Monthly Archives: February 2015

Down, But Not Out: Still Time for IBM to Adapt to Cloud IT

By | February 17, 2015

Disruptive technologies are a time-tested means of upending the business environment. Remember Western Union? No, not the money order company, but the one that lost its communication empire to Bell Telephone. How about former business giants like Kodak, Motorola, WorldCom and most recently, Radio Shack, that once dominated their field and are no longer with us. All were undone by better mousetraps. The same fate awaits IT vendors who persist in defending stale technologies and business models: adapt or die.

IT is in a period of tumultuous change fueled by cloud and mobile technologies that field existential threats to titans like IBM, HP and even Microsoft, all once thought to be bed rocks of corporate stability (and profitability). As I discuss in this column, disruptive technologies spawning innovative new products and services have created seemingly unprecedented shifts in customer behavior, competitive landscape and profit margins that are severely affecting legacy IT vendors like IBM. A previous column focused on the damage inflicted on Big Blue and others, but argued that the financial and organizational pain has a silver lining for customers in the form of better products and services at lower prices: Survival of the Fittest as applied to business. Although it might have appeared I was writing IBM’s obituary, I don’t believe the company, or competitors like HP, Dell, SAP and others that have long sustained fat profit margins off of equally fat corporate IT budgets and overworked, under trained IT staffers, are in, or necessarily approaching an irreversible death spiral. Yet the old tech all-stars face a dramatically different business environment than the that in which they grew to dominance.

Today’s IT disruption results from the nexus of several factors:

  • rapidly commodified technology
  • universal network connectivity and globalized markets
  • significantly greater IT economies of scale promoting larger consolidation of infrastructures
  • enormous data generation and accumulation resulting in deeper data analysis and business insights
  • a consumer preference for services over products and subscriptions over purchases

Collectively these have created what some call the As-a-Service EconomyIndeed, as these charts illustrate, the growth of services as a share of total economic consumption is a trend going back decades, while IT spending on services relative to hardware, which was already several times higher, has increased by 25% over the past few years.

fredgraph

fredgraph_ITsvcs-vs-manufacturing

As I detail in the column, IBM already generates almost 87% of its revenue from software and (mostly) services, the problem is they are the wrong kind in the era of XaaS and utility IT services. IBM’s Global Services business specializing in developing, deploying and supporting complex, customized IT services built upon a foundation of on-premise, big iron hardware and software. IBM-Rev-Breakout_pie-2014Given the overstretched IT resources in large enterprises, where upwards of 80% of the effort is spent on sustaining existing IT services, the consulting, design and implementation business has been quite lucrative for Big Blue.

To prosper in the era of utility IT services, IBM refocus on delivering standardized, modular, usage based services that are easily integrable with third-party products. Instead of concentrating on consulting, design and implementation of one-off IT systems, IBM must rechannel its technical prowess towards building XaaS products and integration services for the as-a-service-economy.

ibm-cloud

Yet IBM isn’t starting from nothing, it already has thousands of developers, working on hundreds of projects in support of cloud and software services. Indeed the company is one of the leading contributors to OpenStack and 120 other open source projects having spent over $1 billion on Linux development alone. The company bought Softlayer to bolster its cloud infrastructure and service delivery and now reports total cloud revenue running $7 billion, up 60% yr-yr, with the as-a-service run rate amounting to $3.5 billion. The company has another promising services business in Watson Analytics, where the company is making a large, but wise bet on commercializing the quiz-show winning software into an extensive cloud platform with the goal of building a data analytics ecosystem. As my column concludes, IBM’s problem isn’t technology, it’s legacy: the company simply has too many people to support a lean, utility-like IT environment based on shared, open and extensible services built upon standardized hardware components.

