Ailing IBM looks to the cloud for salvation

By Graeme Burton
20 Jan 2014 View Comments
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Any company can be sued by one of its customers, but when a contract is originally quoted at AU$6m (£3.3m) and balloons to AU$1bn (£550m), the customer might well have good cause to consult with m’learned friends. That is the situation that IBM is facing in the State of Queensland, Australia, where an old-style implementation of SAP payroll software really did start at the former price and finish at the latter.

Ordinarily, a company like IBM would shrug off such a one-off case, but it comes at a time when more and more questions are being asked about the company’s strategy and future direction after five years of, effectively, moribund growth – especially with cloud computing increasingly challenging the model of software and services that IBM adopted after its near-death experience in the early 1990s.

Further reading

This strategic shift was best exemplified by the sale of its PC division to Lenovo in December 2004 for $1.75bn. And, more recently, speculation has been rife that the company is considering selling its Intel-based X-Series server business to Lenovo as well, as price competition crushes the commodity server market.

Indeed, in the third quarter, IBM hardware sales fell by 17 per cent to $3.2bn, losing the firm $167m. That headline figure, though, disguises a massive 38 per cent drop in Power System sales, Unix systems based on IBM’s Power architecture, and a fall of 18 per cent in System X sales.

Remarkably, the brightest spot in hardware was IBM’s System Z mainframe sales, where revenues increased by six per cent, with “deliveries of System Z computing power” in terms of MIPS (millions of instructions per second) up by 56 per cent.

In microelectronics, too, IBM has lost out on two big-money contracts with both Sony and Microsoft choosing AMD’s x86-compatible “octa core” Jaguar microprocessors for their respective games console launches this year – replacing IBM’s Power architecture that had been at the heart of both companies’ previous consoles.

But sales of software and services in the post-global-financial-crisis world have failed to make good these yawning gaps in hardware revenue. Global Technology Services revenues slipped by four per cent to $9.5bn, while software sales were up just one per cent to $5.8bn.

Even sales to emerging markets have slipped, although the company will not comment on the impact that the Edward Snowden disclosures may or may not have had on its sales.

No wonder IBM has struggled for growth. Indeed, IBM’s overall revenues grew by less than one per cent between 2008 and 2012, although profits grew by one-third (to $16.6bn) on the back of cost-cutting.

Late to the cloud

Where IBM is claiming robust growth – up by 70 per cent in 2013 to the magic $1bn mark – is cloud computing.

Here, IBM has performed an abrupt hand-break turn. Back in 2011, IBM executive Ric Telford told a journalist, “You can’t just take a credit card, swipe it and be on our cloud” – unlike Amazon...
In June, however, IBM chose to follow Amazon by buying just that kind of cloud service when it acquired SoftLayer for a reported $2bn. Aimed at small businesses at the time of acquisition, this will form the basis for a “new division” in IBM to sell cloud services against Amazon, Rackspace, Google, Microsoft and others.

At the same time, IBM has “cloud enabled” more of its software stack. “We have got about 110 SaaS solutions now within our software portfolio, as well as making some of our traditional software available as SaaS,” says Doug Clark, IBM cloud leader, UK & Ireland.

However, for a company like IBM, embracing cloud often has meant forcing through changes throughout the whole organisation. “Global Technology Services is the part of IBM traditionally associated with hosting or outsourcing. It continues to do that, but a lot of the new platforms it is really out to host and support are cloud-based environments,” says Clark.

It is still too early to tell, however, whether the Snowden revelations will have a long-term impact on US technology companies’ sales outside the US – especially cloud. In the third-quarter, for example, IBM registered a surprise 15 per cent decline in sales to Brazil, Russia, India and China, after increasing sales by a robust 7.4 per cent during 2012.

Given all the other challenges IBM faces, it could probably do without such interventions adding to the complexity.

@GraemeBurton

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