IBM must keep head above the clouds to claim glory

IBM must keep head above the clouds to claim glory

January 22, 2014 7:27 pm
By Richard Waters
It falls to every new IBM chief executive to reinvent one of America’s most venerable corporate icons.
After Lou Gerstner countered a decline in hardware sales with a faster move into software and services in the 1990s, Sam Palmisano spent the next decade contending with the threat of Indian IT companies and open-source software.
Now Ginni Rometty faces her own moment of reinvention. The source of her discomfort: More computing workloads are moving to the cloud – which means that they are being farmed out to utility-type companies that do not want high-priced gear and services from the likes of IBM.
Even when choosing to keep their computing in-house rather than shifting it to companies such as Amazon, IBM’s big customers are copying the methods of the new cloud players. Essentially, that means buying lower-cost, standardised hardware, as well as software that automates processes that once required expensive humans.
One example of this will be on display next week in California at the annual gathering of the Open Compute Project. The brainchild of Facebook, this was set up to promote a basic standard model for server hardware.
Servers suffer the feature creep seen in many technology markets, as suppliers try to differentiate their products. Even the plastic bezels that they use to brand their machines are an unnecessary luxury, impeding airflow and increasing power costs for cooling. In the world as seen by Facebook, all such niceties will be stripped out.
The effect of this sort of thing goes much further than hardware revenues. If IBM’s customers move some of their computing to the cloud, they will no longer be paying for IBM services either. And the huge IT outsourcing market on which much of IBM’s revenues depend is also facing a sea change. If customers have more choices for how to manage their IT, they will no longer be as locked into the monolithic service contracts that have involved handing their entire IT operations over to companies such as IBM.
At least one corner of IBM’s hardware business still looks secure. Thanks to the massive sunk costs some customers have made in their existing systems, its mainframes – once written off as a casualty of the client-server revolution – are still going strong. But the future being forged by the likes of Amazon’s web services looks very different from the past.
This leaves two choices for the traditional IT hardware makers.
One is to become consolidators in a high-volume game. Some 70 per cent of the $53bn server business comprises so-called “volume”, or industry-standard, machines that command low profit margins, according to IDC.
This is not for IBM. Having sold out of the PC business nine years ago, it is in discussions about ditching industry-standard servers as well, according to people familiar with its plans.
Dell and Hewlett-Packard, with high market shares in industry-standard servers and PCs, face a tougher choice. Among the challenges these companies face is a new band of ultra-low cost white-label producers known as ODMs, or Original Design Manufacturers.
The other choice is to shift the discussion with customers away from the price of hardware and on to high-value applications and services that make a real business difference. Specialised hardware that serves a particular purpose sometimes still has an edge over generalised technology.
In IBM’s case, for instance, that looks likely to lead to a stripping back of its Unix business – the more expensive end of its server line that it does not plan to sell – to focus on the massive data handling needs of the analytics market.
This adds to the pressure on Ms Rometty. In her first two years on the job, she displayed the touch of a marketer rather than a technologist, as she sought to recast IBM’s portfolio of businesses in ways that appeal to a broader market.
That may be starting to change. Already this year, that has meant earmarking $1.2bn to build more data centres to compete with Amazon in the public cloud, as well as $1bn to build a business in what has become known as cognitive computing, or machines that answer questions posed of large bodies of data.
It is ironic that IBM has been a poster child of efficient cash management in the tech sector, returning a large slice of its free cash to shareholders in recent years while still maintaining an annual R&D budget of more than $6bn. To judge by the grumbling on Wall Street, it may be time for Ms Rometty to place some bigger bets.