In sum, IBM has the resources and skills needed to evolve into IBM 3.0 or 4.0, but it’s unclear whether it has the executive vision, will, talent and finesse to make the transition without wrecking the company in the process. When you’re dealing with a 400,000-employee, multinational behemoth, turning IBM into some hybrid of AWS, Google and Salesforce is akin to rebuilding an airliner in mid-flight. It’s also the perfect way for CEO Ginni Rometty to justify her big bonus.

As a commenter to my previous column pointed out, IBM has been through similarly challenging transitions before and come out more vibrant, innovative and profitable than ever. Successfully evolving Big Blue to the cloud-based as-a-service economy will prove similarly difficult and stressful, but given the firms many financial, technical and employee assets, it’s entirely achievable. I look forward to following its progress.

 

Why Bad News For IBM Is Good News Your Business, But Only If IT Exploits

By | February 8, 2015

The news from IBM, which has been uniformly grim for years, gives the impression of a venerable tech giant in a death spiral. I don’t succumb to such fatalism and believe Big Blue’s problems aren’t terminal, indeed my next column will offer suggestions for how it can adapt to the new world order of cloud IT. Still, there’s no denying that IBM has been making headlines for all the wrong reasons. As I detail in this column, after another weak quarter that saw IBM report the 11th straight decline in revenue, the company had to fend off doomsday rumors of impending employee cuts on a scale rarely seen outside of corporate bankruptcy. Yet the problems buffeting IBM (note that mega-investor Warren Buffett isn’t one of them) stem from disruptive technology and the resultant shift in business strategies that result from the evolution of IT into a utility-like service, aka the cloud. Declining profit margins and, in the case of HP and IBM also revenues, at established IT vendors like Cisco, HP, IBM and Microsoft are a sign that competitive pressures from alternative technology providers is working. The benefits of this disruptive shift largely accrue to customers, the buyers of IT products and services.

IBM’s revenues have been declining for years, but it’s margins held up until taking a precipitous plunge this year and while the company is too large and complex to pin the cause on any single factor, enterprise acceptance of cloud services and the escalating price war among the big three IaaS providers, Amazon, Google and Microsoft, are clearly major contributors. Data aggregated by RedMonk illustrates declining rates for basic IaaS services.

IBM_ycharts_chart

iaas-price-hist-e1416345093506

Cloud pricing has been called a “race to zero” by some analysts and ironically, IBM’s own Softlayer division (acquired in mid-2013) is price competitive with the big three. The problem for IBM, but also HP, Dell, Oracle, Cisco, EMC and every other large technology provider built upon (and used to) fat margins from proprietary systems and overpriced support contracts, is supporting competitive cloud pricing given their existing corporate overhead. Cloud services, namely selling canned infrastructure at $25-30 per virtual machine per month, threatens the existing businesses of traditional IT infrastructure suppliers and calls into question the sustainability of their entire business model. Amazon, the IaaS price leader and trendsetter, is doing to IT infrastructure and its vendors what it did to packaged goods and local retailers, decimating their margins through a combination of technology, scale and ruthless competitiveness. RBC Capital Cloud Price Comparison Source: RBC Capital / Business Insider

RBC Capital Cloud Price Comparison
Source: RBC Capital / Business Insider

As I discuss in the column, the market cloud services while small is exploding. IDC estimates that spending on all forms of cloud services will have “five-year compound annual growth rate (CAGR) of 22.8%, which is about six times the rate of growth for the overall IT market.” If correct, IDC estimates that by 2018, “public IT cloud services will account for more than half of worldwide software, server, and storage spending growth.”

One look at cloud pricing illustrates the challenge to old tech IT vendors. Google posted a detailed pricing example designed to illustrate its advantages versus AWS, however its numbers present an even starker contrast with the costs for traditional on-premise IT equipment. Using a prototypical three-tier application with server four components, each independently scalable depending on load, the analysis shows that the monthly cost on would be just over $1,000 on Google CLoud: $910 for the base load and $110 for peak capacity to handle 10x loads several times a day. Compare this to a $200,000 VMware EVO:RAIL system designed for the same sorts of virtualized workloads. In other words, you could run five of Google’s three-tier applications for three years for the price of a single converged (and highly cloud-optimized) on-premise system. Nevermind the fact that Google and company will continue improving through price cuts and system upgrades over time, even as dedicated, on-premise hardware technologically decays and fades to obsolescence.

