Cloud Infrastructure

09:00 AM
Doug Henschen
Doug Henschen
Commentary
Connect Directly
Google+
LinkedIn
Twitter
RSS
E-Mail
50%
50%
Repost This

IBM's Cloud Business: Ex-Employee Divulges Shortfalls

Confidential IBM documents reveal the company's struggles to meet its cloud forecasts, as the SEC and Wall Street cast a skeptical eye.

IBM's cloud computing revenues are smaller and less "cloud-intensive" than customers and Wall Street analysts might think. That's the claim of a former IBM employee who backed up more than a few of his/her critical assessments of the vendor's cloud prowess with a number of confidential internal documents shared with InformationWeek.

The documents put IBM's 2012 cloud-related revenue at $2.26 billion, a figure the company has declined to disclose publicly. In 2011, IBM did issue a roadmap that set forth the goal of reaching $7 billion in annual cloud revenue by 2015, so the much lower figure raises doubts about whether the company is on track.

IBM also said in 2011 that only $3 billion of that total would come from net-new business, suggesting that $4 billion would be tied to cloud-based ways of delivering its current hardware, software and services.

Noteworthy is data that shows that roughly half of current IBM cloud revenues are tied to hardware, in many cases systems used to run customers' private clouds or partner clouds. "This is not what your readers would think of as cloud," said the former IBM employee, who reached out to InformationWeek after reading a column I wrote challenging IBMto be more transparent about its cloud revenue. "They will think of Amazon EC2, Salesforce.com and IBM SmartCloud as real cloud. Not stuff sitting on their data center floor."

[ Will U.S. cloud companies lose customers because of NSA spying? Read NSA's Prism Could Cost U.S. Cloud Companies $45 Billion. ]

It's unclear whether IBM's re-characterization of certain hardware sales is a factor in a current Securities and Exchange Commission investigationof the company's cloud revenue, as divulged in IBM's second-quarter financial filings.

IBM declined to comment on the ongoing SEC investigation, but speaking on background, an IBM executive said the company "established the whole category of private cloud five years ago. We told the marketplace, and Gartner and IDC came to agree, that a lot of very large companies have gigantic data centers and a lot of stuff they want to control from a privacy or security perspective. Therefore, the first major opportunity from our client base was going to be us helping them build cloud delivery."

Where cloud compute capacity is concerned, the embrace of x86-based systems and standards is cannibalizing IBM's higher-margin mainframe and Power server businesses, says Kulbinder Garcha, an analyst with Credit Suisse, which downgraded its rating on IBM's stock on Aug. 6.

Meantime, emerging platform-as-a-service (PaaS) and infrastructure-as-a-service (IaaS) offerings are "obviating the need for IBM's traditional middleware stack," Garcha wrote in a research report. "The shift to cloud continues to present risks given IBM's technology positioning."

As for IBM's ability to compete with its own IaaS offerings, internal documents supplied by the former employee detail the formidable competition IBM's SmartCloud Enterprise (SCE) faces from Amazon Web Services. One document shows SCE to be generally less expensive than AWS offerings at low levels of service and capacity utilization, but the cost advantages shift to AWS at higher service and utilization levels.

For example, IBM's 32-bit Copper-, Bronze-, Silver- and Gold-level services are all less expensive than Amazon AWS at 25% utilization levels of one-year and three-year reserved capacity, according to this internal assessment. But move up to 64-bit services and 75% or higher utilization and the tables turn, with IBM's prices becoming 20% to 40% higher than AWS's and more than 40% higher in the case of 64-bit Platinum services.

These comparisons could be outdated, as the document is from March 2013, but the competitive pattern described is consistent with the reputations of both vendors, according to InformationWeek cloud computing expert Charles Babcock. "IBM is inclined to get higher margins once it has you hooked, while Amazon rather artfully has made it cheaper to become a big user, with the rate per hour going down the more you are committed to long-term use," Babcock says, noting that no cloud competitor has claimed to beat Amazon's three-year, Reserved Instance price.

