Tech Services

IBM Faces a Crisis In the Cloud


IBM (IBM) is having an identity crisis, and it sure is something to watch.

You may have heard about Big Blue’s recent ad campaign that takes a dig at Amazon.com (AMZN). In its marketing material, IBM claims to power 270,000 more websites than Amazon, via its cloud computing service. It’s a flimsy jab at Amazon because IBM has been a major laggard in the cloud rental market, having bought its way into the business in July with its acquisition of SoftLayer Technologies.

Far from being a cloud pioneer, IBM has spent most of the past few years downplaying services such as Amazon’s as insecure, low-margin businesses of little interest to a serious computing company. “You can’t just take a credit card and swipe it and be on our cloud,” IBM executive Ric Telford told me in early 2011. The company’s pitch to customers was that it knew them intimately and its cloud system was safer. But thousands of startups, including Dropbox and Netflix (NFLX), were more than happy to swipe their credit cards and get going on Amazon.

IBM’s cloud strategy has been complicated by questions about its accounting. The company disclosed in July that the U.S. Securities and Exchange Commission was investigating IBM’s cloud-revenue figures. More recently, IBM lost out to Amazon–twice–in a bid for a CIA cloud contract. With the CIA using Amazon, IBM’s security pitch is a much tougher sell. Its $2 billion purchase of SoftLayer, and its use of SoftLayer’s cloud tech instead of its own, appears to strike a final blow to IBM’s old cloud strategy.

IBM’s reluctance to enter the credit card-swiping end of the cloud business was in keeping with its shift away from low-margin disk drives, PCs, and networking gear toward higher-profit software and services. The company wanted to sell cloud services to large corporate users willing to pay a premium for some hand-holding, not retreat into by-the-hour computer rentals. Unfortunately for IBM, the market and equipment have matured so much that fewer and fewer customers need much hand-holding these days. Even the most arcane data-center equipment is getting easier and easier to use.

Let’s be clear: There’s plenty of work left for an IBM to do. The healthcare.gov debacle shows just how awful some technology projects can still get. But IBM’s revenue will keep falling with this strategy in place, as other companies turn to it less and less.

In its most recent quarter, IBM’s hardware sales fell 17 percent, its services sales dropped 4 percent, and its total revenue fell 4 percent to $23.7 billion. Sales in what IBM defines as “growth markets” fell 9 percent. The company didn’t have the courage to break out sales in non-growth markets.

The acquisition of SoftLayer shows that IBM knows it needs to engage in some hand-to-hand industry combat if it wants to remain relevant. Having sold its disk drive business to Asia, IBM is now renting disk drives by the hour for pennies. If you want to be a technology company in 2013, that’s the sort of thing you must do.

Vance_190
Vance is a technology writer for Bloomberg Businessweek in Palo Alto, Calif. Follow him on Twitter @valleyhack.

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Companies Mentioned

  • IBM
    (International Business Machines Corp)
    • $193.63 USD
    • -0.46
    • -0.24%
  • AMZN
    (Amazon.com Inc)
    • $358.14 USD
    • -2.70
    • -0.75%
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