IBM Cloud, Watson: Suffering From OS/2 Warp Deja Vu?
IBM’s latest quarterly financial results reinforce a growing concern: The technology giant may ultimately become an also-ran in the cloud computing and artificial intelligence markets. The current business scenario is somewhat akin to IBM in the 1990s — which tried and failed to make OS/2 the preferred software platform for client-server computing — ultimately losing out to Windows desktops along with Windows NT and Linux servers.
Part of IBM’s current problem involves the way it reports financial results. By lumping together cloud and cognitive software sales into one line item, the company may actually be undermining a relatively decent (though far from stellar) cloud story.
For its Q1 of fiscal 2019, IBM yesterday reported:
- Total revenue of $18.182 billion, down from $19.072 billion in the corresponding quarter last year.
- Cloud and cognitive software revenue of $5.037 billion, down from $5.116 billion. (NOTE: Reading that one line, some media reports erroneously said cloud revenues were down. In reality, the cloud revenues rose — which suggests the cognitive piece of the business is a laggard, even tough IBM says cognitive applications revenues grew 4 percent.)
- Net income of $1.591 billion, down from $1.679 billion.
The earnings beat Wall Street’s expectations, but revenues were short of analyst expectations, SeekingAlpha says.
IBM Growth Moves: Mixed Results
IBM CEO Ginni Rometty since 2012 has been reshaping the company for growth markets such as cloud services, cognitive computing, mobile, security and more. IBM has also been selling off slow-growth or no-growth software businesses.
The company’s current status, generally speaking, hasn’t impressed me. Among the reasons:
- Gartner says the worldwide public cloud market will grow 17.3 percent in 2019. But IBM’s annual as-a-service run rate grew only 10 percent year-over-year in Q1 2019. AWS and Azure are larger and are growing far more rapidly.
- The artificial intelligence market is expected to exceed $191 billion by 2024, representing a compound annual growth rate of 37 percent from about 2018, according to this report. And yet it’s safe to say that IBM’s own cognitive software revenues were relatively flat and perhaps even down in some areas.
Next Up: Red Hat Won’t Save IBM
Amazon Web Services and Microsoft Azure are running away with the public cloud market, while Google Cloud Platform is at least giving chase with some new and innovative MSP-oriented moves.
As a result, many ISVs (independent software vendors) and MSPs are embracing multi-cloud management strategies that extend across AWS and Azure — and, increasingly, Google. IBM occasionally pops up in that multi-cloud management conversation — but not frequently enough, in my opinion.
IBM’s answer to the cloud challenge involves buying Red Hat for hybrid-cloud software. The concept: Red Hat Enterprise Linux (RHEL) is very popular within on-premises data centers and across public clouds. Buying Red Hat, therefore, gives IBM instant credibility as a multi-cloud and hybrid cloud software provider.
That’s true. But there are three problems with the IBM-Red Hat strategy:
- At $34 billion, IBM is overpaying for Red Hat in my opinion.
- Red Hat’s growth, at least from my perception, is slowing just at IBM seeks to finalize the buyout.
- Red Hat’s culture doesn’t appear to be a fit for IBM — though Red Hat leaders are downplaying those concerns.
Challenges and Opportunities
Several bottom-line realities are quite clear:
- Cloud Challenges: IBM essentially is an also-ran in the public cloud market — a distant Number Four player at best, though even that is debatable as Alibaba comes on strong.
- Watson Missteps: IBM’s limited cloud success has harmed Watson. Instead of largely locking Watson to IBM hardware and IBM Cloud, it has taken the company a stunning nine years to realize that it should unleash Watson’s power on third-party public clouds like AWS and Azure.
In other words, IBM leaders missed the most important point of the cloud era — they didn’t make Watson easy to consume.
OS/2 Warp Deja Vu?: For me, it’s a case of deja vu. Roughly 25 years ago, IBM OS/2 may have been the strongest operating system on the market. But the best technology didn’t win because (A) it was difficult to install/consume and (B) lacked ISV support. Fast forward to present day, and similar trends are surfacing with IBM Cloud and Watson — especially as ISVs flock to Azure and AWS.
When OS/2’s limited opportunities became clear, IBM went out and acquired Lotus Notes to move into the faster-growth groupware collaboration market. It was a good move for about a decade — until Microsoft Exchange Server ultimately crushed IBM in that sector.
IBM: Where’s the Killer Idea?
Fast forward to present day. IBM has essentially lost the public cloud wars, and will acquire Red Hat to try and win the hybrid cloud wars. Amid all that, IBM’s overall business is holding up reasonably well. Overall cloud revenues are growing.
Good profits and cash flow will fund R&D, and there are additional opportunities on the horizon. Chief among them: Areas like Blockchain and security.
In security, IBM delivered double-digit growth in Q1 2019, and has good traction with threat management software and services offerings, including QRadar and Resilient, CFO Jim Kavanaugh said during yesterday’s earnings call. Also, IBM’s security intelligence operations and consulting services, which detect and respond to security threats for clients, are gaining momentum, he added.
Those are promising anecdotes. But overall, it’s clear to me that IBM’s so-called strategic imperatives haven’t fully paid off for the company, its customers or its partners.