Previous
1 of 3
Next
Comment  | 
Print  | 
More Insights
Comments
Newest First  |  Oldest First  |  Threaded View
D. Henschen
50%
50%
D. Henschen,
User Rank: Apprentice
8/22/2013 | 5:29:00 PM
re: IBM's Cloud Business: Ex-Employee Divulges Shortfalls
Sounds like a shot across the bow of any IBM employee (or ex-employee) who might otherwise be inclined to add their two cents here. That's my personal view, anyway.
Barry Graham
50%
50%
Barry Graham,
User Rank: Apprentice
8/16/2013 | 3:39:19 AM
re: IBM's Cloud Business: Ex-Employee Divulges Shortfalls
You base your report on the word of someone who signed an agreement saying they wouldn't divulge confidential information and then goes and does just that? If IBM were a country this person would be seeking political asylum somewhere else by now. These are my own personal views.
Andrew Binstock
50%
50%
Andrew Binstock,
User Rank: Apprentice
8/15/2013 | 5:38:41 PM
re: IBM's Cloud Business: Ex-Employee Divulges Shortfalls
Agreed. This is a problem for all hardware vendors, including HP, Dell. Unsurprisingly, none of these companies has been able to gain traction with their cloud alternatives. However, there is time still time for new entrants into the market. In this regard, I expect IBM and HP, with their legions of IT consultants to have the inside edge, certainly vs. Dell.
cbabcock
50%
50%
cbabcock,
User Rank: Apprentice
8/15/2013 | 5:26:32 PM
re: IBM's Cloud Business: Ex-Employee Divulges Shortfalls
IBM lags other vendors in certain areas of cloud computing and has a need to stretch a point or two. But we could apply the yardstick of exaggerated cloud revenues to many companies; Oracle, for example, springs readily to mind. Perhaps the SEC should investigate the NIST definition of cloud computing. It would find that it describes several new ways of distributing compute cycles that don't necessarily have a lot in common. One of them, the private cloud, is found in many enterprise data centers. I believe some of IBM's server sales can be categorized as private cloud implementations. How many? I don't know. Nor am I holding my breath until the SEC audits all the claimed cloud customers for fealty to the standard. Charlie Babcock
D. Henschen
50%
50%
D. Henschen,
User Rank: Apprentice
8/15/2013 | 5:01:17 PM
re: IBM's Cloud Business: Ex-Employee Divulges Shortfalls
20-year policy of staying out of the enterprise applications business didn't set it up well for taking apps into the cloud. With SaaS, it's all about the apps, not the infrastructure and middleware behind the scenes. On IaaS, IBM's middleware and infrastructure portfolio still needs more "cloudiness."
ibmcloudhahaha
50%
50%
ibmcloudhahaha,
User Rank: Apprentice
8/15/2013 | 4:14:40 PM
re: IBM's Cloud Business: Ex-Employee Divulges Shortfalls
The transition would have been doable if not for the promised straight line profit growth as outlined in EPS roadmap 2015
RobPreston
50%
50%
RobPreston,
User Rank: Apprentice
8/15/2013 | 3:59:38 PM
re: IBM's Cloud Business: Ex-Employee Divulges Shortfalls
IBM's in a bit of a quandary. Cloud is one of the fastest-growing markets, so it wants to be a leader there, but not if that push eats away at its current, higher-margin system businesses. As enterprise apps move into the cloud, requiring less of IBM's middleware and application consulting/integration services, perhaps it needs to get into that business in a bigger way.
More Blogs from Commentary
Infrastructure Challenge: Build Your Community
Network Computing provides the platform; help us make it your community.
Edge Devices Are The Brains Of The Network
In any type of network, the edge is where all the action takes place. Think of the edge as the brains of the network, while the core is just the dumb muscle.
Fight Software Piracy With SaaS
SaaS makes application deployment easy and effective. It could eliminate software piracy once and for all.
SDN: Waiting For The Trickle-Down Effect
Like server virtualization and 10 Gigabit Ethernet, SDN will eventually become a technology that small and midsized enterprises can use. But it's going to require some new packaging.
IT Certification Exam Success In 4 Steps
There are no shortcuts to obtaining passing scores, but focusing on key fundamentals of proper study and preparation will help you master the art of certification.
Hot Topics
5
Fight Software Piracy With SaaS
Andrew Froehlich, President & Lead Network Architect, West Gate Networks,  4/22/2014
3
Microsoft Lync: 10 Ways To Do More
Kristin Burnham, Senior Editor, InformationWeek.com,  4/17/2014
2
What DJs Can Teach DevOps Cynics
Steve Shah, Senior Director, Product Management, NetScaler Product Group, Citrix,  4/17/2014
White Papers
Register for Network Computing Newsletters
Cartoon
Current Issue
2014 Private Cloud Survey
2014 Private Cloud Survey
Respondents are on a roll: 53% brought their private clouds from concept to production in less than one year, and 60% ­extend their clouds across multiple datacenters. But expertise is scarce, with 51% saying acquiring skilled employees is a roadblock.
Video
Slideshows
Twitter Feed