It looks like IBM has finally settled on a strategy that could lead it to financial success; become Red Hat. The quarter just ended was IBM’s first revenue gain in four quarters, and while there’s little doubt that the marketing theme of “hybrid cloud” helped IBM overall, the only significant sales upside (15%) came from Red Hat. The strategy that seems to be evolving is one based on a combination of “CloudPaks” and Red Hat software, with other IBM business units either supporting that combination or trying to keep from actively reducing revenue growth, at least.
To some, including me, this is a bit of a shock. IBM, after all, is undoubtedly the longest-lived of all the IT vendors, going all the way back to the literal dawn of business computing. They’ve reinvented themselves many times, more than any other company, and it may be that’s what is happening again here. They’ve just chosen a different avenue to channel the new IBM, one that instead of bringing technology pieces in-house to add to IBM’s technology story, brings the story instead.
The most significant strategic insight we can draw from the IBM quarter is that “hybrid cloud” as a concept is vastly under-appreciated. There has never been any realistic chance that enterprise consumption of cloud computing services would be anything other than the hybrid model, and yet somehow everyone seems surprised. I have to attribute that to vendors’ positioning of virtually everything as “hybrid cloud” and the media’s resulting scattershot approach to covering it.
Hybrid cloud, as far as enterprises are concerned, is the use of cloud computing services to create a more agile front-end to legacy applications. There is no need to build a private cloud, and in fact there’s no need (or desire) to make any significant changes to the data center component of the hybrids. However, there is a need to create an effective data conduit from cloud to data center, and also to create a framework that allows the combined (hybrid) application to be managed effectively, including but not limited to deployment and redeployment.
That IBM could gain marketing traction for telling enterprises what they really knew all along is a bit astonishing, but it also illustrates the risk that IBM had with hybrid cloud and the reason why Red Hat is valuable. Hybridization is a software-centric problem because the goal is not to disrupt data center hosting more than is absolutely necessary, and Red Hat has the cloud software framework to do that. Had IBM tried to go hybrid on their own, they’d have been vulnerable to solidifying a strong but under-used positioning strategy, then failing to deliver anything tangible on what they validated. Someone would have stepped in and someone still might, of course.
Whether IBM can hold its successful hybrid cloud positioning against competitors depends on how strongly those competitors could counterpunch. A big part of that relates to IBM’s own account control, and one interesting testimony to the continued strength of that is the unexpected improvement in mainframe sales. A lot of big accounts still rely on mainframes to host their core business applications, and if those accounts are expanding their commitment at this point, it shows IBM is still considered a highly credible partner.
The concept on which that continued credibility seems to rest isn’t the mainframes (the sales increase is an indicator of another trend, not the trend itself), but the CloudPaks. By creating a package that represents a cloud position, horizontal or vertical, IBM has productized its own strategic concept, and given it something to link with its Red Hat acquisition, making the CloudPaks both a product bridge and a strategy bridge in the Red Hat picture. In the most recent quarter, the bridge worked and hybrid cloud and Red Hat were clearly symbiotic for IBM. The big question for IBM (and its competitors) is whether the bridge will continue to work.
On the plus-for-IBM side, there aren’t all that many firms who can field the scope of software technology that IBM can, and even fewer who have significant strategic influence. In fact, there are only two or three (depending on how we arrange them, as we’ll see).
Another IBM plus is IBM’s cloud, which has been jousting with Google for third place among public cloud services. Having a cloud service makes IBM’s hybrid cloud story more credible, and also more profitable if they can convince users to hybridize with the IBM cloud rather than with one of the giants. However, IBM’s cloud credibility is high only with those big IBM accounts, at least so far.
On the minus-for-IBM side, we have the fact that until the Red Hat deal, IBM was king of a declining market sector. Mainframes may be expanding where they’ve already taken root, but they’re not a populist IT strategy. Red Hat gave IBM traction outside its limited bit-account base, and that’s important because the majority of the market for hybrid cloud is outside that base. IBM may have reaped a nice harvest in the most recent quarter, but it’s not going to take long before it has to expand its sales efforts outside the sector where it really has strong account influence. It’s there that it will encounter competition.
There are three players who might do something that counters IBM’s positive trends, as soon as the third quarter. One is Dell, one HPE, and one VMware. The is-it-two-or-three point I made earlier is obvious now; Dell and VMware may be splitting, but it won’t be done until later this year, and in the meantime it may overhang both companies by diverting executive attention away from big strategic initiatives.
HPE is a company who has consistently underplayed its assets. It’s a full-service hardware and software company, it has good technology, representation in all the key verticals, a good partner/distributor program, and the not-uncommon tendency to mellow its positioning to avoid overhanging current-quarter sales. You don’t want to tell a prospect about something that could take half-a-year for them to work through, when you have to make your numbers at the end of the current quarter.
While it’s difficult to say how this all nets out for IBM, my view is that it puts the company under tremendous pressure. If the hybrid cloud strategy looks like a win, there are competitors with a broader user base who could try to exploit it. If IBM makes a single stumble in execution, competitors will capitalize on it. Even if they don’t, I think IBM has shown that the industry is crying out for a credible hybrid cloud story, and while IBM moved the ball with their positioning, they didn’t score…yet.