Management Information Systems Discussion

.·. 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 ~ 0ar. 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. ' '