Give credit to IBM leadership for recognizing the problem. Discussing the company’s latest quarterly results, IBM’s CFO identifies its fundamental challenge:

“For 2015, specifically, we are dealing with some transitions in our business,” Martin Schroeter, IBM’s chief financial officer, said on a conference call with analysts.

“For example, while we are fully participating in the shift to cloud, margins are impacted by the level of investment we’re making and the fact that the business is not yet at scale. We will see some year-to-year benefit to margins in 2015 as the business ramps, but we won’t be at scale.”

Unfortunately, the cure for IBM (and other old tech firms), in the form of radical cuts in employees resulting from the replacement of labor-intensive custom IT consulting and support services by automated, standardized cloud infrastructure, may be (or at least seem to be) worse than the disease.

IBM-GOOG-MSFT_empl_rev-empl

Look at the numbers. Google runs its entire business with 54,000 employees. The vast majority are in product development and marketing, not IT  operations and support. IBM has over 400,000 employees, but here most are in consulting, service and support. The transition from customized, on-premise IT infrastructure to standardized, utility services renders many jobs superfluous.

I contend that the symbiosis between corporate giants and Main Street business, infamously summarized by GM’s then CEO, is ancient history. What’s good for General Motors or IBM isn’t necessarily good for America. In IT, the democratizing effect of commodified technology, universal connectivity and resultant utility (cloud) information services levels the digital playing field between tiny startups and multinational corporations. Turning IT into a utility effectively ends the rapacious exploitation of a customer’s technological ignorance by big IT vendors. If your business isn’t taking advantage of cloud economics, more enlightened competitors will soon be eating your lunch. It’s time for organizations large and small to rebuild information systems and business applications upon a platform of adaptable, metered utilities, not static, dedicated plant and equipment.

Box Delayed Its IPO To Refocus Strategy, But It Still Lacks A Competitive Moat

By | February 5, 2015

Almost a year after first filing the paperwork, Box IPO’d to much investor interest, up 70% on the first day of trading. The intervening weeks haven’t been so kind as Box now trades off almost 30% from its high that day even as the tech-heavy NASDAQ Composite index is flat. As I wrote in this column, Box’s saga from cash-burning cloud startup to wildly successful IPO has been well chronicled, but the initial reception on Wall Street is actually a testament to savvy leadership, which used the unusually long interregnum between filing and actual IPO, one funded by a much-needed interim round of private funding, to sharpen the company’s mission. The resulting message: Box is more than just another cloud file sharing site.

ycharts_chart (1)

Box’s leadership, notably founder and CEO Aaron Levie, were fighting an understandable inclination to lump Box in as just another consumer cloud sync-and-share service. Its appellative similarity to the most popular consumer service, Dropbox, and Box’s embrace of the freemium pricing model made it easy to conflate the two. Even for those of us that have been using cloud storage since day one find it a natural association given that Box, which actually predates Dropbox, initially sold itself as a convenient way for individuals to access files from anywhere on any system. But Box’s pivot from “store” to “manage” is key to its strategy of becoming a premier enterprise content management platform. 

Box-v1_Form_S1 Box-v2_Form_S1

Box’s enterprise strategy was succinctly articulated by  CEO Aaron Levie moments after the firm’s opening trade on the NYSE:

“The thing that’s largely misunderstood about our business is that we’re not in the consumer space. Box helps manage corporate data and corporate information for the world’s largest companies.”

He then pivots to position Box as a cornerstone service facilitating the move of enterprise IT from in-house, on-premise software to cloud-based services.

