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IBM's Cloud Business: Ex-Employee Divulges Shortfalls

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, 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.

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