For years now, IBM has been struggling to arrest revenue and profit problems, and they got it at least somewhat right in their last quarter. Perhaps the positive response to their quarterly report this week was almost a “relief rally”, but the stock was up this week on their beating estimates. The question isn’t so much whether this is a one-time move, but rather what tide has risen to lift IBM’s boats. If it’s a true tide and not a rogue wave, IBM might be heading for a bigger position in the market.
The upside IBM saw was, according to some IBM users I’ve chatted with, largely due to the hybrid cloud trend that has been developing since 2018. After almost a decade of shooting at the wrong duck, the cloud industry finally figured out what cloud computing really meant for enterprises. That’s spawned a shift in IT thinking, a shift toward an application model more suited to hybrid deployment, and that’s gotten many IBM customers excited.
The bad news is that IBM didn’t create the hybrid awareness. IBM’s strategic influence in the market has steadily declined, in no small way because they’ve not articulated a strong cloud position and have no broad base to do so. You can see in the earnings call transcript, where their first point about customer engagement was about analytics. IBM understands what it’s been touting for half-a-generation. The cloud, even hybrid cloud, is alternately a direction IBM is moving in and a necessity in leveraging some of those old notions that IBM thinks should be important but that customers have been yawning about.
The good news is that IBM’s acquisition of Red Hat could be giving it the best platform in the industry for leveraging where hybrid cloud is going. Red Hat is the premier provider of open-source software, and that in itself offers IBM the kind of market breadth that it used to have in its heyday and lost when it sold off so much of its hardware business. Not only that, enterprises tell me that their ideal platform toolkit for building and running hybrid cloud applications would be built on open-source components offered by a vendor, bundled with support, and pre-integrated for ease of adoption. That’s exactly what Red Hat has been about from the first, and now IBM has them.
It’s probably clear to everyone at this point that I think the question for IBM, the factor that will determine whether they’re on a roll or rolling over, is how these two news points interplay with each other. When I blogged about IBM’s acquisition of Red Hat, I noted that my concern was that IBM just wasn’t strategic enough to play them correctly. That concern can be expressed in terms of my “bad-news” point; IBM is still thinking in twenty-year-old market terms, is still seeing open-source and hybrid cloud as implementation details and not strategic shifts. That’s what we need to discuss.
Let me open the discussion with a long but highly relevant quote from their earnings call: “Let me pause here to remind you of the value we see from the combination of IBM and Red Hat, which is all about accelerating hybrid cloud adoption. The client response to the announcement has been overwhelmingly positive. They understand the power of this acquisition, and the combination of IBM and Red Hat capabilities, in helping them move beyond their initial cloud work to really shifting their business applications to the cloud. They are concerned about the secure portability of data and workloads across cloud environments, about consistency in management and security protocols across clouds, and in avoiding vendor lock-in. They understand how the combination of IBM and Red Hat will help them address these issues. We see the strong bookings Red Hat recently reported as further evidence of clients’ confidence in the value. Remember, the quarter ended a month after the transaction was announced.”
To me, the best thing about this quote is that it shows IBM is aware that the migration to hybrid cloud demands sustaining the same kind of security, governance, and reliability/availability that enterprises have demanded from the first. For IBM customers, customers who know all about these constraints, IBM is a credible source of insight and products. That’s proven by the overwhelmingly positive response to the Red Hat deal that IBM is citing.
The worst thing in the quote is the assertion that the Red Hat deal is “helping them move beyond their initial cloud work to really shifting their business applications to the cloud.” Earth to IBM: hybrid cloud is not about shifting, it’s about refactoring to a dualistic hosting environment. The earnings call isn’t a perfect place to start strategic marketing and positioning (most buyers don’t listen to it), but it’s a place that demonstrates the bias of senior management. If senior IBM management is still talking about “shifting work to the cloud” when hybrid environments are really about building cloud front-ends for existing applications that will stay in the data center, then IBM has a problem.
The other, obvious, problem is that if the good news is that Red Hat gives IBM a broad base, then it would be better news if we saw IBM recognizing that. Where is a statement that Red Hat opens a whole new market for IBM, a market much larger than its current customer base? I couldn’t find anything in the earnings call transcript that committed IBM to exploiting Red Hat’s almost-universal market story instead of IBM’s very limited my-customers story.
Red Hat has the high ground in hybrid cloud. They have a position that’s extremely good even now, and with a little strategic insight could be made even better. IBM had a good cloud quarter, and with a little strategic insight, it could have been (and could continue to be) better. If IBM lets Red Hat alone, it will reap some benefit from Red Hat’s story and probably turn gradually positive over the longer term. If IBM tries to pull Red Hat and hybrid cloud into a pedestrian infrastructure evolution story, it will kill Red Hat and its own momentum, and that will be very bad for IBM and the market.
If IBM leans on Red Hat thinking to re-frame its entire view of how IT is evolving, it would be very positive for IBM and Red Hat, and also good for the market. I remember well the days when IBM was the insight leader in IT. Not only was IBM stronger then, but IBM’s competitors and the market overall were stronger, because IBM had a unique ability to articulate a vision of the future that you could buy into whether you bought IBM products or not. That’s the kind of thinking IBM needs to keep those good quarters coming, and growing.
The prospect of IBM coming of age, cloud-wise and market-breadth-wise, is enough to strike fear into competitors’ hearts, not only vendors but cloud providers. It’s not so much that IBM’s own cloud presents a risk, but rather than a realistic hybrid cloud vision could have a profound impact on the market dynamic. Microsoft is the hybrid cloud favorite because it has better cloud-to-premises symbiosis in its tools. An open solution from Red Hat and IBM could level the hybrid cloud playing field.
On the vendor side, though, there’s plenty of risk to watch. HPE and Dell both have massive server businesses to protect, and if there’s an open hardware-independent solution to hybrid cloud then neither of the two has as much potential for competitive differentiation. The Red Hat and IBM coalition, properly drive, could commoditize servers completely—which doesn’t hurt a vendor who’s exited that market, of course.
It may be Cisco who has the most to gain, and lose, here. Does Cisco, who’s never been a software kingpin, overtly or covertly take on the role of platform for IBM’s new hybrid model? That rides IBM’s coattails, which is tempting but dangerous if IBM boots its strategic exploitation of Red Hat. Does Cisco go it alone, with “digitized spaces?” We’ll see.