The Battle in, and for the Cloud

IBM and Google both reported their quarterly numbers, with both companies beating on the revenue line but short on profits.  The markets this morning took disconnected view; IBM’s shares were off pre-market and Google was up, though both movements were modest.

Google’s revenues beat slightly, with decent guidance, and this is probably what the Street likes.  Nobody wants to see the end of the free-stuff ad-driven model for online services, but it seems pretty clear from the call that Google is seeing the need to step beyond the traditional ad business for profit growth.  There was a lot of talk about Android, about Google’s Shopping, and the only real focus on search dealt with app search more than traditional search.  The main point here is that whatever economic recovery we’re having, it’s not driving huge improvements in Google’s numbers.

IBM also beat on the revenue line but full-year guidance fell short of expectations.  On the call, IBM talked a lot about the cloud, about the new Apple deal for enterprise mobility, and about R&D to do things like bringing Watson to the enterprise.  I think the Street is looking at these things as futures, which they almost certainly are, and therefore more likely to pull down current profits than to help.  And remember, we live quarter by quarter up on Wall Street.  Tech, they say, is recovering but again we’re not seeing an explosion of good stuff for IBM, certainly nothing to match Intel’s or even HP’s performance.

With Google, I think most people who use the Internet recognize that we’re seeing a very significant shift in the quality and utility of search.  Part of it is driven by the mobility shift—people don’t search the same way when they’re mobile.  Part is driven by the fact that too much SEO and ad word placement will make it much harder to see relevant results, which means that people may either search less or learn to filter out what are clearly commercial intrusions into their own process.  In either case there’s only a limited upside.

It’s not that Google’s numbers show an immediate problem.  Own-site revenues were up strongly and cost of traffic was down, but so was revenue per click, which suggests that the online ad market continues to commoditize despite all the talk about how better targeting should make clicks more valuable.  Google is doing fairly well and it’s also investing in the future, with some near-term opportunities to grow revenue as well as some possible ramps for longer-term gains.

Android and shopping obviously represent near-term stuff.  Google seems to have an Android revenue model based not on licensing the software but on using the platform to draw traffic to both search and retail sites.  This seems a good approach; it’s keeping handset vendors from building their own operating systems, which might hurt Google in the short term by fragmenting the app space and in the long term by decoupling handsets from an orderly evolution to cloud-augmented apps.

The long term, in my view, is really defined more by a financial truth than by a technical announcement.  Google’s internal rate of return is slowly falling—they’re becoming more a “traditional” company (like Cisco in that respect).  As IRR lowers, companies can start looking at big-ticket cash-cow opportunities that have lower ROI.  I don’t think Google is close to making fiber to the home really pay, but it seems likely that their TV and fiber projects might be attempting a convergence on a future when online video could really displace broadcast.  Sadly for Google, no research suggests that’s going to happen any time soon.

Some insiders tell me that Google’s big jump in uncategorized revenue was due to cloud service growth, but Google is not yet a cloud company in the sense it could be, and that may have to change because of the directions of the other company who reported—IBM.

I think what’s differentiating IBM and Google is that IBM is talking about the long term without offering much real hope in the short term.  The Street likes the Apple deal but it’s not ready to take it to the bank.  Apparently IBM isn’t either because guidance was soft.  The big question for IBM, then, is the cloud, and I want to frame the cloud in terms of strategic influence and overall IT opportunity.

My surveys have consistently shown that both information technology spending and network spending are rooted in data center evolution.  IBM was the unchallenged leader in influence there for most of my own professional career, but then started to slip in the middle of the last decade and have never stopped that slow slide.  The cloud, rightly or not, is seen by most CIOs as the embodiment of data center change, and IBM rates below both Cisco and HP in terms of cloud influence.  It’s not that IBM doesn’t have a cloud strategy and perhaps even a great one, as it is that the strategy is positioned so badly that it doesn’t drive the influence gains it could.

Here’s a basic truth, one that IBM in IT and Juniper in networking both need to face.  You cannot drive a revolution in your space without a very strong cloud position, because buyers don’t accept that there’s any other revolutionary change out there.  The Cisco deal with Microsoft in the data center may be more trouble for IBM than for anyone else, because Microsoft is a contender in terms of data center strategic influence, and if it were combined with Cisco it would lead the pack.  If Cisco/Microsoft were to get their partnership right, they could create a momentum that would be nearly impossible for even smart and well-positioned moves from IBM to counter.  Even HP, now building cloud influence, would have a problem.

Positioning is IBM’s only hope, as I’ve been saying for over a year.  The cloud revolution, like all revolutions, is 90% slogans and 10% programs.  IBM wants to get the plumbing right while somebody else is doing the trim and bric-a-brac.  They’ll never sell the house that way.  The cloud, and the cloud-related revolutions of SDN and NFV, is in its very early phases and the drivers that will take the cloud to fruition are not yet visible.  That’s good news for outlying players—you can still grab the high ground, if you dare.  IBM needs to dare, because I think Cisco is going to make its own bigger cloud move shortly, perhaps as soon as this fall.

IBM, Apple, Cisco, Microsoft, and Google all have a stake in the intersection of mobility and computing, something that could be the primary mover of cloud technology into the ultimate, right, path.  Nobody has a clear handle on this yet, and for other companies the time to counter the moves of the giants and preserve market influence is definitely passing.