IBM: New business lines falter as old ones die

IBM’s reinvention as a software and services business still serves as an object lesson in turning troubled technology companies around. The former technology giant switched from a dependence on selling mainframe and servers to selling software, services and outsourcing.

At the time, the turnaround seemed miraculous. Now IBM needs to pull another rabbit from the hat.

The technology market is going through yet another transition. IBM has placed plenty of bets in the brave new world. In typical IBM style it even has an acronym for these markets: CAMSS (cloud, analytics, mobile, security and social). They are all fast-growing areas, but IBM’s efforts are not growing fast enough to offset declines elsewhere in the company’s portfolio.

Margins are a problem

Worse, these new lines of business have lower margins than existing lines, which in turn have lower margins than IBM’s mainframe-era businesses.

IBM was late to all these exciting new markets. Take cloud: In the latest financial report IBM says cloud revenues climbed 50 percent year on year. We need to be careful with these numbers as IBM has a habit of bundling hardware sales services into its cloud revenue numbers.

To put IBM’s figure in perspective, Amazon recently announced 80 percent year on year growth in cloud services.

IBM trailing AWS and Microsoft in cloud

Despite billion-dollar investments and Softlayer (a cloud business) acquisition, IBM trails a long way behind Amazon and Microsoft in market share. 

While focusing on market share can be misleading in technology discussions it is important in cloud computing because of economies of scale.

Gartner also marks IBM behind Google and Rackspace on “ability to execute”.

To be fair, IBM isn’t a plain vanilla cloud company. It often wraps cloud with other sophisticated services. That sounds good, but it could be a problem. IBM doesn’t have the culture needed to run the commodity cloud infrastructure customers demand.

Missed the cloud boat

The cloud market looks set to shake down with a handful of global giants emerging along with specialist and geographic niche players. IBM doesn’t rate in the top five cloud companies. Its best hope is to be a specialist cloud niche player.

The other new markets are similar. IBM isn’t doing well in analytics and apart from a deal with Apple is nowhere in mobile.

IBM has yet to explain what the social part of CAMSS means, which leaves security. Now there’s no question security is an important and growing market. There will be fortunes made in this area, but security alone is not enough to sustain IBM. At least not the company we know.

One odd aspect of IBM’s strategy is the company is throwing money at risky, low-margin areas that don’t suit its culture. The cash might be better spent leveraging strengths.

Amazingly there is still money in mainframes

Sure, the mainframe market is in long-term decline, but as ZDNet reports revenue from IBM’s latest mainframe was up 9 percent year-on-year.

IBM’s strategic problem is that it has no answers for the changes taking place in the industry. The people able to make the right decisions are the kind of people who don’t rise to the top of the company’s conservative culture.

The company’s stock response when a market turns into a low-margin commodity business is to sell it off and breath a sigh of relief that it doesn’t have to get dirty down there. It’s done that with printers, PCs and more recently, with servers. Then, every so often, it embarks on another session of masochistic cost reduction, which means sacking workers and making those who remain less motivated and even more risk averse.

This approach avoids difficult questions like “how can we adjust our business model to deal with the new realities?” It’s a question IBM can’t put off any longer.