Cloud storage

IBM needs to reinvent itself to deal with cloud computing. Although the job was never going to be easy, IBM has an enviable track record on major change.

It is the organisation that defined the original computer business. IBM built a monopoly and lead the mainframe era. Although it was late into the PC game, when it arrived it redefined the small computer market with the iconic IBM PC.

IBM wasted no time exiting the PC business when margins evaporated. It got into the consulting game ahead of the pack. IBM switched focus to software. It moved from hardware to services more than a decade before that idea arrived on rival HP’s radar.

Now IBM needs to show it has what it takes to compete with the likes of Amazon. So far it has struggled.

Cloud computing strikes at the core of IBM’s business. It threatens the rivers of gold IBM makes selling big, expensive mainframe computers, along with the software and service revenue that comes in their wake.

Customers who buy IBM mainframes must invest millions. That means anticipating needs when the future is far from certain. An IBM cloud means they only buy the computing they need, when they need it. Which explains why the mainframe market is falling.

IBM’s response has been to offer its own cloud services. It acquired a small competitor, Softlayer, buying the capacity and skills needed to compete in the cloud.
Playing catch-up this way looks like a smart strategy.

Yet there’s an awkward payload. IBM’s shareholders expect high profit margins. Cloud computing is a viable business. Done well the cloud makes a predictable income stream, but it is a low margin business.

And that’s where IBM is stumbling. It promised shareholders a high return. For the last five years it has told shareholders it would make US$20 in adjusted earnings per share by 2015.

That figure already looked doubtful. For the last ten quarters in a row, IBM’s revenue has fallen. Management pulled out the stops to meet the US$20 target. It sacked workers, borrowed money, tried creative accounting. None of these moves did anything to help IBM compete with Amazon, Google or Microsoft in cloud computing.

Overnight IBM CEO Ginni Rometty abandoned the US$20 a share target. She paid GlobalFoundries — no I’ve never heard of it either — US$1.5 billion to take the chip business off IBM’s books. Rometty also dropped a US$4.7 billion charge on the market.

IBM investors didn’t like the news. The share price fell seven percent.

Grumpy IBM investors better get used to the idea that keeping the business relevant is more important than hitting financial milestones. That short-term gain would be at a long-term cost. Perhaps even the demise of IBM — a brand that has lasted more than 100 years.

Long-term survival may hinge on building an IBM cloud empire to compete head-on with Amazon, Microsoft and others. That’s worth a try and is a better choice than a slow death.

Once IBM has established a cloud empire, it can wrap its lucrative software and services back into these offerings. That way it can recover some of the lost margins.

Bowing to investor’s short-term dictates or shoring-up unsustainable business models do not work. The smart move is to focus on creating products and services people want to buy.