IBM is spending, but is it enough to buy the cloud?

Big Blue appears set on a dual strategy to offload hardware businesses as quickly as possible, while snapping up software and cloud companies with equal speed.
Written by Colin Barker, Contributor

Just last month, IBM announced that it was planning to spend a hefty $1bn on software and services — a very large chunk of which was to go on its SoftLayer Software as a Service (SaaS) cloud offering.

This seems like a clever move by IBM as it continues to align as many efforts as possible with cloud. At the back of all of this is its self-imposed target of hitting earnings per share (EPS) of $20 next year.

IBM's current EPS is a healthy $17 and change, but that stills leaves it some ground to make up if it is to hit the target within the deadline set by former CEO Sam Palmisano. Another tough target he set was that the company should hit $100bn in cash flow.

Out of the current swirl of new technologies, IBM sees the cloud as the major platform for growth, and is happy to spend (see chart below).

IBM's cloud spending spree:

When & how much What it bought
February 2014: $1bn BlueMix with SoftLayer Platform-as-a-Service (PaaS) and Cloud Foundry. Also buys NoSQL's  cloud database, Cloudant.
January 2014:  $1.4bn 15 new datacentres for the company's worldwide cloud including ones in the US, China, Hong Kong, India and the UK.
January 2014: $1bn Flushed with its success in building a system that could win in the US TV game show Jeopardy! IBM's new Watson Business Group invests over a billion in AI including $100m to fund start-ups .
September: 2013 $1bn On Linux and open-source technology for Power System servers.
June 2013: $2bn (estimated) IBM buys SoftLayer, the dedicated server, managed hosting and cloud computing company which becomes the IBM Cloud Services Division.
April 2013: $1bn On Flash Storage in its effort to promote storage based on flash memory as the standard for data centres.

It has this in common with much of the rest of the industry, of course. One set of analysts that is predicting huge cloud growth is Evans Research, which recently produced an IBM-commissioned report which said that while just 18 percent of developers worldwide currently work on cloud applications, by 2019 that figure will have risen to 67 percent. That represents some 12m people working largely or exclusively on cloud applications.

Hybrid clouds will be the big engines for growth over the next five years, with the combination of on-premises and cloud applications being increasingly seen as the norm. Analyst group Gartner has added its weight to the argument by saying that it believes 50 percent of enterprises will have hybrid clouds in place by 2017 — pretty much in line with the Evans Research calculations.

As part of this process, IBM is determined to show that it has the resources and the willingness to put billions into software development and related cloud activities. In last month's announcement, the company said it was bundling a range of software and services into the product Blue Mix, which will also make use of the open source platform as a service (PaaS) Cloud Foundry.

According to IBM, the goal of BlueMix is to "enable developers to rapidly build, deploy, and manage their cloud applications, while tapping a growing ecosystem of available services and runtime frameworks". All this is to be backed up by the $1bn investment.

Another part of this was the acquisition of the Boston-based, NoSQL database vendor, Cloudant, which runs on IBM's SoftLayer cloud platform as a cloud-only DataBase as a Service (DBaaS) offering.

And, as IBM was quick to point out, unlike some competitive offerings, BlueMix, "is based on open standards and provides a range of IBM software group capabilities — like Java, Mobile Backend development and application monitoring — through an as-a-service model in the cloud". 

As part of BlueMix, IBM "is building a powerful line-up of developer services focused on mobile, web apps, integration, DevOps and data management". Is that all? No, in addition, IBM is continuing to allow developers access to a suite of SaaS business applications with compatible API based services.

So what's the IBM plan?

IBM has been spending a lot of money over the past year. The $1bn spent on BlueMix/SoftLayer was just the hefty tip of a very large iceberg. In January, IBM spent $1.2bn on 15 new datacentres around the world, which it was adding to the 25 it already had — all of which are devoted to cloud services, the company says.

Then in January this year, IBM announced that it was going to form the Watson Business Group to specialise in artificial intelligence at a cost of another $1bn. Included in that would be $100m devoted to helping start-ups that were working on cognitive apps. Much of this is likely to be delivered through the cloud, too.

So what do the analysts think of IBM's chances?

When I asked Gary Barnett, principal analyst at researcher Ovum, for his take on the events at IBM, he went straight to the history books. He said you have to go back to the days when Lou Gerstner was in charge (1993 to 2002) to understand what IBM is going now.

"Remember that it was Gerstner who taught the elephant to dance," Barnett said, a reference to Gerstner's book, Who Says Elephant's Can't Dance? "He started the process of re-shaping IBM and all the CEOs since have followed that lead," Barnett said.

The process began, according to Barnett, with Gerstner pulling IBM's many and various businesses into four key divisions. "Since then, it has been a matter of pulling the company into areas of business that are not just defined by hardware or software but on other areas like [for example] the cloud," he said.

Barnett said that where IBM was once defined by and divided into what it sold — such as hardware or software, mainframes or servers, etc — now "it is the businesses that define the organisation of the company".

So, for example, we now have Watson, IBM's artificial intelligence development facility which is open for the use of people and organisations outside of IBM. "The work that Mike Rhodin is doing with Watson is a great example of what IBM is trying to change into," Barnett said.  "IBM have given him a billion dollars and said this is what we want, get on with it. That is the new IBM."

Barnett believes this is all underpinning IBM now. It means an end to complex management structures and convoluted organisational charts and an emphasis on simplicity.

There was a time when IBM was a US company with a large international presence, but Barnett believes now that IBM is becoming a large international company with a presence all over the world including the US. And Barnett believe that many people underestimate just how traumatic a change that is for a company that once defined itself as American first and last.

But it is a process that has been going on since Gerstner and will be continued — but not necessarily finished — by Rometty. "I think it is half-way there," Barnett said. Does that mean more layoffs on the scale we have seen over the last year? Barnett thinks not. IBM is doing the difficult part, the mass layoffs, but Barnett does not believe that that will continue much longer.

"IBM is a big company and it goes through these cycles of losing people and the hiring again," Barnett said. "It has been doing this on a regular basis for the last 100 years."

The analysts agree with this judgement. Gartner keeps a detailed rating on all the major suppliers including IBM. It has always given IBM what it calls a "strong positive" rating for areas like strategy, marketing and organisation, but now newer areas for IBM like mobile, cloud and smart commerce are moving into promising or positive ratings.

Good news perhaps for the old slugger — a 100-plus years old remember — which is growing in the confidence of one who thinks the whippersnappers still have something to learn.

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