Signposts on IBM’s and Google’s Paths

Tech got some semi-good news in two earnings reports yesterday, from Google and IBM.  I insert the “semi-“ because the quarter measures the past, which is only an indirect indicator of the future.  The most significant insight from the reports is that the politically driven economic slump we had in the holiday period last year didn’t stall businesses and didn’t completely kill consumer interest either.  It’s not a signal that the stupid “cliff” impasse didn’t matter, but at least it suggests it wasn’t fatal—yet.

Google reported slightly better-than-expected results, but the big news was that the critical CPC (cost per click) ad metric lost only 6% rather than the 15% it had lost the prior quarter.  Sharp declines in CPC indicate advertisers aren’t willing to pay as much for ads, which means they are less confident about a return.  Whatever the reason for that, CPC declines for Google are bad for everything online that depends on ad revenue.  But the Google revenue line was light, demonstrating that advertising is impacted by consumer confidence, which is still fragile.

Another interesting piece of news is that Motorola’s loss for the quarter lightened by about $200 million, but some of the improvement was the exclusion of the Home group that Google is selling off.  The take-away here is that a company like Google can’t just jump into areas like phones and hit a home run.  In fact, manufacturing isn’t the kind of high-margin business Google likes.  It seems to think it needs to be an appliance player in the long run to keep Android competitive with Apple.

Getting rid of Home may say something too.  Here’s an interesting progression.  First step; you can’t make money on broadband home access without video.  Second step; you can’t do home video without a set-top box.  Third step; Google is getting rid of its STB.  So…fourth step; Google isn’t serious about large-scale gigabit broadband?  That seems a pretty inescapable conclusion to me.

IBM’s numbers were good, no question about it.  Earnings and revenues were up.  Free cash flow was up, and so were gross and net margins.  On the hardware side, the mainframe revenues were up 56% and POWER systems off by 19%.  Software was up 4% with branded middleware up 5% and WebSphere up 11%.  Tivoli Security was up 16% and Rational up 12%.  Cloud revenue was up 80%.  Obviously IBM continues to perform, but there are some less obvious but interesting insights here.

First, IBM’s hardware growth is focusing on the big data center area, the “mainframes” that people have been declaring dinosaurs for decades.  What IBM is doing is integrating mainframes with adjunct elements to create vertically integrated computing.  They’re also fitting cloud into data center instead of trying to displace the latter with the former.  The point is that if we believed the cloud story we hear in the market today, IBM’s numbers would make no sense.  Thus, we shouldn’t believe it.

Second, IBM is reflecting a polarization in business computing that may be one factor in our distorted view of the market.  IBM has very large customers who spend a lot of money and who justify dedicated account teams.  They’re not as much market evangelists as firms like HP who have to sell into the broad market.  The lack of marketing impetus for IBM creates a limit on how big and broad it can get, but it also helps it to sustain stable margins and growth.

Third, even in uncertain financial times IBM is demonstrating that you can make money on tech.  Why?  Because IBM more than anyone else sells into BUSINESS BENEFITS and not technology features.  They understand that if you want a buyer to spend more, you have to show them a bigger and more compelling benefit case.

We might want to consider this perspective in network equipment, a space IBM supports with OEM deals and not its own products.  Look at IBM’s positioning of hardware and software and you find, as I’ve said, alignment with buyer productivity and profit.  Look at network positioning now.  We tell carriers to buy more gear to carry traffic whose revenue per bit is declining by 50% per year.  We tell enterprises to buy more gear to improve connectivity or to support business video collaboration, which are technical goals imperfectly tied to buyer benefits.

I want to come back to a quote from Google’s Page on their earnings call:  “People carry a super computer in their pocket all the time. In fact, we feel naked without our smartphone. And many users have more than one device: a laptop, a phone, and a tablet. We are living in uncharted territory. It’s a new kind of computing environment.”  IBM’s mobility efforts have leveraged this reality effectively for the enterprise, and Google’s success depends on its leveraging that same principle for the consumer.  They’ve done that with Maps, which demonstrates that they can make a cloud concept work even for iOS users.  They need to do that beyond Maps.  And IBM needs to do its magic, eventually, beyond its big-account base.  Page is right, this is a new kind of computing environment, and no matter how you tack goodies onto the past, you’ll never reach the future without striking out on your own.

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