On October 17, the Wall Street Journal reported that IBM revenues have now declined for six straight quarters. IBM has told financial analysts that the company is capable of generating revenue growth in the low to mid single digits, but the fact is that IBM has not achieved that kind of growth since 2011. According to the report, IBM’s hardware revenue has fallen by 17%, with the hardware unit losing $167M, and the growth in the software business has gone from 4% to -1% (in other words, the software business has shrunk).

Key Market Dynamics Affecting IBM

If there is one constant in the computer industry, it is change. Unfortunately for IBM, the company appears to be on the wrong side of many of the current and probable near-term future trends:

  • Attracting the Best and the Brightest:  At one point in the history of the computing industry, a measurable percentage of the best and brightest people—those responsible for creating the innovations that create the products and intellectual property that drive growth—worked for IBM. Today, the best and the brightest work for the following types of companies (listed in order of ability to draw top technical workers):
    • Silicon Valley Startups: The sharpest technical people on the planet work for these companies for two reasons. The first is that they can really make a difference (change the world), and the second is that if the company does well, they stand a good chance of getting rich.
    • Smart Young Public Vendors: Rapidly growing high-technology companies like Google, Facebook, Twitter, VMware, Splunk, Amazon Web Services (AWS is its own software company), and others also allow the best and the brightest to make a difference while benefiting from extremely attractive compensation packages.
    • Leading-Edge IT Consumers: Amazon is on this list because it is also a consumer of IT; so are eBay, NetFlix, and countless other organizations, including some interesting ones like @WalmartLabs.
    • Early Adopters, Like Financial Services: The big banks and financial services companies in New York and London have long used IT as a competitive weapon, and therefore they work very hard to attract smart people. Again, the issue is that very smart people in these companies can make a bigger difference to the company and make more money than they can working for a vendor whose stock price is flat or declining (more on this point below).
    • Traditional IT Hardware and Software Vendors: This is where IBM fits—in category #5 on this list organized in order of how attractive a company is to the best and brightest as an employer.
  • Cheap (Commodity) Hardware: Data center virtualization and clouds have so much redundancy built in that many customers are refusing to pay a premium for “enterprise grade” hardware. Their reasoning is that if a server fails, so what. The software will restart those workloads someplace else.
  • Hardware Consolidation: Data center virtualization turns a data center with forty thousand servers into a data center with eight thousand, four thousand, or even fewer servers. Yes, the customers buy new servers when they virtualize, but once consolidation has occurred, there are only 10% to 20% as many servers to refresh the next time around. The combination of commoditization and consolidation most certainly had a fair amount to do with IBM’s hardware revenue fall of 17%.
  • Data Center Virtualization: Yes, IBM is one of the largest implementers of data center virtualization via its Global Services organization. But when IBM implements data center virtualization, it is reselling other people’s software (particularly VMware’s), not its own.
  • The Public Cloud: While it is too early to call winners and losers in the public cloud for good, right now Amazon is the Windows of the cloud. For an old systems company like IBM to approach Amazon’s cost of doing business, and therefore pricing, is pretty unlikely.
  • Revolution in Systems Software: VMware, Microsoft, and Red Hat own the system software business in the data center. Amazon and Google build and own the system software in their clouds. IBM’s only relevant entries are AIX and the mainframe operating systems, all of which can effectively be characterized as legacy offerings.
  • Revolution in Middleware: Middleware, that layer of software between operating systems and applications, is undergoing a significant revolution. Application layers are being revolutionized by new languages (Ruby, Python, PHP, Node-JS) and new platforms (Tomcat, Spring, CloudFoundary), where again IBM is just a reseller. The database layer is being revolutionized by open source technologies like HBASE, Cassandra, Mongo, Neo4J, and others to the great long-term detriment of the legacy database vendors like IBM and Oracle.
  • Revolution in Management Software: With the Tivoli product line, IBM is stuck with a legacy systems management stack that is hopelessly complex, difficult to implement, and difficult and expensive to own. As the world moves to private, hybrid, and public clouds, that legacy management stack is going to be left behind. Ask yourself if any of the leading-edge companies that consume IT (Amazon, Google, Facebook, Netflix, etc.) use legacy management software. The answer is no.
  • New Business Models for Selling Software: Some of the most successful new software companies on the planet use an “easy to try and easy to buy” business model. Most start with something that is free and then, after earning the trust of the customer, offer additional products or services that are paid. Think Google, LinkedIn, New Relic, Splunk, Angry Birds, AppDynamics, Amazon (with the free tiny image), etc. IBM is stuck in the old model of selling expensive software the expensive way—with expensive people in the field.
  • Declining Attractiveness of Services: While IBM stands out in its ability to deliver complex IT projects to enterprises and governments all over the world, many customers are looking to replace complexity with simplicity. Many new vendors specialize in delivering products that require few to no vendor-provided professional services to make them work. IBM’s products are by and large hard to install and hard to configure, take a long time to deliver value, and require expensive professional services (from IBM) to make them work.
  • Smartphone and Tablets: IBM has no presence in the two most rapidly growing forms of end user computing devices in the history of the industry. Google and Apple are running away with this market (with Microsoft struggling to catch up).
  • Declining to Flat Stock Price (see chart below): A stock price that is not rising is a death knell for a technology company. It means that it becomes more difficult to attract top people with incentive stock plans. It also means that it becomes more difficult to acquire companies whose technologies refresh and invigorate the portfolio.

IBM Stock Price (Last Two Years)

IBM.Stock.Price

Click to Expand

 Summary

While IBM is still a huge (and profitable) technology company, it is on the wrong side of nearly every important market dynamic in the technology industry. We have a long way to go before IBM is a buggy whip, but things are definitely headed in that direction.

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Bernd Harzog (328 Posts)

Bernd Harzog is the Analyst at The Virtualization Practice for Performance and Capacity Management and IT as a Service (Private Cloud).

Bernd is also the CEO and founder of APM Experts a company that provides strategic marketing services to vendors in the virtualization performance management, and application performance management markets.

Prior to these two companies, Bernd was the CEO of RTO Software, the VP Products at Netuitive, a General Manager at Xcellenet, and Research Director for Systems Software at Gartner Group. Bernd has an MBA in Marketing from the University of Chicago.

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