IBM delivered a rare miss in their quarterly numbers, and a significant one at that. While the company seemed to focus on execution issues and delays in getting contracts signed rather than the usual macro-economic conditions tech vendors like to blame, I think the problems are deeper for IBM. And for the rest of the space.
From the first, at least according to our surveys that began in 1982, IBM has led the vendors in the strategic influence they exercise on customers. In the last decade, though, IBM has steadily declined in influence. They opened this century with enough influence from mid-sized businesses to enterprises to drive projects over even combined opposition. Now they can barely drive them without opposition, and of course opposition is mounting. Worse for IBM, their influence is concentrated almost completely in the enterprise space. You can see that in their numbers; hardware sales of mainframes were strong and everything else was weak. “Everything else” represents the hardware classes that are suitable for the larger and broader market.
What’s responsible for this? IBM, once the bastion of business-speak, is now seen as being able to articulate its message only to professional IT cadres. Integrators told us that IBM can’t address the SMB space at all, even in marketing/advertising terms. Absent marketing articulation, nobody can do anything at the sales level except play defense, and that’s what’s happening. And you always lose eventually by playing defense.
Digging into IBM’s numbers and their call, you also catch the disquieting truth that some of the key components of their software strategy are losing steam. Lotus, of all groups, turned in the best growth for them. WebSphere, which absolutely has to be the framework whereby IBM would introduce new productivity paradigms, had once gained better than 20% and is now into single digits. But it was hardware that dragged IBM down; only mainframes were above water for the quarter, and Lenovo has confirmed that IBM is looking to sell off its whole x86 server business. Too much competition, too little profit.
Frankly, this kind of quarter makes me wonder yet again what IBM is doing backing OpenDaylight. You can’t make money selling hardware, says IBM’s quarter. You certainly can’t make money selling open-source software. So do they plan to link a losing hardware business to free software to boost profits? Somehow that seems illogical. Do they plan to do what I suggested regarding OpenDaylight, which is to commoditize the lower part of the SDN market and focus on building the upper layers? If they do, they need to have a lot more value to offer above the SDN controller, and I’m not sure where they think they’ll get it. NFV is an example of a clear new-server-and-software application area, and yet Intel seems more aggressive with SDN/NFV positioning than IBM is.
For the industry, I think this should be a wake-up call, which is a good thing if true because as an industry we’ve been stuck in the cost-reduction stupids. CEOs and CFOs of the tech world, unite! You have only your profits and reputations to lose! What happens to a company who can sell only by promoting cost reductions versus prior product generations? They sell less, of course. That means they start missing their quarters. I’ve been harping on the fact that since the literal dawn of tech, we have had regular cycles of IT spending growth that corresponded to new productivity paradigms that created new IT benefits. We had, until about 2002, when they stopped. They’ve not restarted since. This is the problem that the IBM of old could have solved. This is a problem that any respectable IBM competitor of old would have jumped on had IBM somehow missed the boat. Nobody’s jumping; we’re still stuck in TCO-neutral here, promoting the cause that there’s nothing new and useful computers can do, so every technology enhancement has to lower their cost. It’s not taking us to a happy place, it never could have, and so I’m tired of everyone griping about stagnant sales. If you don’t like them, get off your ass and come up with a value proposition other than “spend less”.
This has to be a critical issue for Cisco, too. Microsoft, despite the issues it has, beat its estimates slightly. Oracle, another rival, has a stronger software position and thus isn’t as exposed to the whole hardware problem. Software, remember, is the link between humans and IT; we don’t have disk interfaces so we need productivity intermediation that only software can buy. Oracle bought Acme, so might they be getting ready to buy into some new UCC-based productivity thing? Could be, and if it is then where does it leave Cisco’s server side?
And Cisco’s network, of course. I’m not among those who believe that SDN is going to destroy the network vendors. I’m a believer that their focus on TCO is doing a great job of destruction on its own and doesn’t need help from the tech side. SDN is an opportunity for network vendors, a way of creating a framework for point-of-activity empowerment that could represent that needed and long-delayed benefit driver for a new spending cycle. But all these guys are playing SDN defense, linking it to operations cost management, which gets us back to lowering spending, bad quarters, and maybe new management teams. And Cisco’s not the only vendor in this boat; every player who wants to sell to the enterprise has to either offer better benefits to drive higher spending or (surprise, surprise!) accept lower spending.
Businesses buy IT and networking because it makes people more productive. The more productivity you drive, the more they can spend—on you. Seems simple to me, but apparently a lot of senior management in the vendor space is finding it too complicated to deal with. Maybe some new management teams really are in order here.