“We are participating in a one-in-a-lifetime transition from on-premise computing to cloud computing. That’s a world in which you would invest in storage infrastructure, content management software, search appliances, security technology — all of that in your own data center — and what we do at Box is take all of that technology, put that in our data center and deliver it as a service.”

About Us - Reinventing How the World Uses Business Content - Box.clipular

It’s impossible to argue with Levie’s characterization of the disruptive change resulting from cloud computing. Indeed, as I recently argued, it’s a significant force behind the financial decline at old-line tech firms like IBM and HP. Box’s problem is that it’s service is indistinguishable from many existing SaaS content management systems and far less integrated with the most popular content generation platform, Microsoft Office, than Microsoft’s own cloud offering, Office 365, which includes access to Microsoft’s suite of collaboration software, SharePoint Online, Exchange Online and Lync Online. Indeed, as I pointed out in an earlier column, Box’s own S-1 filing outlines its lack of a competitive moat [emphasis added]Form S-1.clipular (4)

The market in which we participate is intensely competitive, and if we do not compete effectively, our operating results could be harmed.

The market for cloud-based Enterprise Content Collaboration services is fragmented, rapidly evolving and highly competitive, with relatively low barriers to entry for certain applications and services. Many of our competitors and potential competitors are larger and have greater name recognition, much longer operating histories, larger marketing budgets and significantly greater resources than we do. Our competitors include Citrix, Dropbox, EMC, Google, and Microsoft. With the introduction of new technologies and market entrants, we expect competition to continue to intensify in the future. If we fail to compete effectively, our business will be harmed. Some of our principal competitors offer their products or services at a lower price, which has resulted in pricing pressures on our business. If we are unable to achieve our target pricing levels, our operating results would be negatively impacted. In addition, pricing pressures and increased competition generally could result in reduced sales, lower margins, losses or the failure of our services to achieve or maintain widespread market acceptance, any of which could harm our business.

Many of our competitors are able to devote greater resources to the development, promotion and sale of their products or services. In addition, many of our competitors have established marketing relationships and major distribution agreements with channel partners, consultants, system integrators and resellers. Moreover, many software vendors could bundle products or offer them at lower prices as part of a broader product sale or enterprise license arrangement. Some competitors may offer products or services that address one or a number of business execution functions at lower prices or with greater depth than our services. As a result, our competitors may be able to respond more quickly and effectively to new or changing opportunities, technologies, standards or customer requirements. Furthermore, some potential customers, particularly large enterprises, may elect to develop their own internal solutions. For all of these reasons, we may not be able to compete successfully against our current and future competitors.

I continue to argue that cloud storage and file sharing isn’t a product, it’s a feature. Whether it’s Microsoft’s Office 365, reinvigorated by native iOS apps, Salesforce document management app plugins, or cloud-first productivity suites like Google Apps, Zoho or Quip, online content storage and sharing is now a baseline feature. As I point out in my Forbes column, although Box clearly has features enterprise customers value in a bolt-on file sharing product, what is its value when productivity and collaboration products companies already use, notably Office and SharePoint, but also cloud-native suites like Jive, Slack, Yammer (also owned by Microsoft) and Salesforce Chatter provide similar document sharing and workflow? Why pay Box $15 a month for content management when Microsoft gives you an entire productivity suite plus email and video conferencing for less?

I like Box, although I rarely use it anymore for exactly the reasons cited above: it’s redundant. Levie is certainly correct in his diagnosis of the fundamental shift in application deployment and usage to a utility-based model, however Box has no unique advantages and many shortcomings (like lack of native application support) versus competing services. I continue to believe that it’s viability as an independent company is dubious, however its cloud-savvy developers and IP would have value for another, more vertically integrated company. With a current valuation of about $2 billion, Box would be pocket change for a company like Apple or Google and even digestible by smaller SaaS pure-plays like Salesforce. Box remains an interesting company to watch in the cloud software market, but despite the IPO, I believe Box is still an acquisition target.