December 12, 2013

102 year-old I.B.M. is showing youthful vigour in working to improve its cloud and managed hosting offerings. The evolving I.B.M. model is based on a rich set of cloud-delivered software, tools and applications. Recall that I.B.M. has, since its last crisis/major pivot, focused relentlessly on acquiring software firms and integrating the newly purchased capabilities into a broad-ranging software and services offering for enterprises and governments.

2013 has seen an extension of this strategy to the cloud. The first major acquisition of I.B.M. under the leadership of freshly-minted CEO Ms Virginia Rometty was the $2 billion purchase of SoftLayer, a cloud computing company with a broad geographic reach and an accompanying – and intense – focus on efficiency through automation.

Whilst other large cloud players are making splashy announcements – Amazon’s AWS continues to leverage its scale and low cost-of-capital gain ground as a provider of public cloud services even as Google and Microsoft revealed plans to spend $1 billion+ each on cloud initiatives – IBM has been building its offering and is seemingly poised to make another series of significant marketing and product announcements in 2014.

I.B.M. and SoftLayer are poised (according to Mr Lance Crosby, CEO of the latter division) to start offering many I.B.M. software products as a cloud-delivered service. A “comprehensive” offering of over 140 applications, tools and infrastructure services – from e-commerce platforms to analytics to marketing tools to mobile application development tools – will be made over SoftLayer’s automated cloud platform.

The theory appears to be that there will be three layers of service offering available in the market. In the public cloud you will find the basic, inexpensive, non-secure offering: exemplified by Amazon AWS’ offer of raw computing power – infinitely scalable and on-demand – at an attractive price. Secure public cloud operators such as FireHost and managed hosting firms (such as Cogeco’s Peer1 Networks) will market cloud offerings with greater security and customer service. I.B.M. SoftLayer is aiming to offer service, security and a rich set of cloud-delivered applications, largely aimed at at enterprises and other larger organisations.

Mr Crosby noted “It will take Amazon 10 years to build all of this. People will be creating businesses with this that we can only dream about.” [1] At a presentation this summer I.B.M.’s Dr. Matthias Kaiserwerth proposed that a software-rich public cloud platform such as described above will allow companies to “balance optimisation with innovation to enable new products and service models”. I.B.M. also feels that it has the market heft to support this push: in combination with SoftLayer it is arguably generating $4 billion of cloud-based revenue on an annualised basis, and has a network of its own high-quality data centres in key markets to merge with the 13 data centres that came with the SoftLayer purchase. As was the case with its backing of Linux a decade ago, I.B.M. is also supporting open source software (having devoted substantial resources to the OpenStack cloud computing initiative).

The battle lines are drawn: I.B.M. is focused on delivering enterprise-quality, dynamically-orchestrated services at scale. Amazon AWS provides essentially support-free, raw computing power on demand. In the middle companies will need to define business models around rich customer support, integration, security or some other feature set. These providers will likely have much more success in the market below I.B.M.s large enterprise sweet spot. A focused business model and clear definition of how a particular product offering will help, for example, a small- or mid-sized customer will be critical in this regard. Efficient and high-quality facilties will also be required – whether these are rented or owned will be in good measure a function of the cost of capital.

Whilst many of the mid-sized clients defined above may have less sophisticated software requirements, they may in turn be open to a relationship that combines managed hosting with connectivity. In Canada, Cogeco (arguably the leader in this regard) and Rogers have invested in the connectivity, colocation and (in Cogeco’s case via Peer1) hosting/cloud assets to offer this kind of solution and gain a competitive edge against more sluggish telco incumbents.

[1] Interview with NYTimes DealBook/BITS, 4 December 2013