IBM and Intel Show the Cloud is Complicated

We’re starting to get some earnings reports from tech bellwethers now, and so it’s time to take a reading of the space and try to assess how tech might develop through the balance of 2014.  We’re still early in the game, particularly for networking, but we do have some insights from the IT hardware side available in Intel’s and IBM’s numbers.  We’ll start with Intel, whose quarter was a combination of good, not-bad, and unexpectedly (and maybe seriously) bad.

Data center revenues were up for Intel, particularly for cloud-related stuff, and that’s clearly a good thing for Intel.  Given that the cloud could be one of those rob-Peter-to-pay-Paul things, the fact that data center products overall were strong suggests one of two possibilities.  First, perhaps the cloud isn’t going to rob Peter as much as expected.  Second, perhaps the cloud investment leads the impact of cloud hosting on data center spending by more than expected.  I think it’s a bit of both, but mostly that the real impact of the cloud won’t come from displacing current in-data-center hosting of applications but in creating new applications that are cloud-specific.

PC client chip revenues were stronger than many had expected, though I think that it’s clear that the impact of tablets on PC sales has been overestimated.  There’s a chunk of the market that will stay with the PC for a very long time, perhaps even perpetually, and the biggest impact of tablets will likely be erosion of average selling price for the PCs, something that isn’t likely to hit Intel as hard as it would the PC vendors themselves.  However, it’s likely this is what has caused Intel to take a hit on gross margins.

The big issue for Intel is the big miss in mobile, which was down a whopping 61% year over year.  The company hasn’t been able to gain any real traction in the LTE space, largely because the Windows smartphone designs that would be most logically targets for Intel chips aren’t selling well compared with competition from Apple and Android (and likely won’t do much better any time soon).  While Intel has been successful with its “Internet of Things” activity built around the Atom CPUs, their success has been limited to vehicle entertainment systems and POS terminals.  That Intel has decided to wrap these applications into a glamour title “Internet of Things” suggests to me that they realize they’re not going to gain much in the mobile space and so they’re preparing a substitute strategy.

The challenge for Intel is that there’s no brand recognition with either of their success stories in IofT, and that where brand matters (tablets and phones) they’re not a player.  Given that it’s very doubtful that Google would let Intel do something distinctive in terms of software features to brand an Android device, Intel is again dependent on Windows no matter how many Android designs they spin out, and what Intel needs is a brand of its own, something more updated than “Intel inside”.

And “brand” is something that could come from the software side.  I was disappointed that Intel had no comment on software on their call, especially since Intel’s Wind River activity has arguably the best (and maybe only) NFV server platform story out there, and NFV servers could be the largest incremental server opportunity in the market for the balance of this decade.  Intel needs to be thinking about what IBM did, and of course that leads us to the IBM call.

IBM also had its mixture of news.  Service margins were up, but the most significant upside was that of software and WebSphere in particular.  IBM is essentially admitting to not being a hardware company in the longer term (it’s selling off its x86 and its other hardware lines were all disappointing), and they can’t be a service play alone and differentiate over others like Accenture.  Thus, software.

To me, the problem is the fact that IBM is explicitly betting on the cloud, and yet it’s not linking the cloud convincingly to its software.  In my surveys last fall, IBM was behind HP in terms of customer regard for their cloud story, even in the enterprise sectors where IBM was strongest.  The reason was that IBM didn’t seem to be able to articulate a cloud strategy as much as a series of cloud tactics.  Look at this from the call:  “In the quarter we announced a $1.2 billion investment to globally expand our SoftLayer cloud hubs. We launched BlueMix, our new platform-as-a-service to speed deployment of hybrid clouds. We acquired both Aspera and Cloudant to extend our capabilities in big data and cloud.”  Where is the strategy here?  You can’t say “My cloud strategy is to say ‘cloud” a whole bunch of times.”  I counted 31 “cloud” references on the call, but not a clear statement of why IBM’s approach was better.  OK, you can say that this was a financial call, but I think you can make the same statement about the collateral on IBM’s website.

What’s frustrating is that IBM has all the pieces, at least as many as anyone else and perhaps more.  In what I think is the critical fusion of cloud, SDN, and NFV, IBM has the asset base that maps to the right answer better than anyone else does.  Yet IBM’s position in that critical fusion can’t be explained by carriers or IBM’s customers in general.  Outside of IBM’s base, we found few enterprises who could explain IBM’s cloud position, and that was also true of carriers.

All of this still seems to be rooted in the waltz into sales/technical without taking the detour through marketing.  Marketing is what’s supposed to build your brand, to link you to the trends that matter to your prospects.  Marketing should have articulated the IBM cloud vision, made that vision compelling, and then associated the vision with specific IBM initiatives.  Should have, but hasn’t so far.

It would be risky to say that IBM is in serious trouble here, given the company’s reputation for transforming itself successfully through a half-dozen revolutions in tech.  For now, the problem is that hardware isn’t going to get better, and the loss of x86 systems is going to disengage IBM from a lot of package opportunities.  There is a cloud business for IBM to build, but they need to be able to explain just what that business is, and differentiate their vision from that of HP.  And that, friends, is likely to be the challenge for many IT and networking vendors in this earnings season.

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