A Deeper Look at IBM, Pre-Earnings

As we advance toward IBM’s earnings call on January 21st, and with additional news now out that IBM is again trying to sell off its x86 server business, it’s clear that we’re heading for one of those watershed moments.  I’ve been associated with IBM products in some way for almost fifty years now, and watched the company move with seemingly little effort through major product transitions.  The one that’s coming now may be the most “major” of all.  For the first time in my memory there is a serious question of whether IBM can make it through without serious impact.

There are a lot of silly and short-sighted views of what’s wrong with IBM, most of which focus on the fact that the company still depends on its mainframe and UNIX revenues.  It’s true that depending on “legacy” anything is a risk, but network equipment vendors have all ridden their current revenue horses for decades too.  You don’t throw out product families because you’ve had them around for a while, you wait until it’s clear that you can’t evolve them.  Yes, IBM is losing revenue on these legacy boxes, but the x86 stuff is doing worse, which is why IBM is interested in dumping those families.

That’s the question that now faces IBM.  Companies have enormous investment in their current IBM systems, but if there is a change of paradigm on the horizon then there’s obviously a good chance that those current products won’t be suitable in the new age.  Some customers will evolve out of the lines, and if UNIX and mainframes are old-hat to the new buyers, there will be nothing to replace them.  So the question is, is there a paradigm change on the horizon?

Maybe, I think.  The Street thinks that the cloud is going to hurt IBM, presumably because it’s going to commoditize hardware.  Of course, what you find in “the cloud” is the x86 stuff that IBM wants to get rid of, so wouldn’t the cloud be more of an impact on whoever buys IBM’s COTS business?  No, it’s not that simple.  The cloud’s impact on IBM arises because it might impact how applications are written, it might be that paradigm shift.  If it is, though, it could help IBM as easily as hurt them.

If we follow the “hurt” track first, this is how it goes.  The cloud presents a new virtual-OS model based on what I’ve been calling “platform services” and targets it at worker productivity (what I’ve called “point-of-activity empowerment”).  These shifts induce enterprises to spend on new software, and that software is based on commodity technology not the high-margin mainframes and UNIX stuff.  As a result, IBM bleeds off customers in these two hardware areas, and can’t hope to replace them with new customers.  They contract sharply.

The critical presumptions in this scenario are the paradigm shift and the notion that the new paradigm is supported immediately on COTS platforms where IBM can’t be competitive by its own admission.  I think the paradigm shift is real but not imminent, and that means that IBM could address the second point, the commoditization of the new cloud platform.

There is an incredible amount of new work needed to support platform-services-based point-of-activity empowerment.  IBM is probably one of the few companies on the planet that could actually afford to drive something like that.  Suppose that IBM built up its new cloud vision (they’re spending $1.2 billion on expansion, remember?) around platform services and mobile broadband empowerment.  Suppose they supported these concepts first and strongest on their higher-margin platforms.  Might that not drive enough growth there for the revenue and profit trends for these systems to turn around?  And think about this a moment.  The premise behind “platform services” is that high-value cloud-friendly application elements are presented as web services to any OS and middleware combination.  It’s PaaS without the fixed software base.

IBM could win with this, and here’s the scenario.  They field their PSPOAE (Platform Services Point of Activity Empowerment) offering based on their cloud and their high-end enterprise system software.  There’s a significant business benefit to be had from the POAE part, and that gain drives new investment (R begats I).  It also makes IBM a powerhouse in the cloud, and even lets IBM build software margins on top of x86.  IBM turns around by 2016 and becomes a powerhouse again.

The thing that’s wrong with this picture isn’t technical, it’s promotional.  IBM had the strategic moxie to bring this about for all of the time I’ve surveyed enterprises except for the last three years.  From that point, they’ve lost strategic influence because they’ve lost their marketing touch, becoming too much of a sales engine.  That’s the real reason why they can’t make money on x86.  Low-end platforms are not sold, they are marketed.  So IBM would have to turn around its positioning/marketing almost instantly, certainly in 2014, to promote something as massive as PSPOAE.  The “old” IBM could have, would have, done that, but the old IBM would never have let their brand slide.

Waiting in the wings for IBM to fail is…who?  HP or Dell, who have made money on COTS and thus don’t have the risk of obsolete platforms?  Cisco, who wants to be the next IBM and so surely would try to benefit from a decline in the “current IBM?”  No, I think not.  It’s Amazon.

Amazon now holds the IT cards, if they choose to play them.  They are already the premier provider of platform services.  They have brand credibility, they have a tolerance for low margins, they have shareholders who are prepared to take a risk for a big payoff.  If Amazon were to frame a point-of-activity-empowerment model within AWS, they’d end any hope of IBM coming through this latest transition as the premier IT company.  They’d also end any hope Cisco has for taking over from IBM, and they’d consign Dell and HP to providers of commodity iron.  Is this the kind of risk Amazon would take?  Can IBM, or Cisco or Dell or HP be bold enough to counter it?  That’s what we should be watching for as 2014 unfolds.

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