.

There is evidence in the latest quarterly report that the new strategy could be working, at least to some extent. Cloud revenue is up 50 percent year-to-date and “cloud delivered as a service [is] up 80 percent year-to-date with a third-quarter annual run rate of $3.1 billion,” according to IBM’s earning report. As IBM stated in the report, “While we did not produce the results we expected to achieve, we again performed well in our strategic growth areas – cloud, data and analytics, security, social and mobile – where we continue to shift our business.”

After 10 quarters of falling revenue, that has to at least be encouraging. They are making money and showing growth in those areas where they are trying to make this transformation, but in today’s world where the cloud levels the playing field, it means it’s harder to make those huge markups they once had selling hardware that made IBM such a wealthy company. The nature of the cloud is such that it drives down prices and puts the customer in control and that’s not necessarily a comfortable place for a company like IBM.

And IBM is still suffering as it tries to extricate itself from its older hardware businesses. Just this week it had to pay Globalfoundries $1.5B and a valuable patent cache to take its Power processor manufacturing business. It’s not every day a sale involves the seller paying the buyer a substantial amount of money, but  IBM needs these chips for its continuing mainframe business and for its growing Watson business –and according to an IBM spokesperson, the chip business generated a significant loss. Perhaps paying another company to continue making these chips was the best deal they could make. The deal also resulted in a one-time charge of $4.7B.

As it deals with this transformational overlap, IBM and its fellow enterprise technology giants have to be wondering just what it takes to succeed in this brave new world because it’s clear that transforming in this fashion is not going to be easy for any of them and they all face a similar set of problems. All of these companies need to remember that while the cloud offers a path to the next generation of computing, it might not give them the huge earnings they have been used to in the past and that could be the toughest lesson of all.

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