IBM's 4Q2013 earnings - which showed another quarter of disappointing revenue growth - have observers wondering: what's happening at IBM? Will they be able to successfully reorient around the emerging, high-growth "3rd Platform" IT, built on cloud, mobile, social and big data technologies and solutions, or will they become the next DEC or Wang? In this post, IDC Chief Analyst discusses a massive mobilization within IBM - one that started to accelerate 6 months ago - to position the company as a leader in this new IT era. Significantly increased investment scale, a faster pace, and a flurry of moves are underway in 2014; the question is now: how well and how quickly can IBM execute?
On Tuesday, IBM announced its financial results for the fourth quarter of 2013, and the results were disappointing - with revenues down 5% (3% in constant currency), driven by a 26% drop in hardware sales and 14% drop in sales in the BRIC countries. In spite of this top line dip, IBM financially engineered - through share buy backs, a lower tax rate and cost reductions - a 14% increase in operating earnings per share, to $6.13, 14 cents above financial analyst expectations.
CEO Ginni Rometty showed her own disappointment with IBM's top line performance rather dramatically: foregoing her 2013 bonus (around $4 million on plan). Her senior team did likewise.
So what are we to make of this?
Well, first, it's obvious that IBM would be well-served selling at least the low-end portion of its $5 billion x86 server business, which is a major drag on IBM profits. And rumors have been rampant the past week that such a sale is getting close. (By the way, even after a sale, IBM would remain a very big partner of Intel - we expect IBM's SoftLayer cloud business to be a bigger and more profitable route through which IBM will sell x86-based computing cycles.) [UPDATE 23Jan2014: This morning IBM announced an agreement to sell most of its entry level x86 server business to Lenovo. Watch idc.com for analysis of that deal.]
Much more importantly, though, these financial results underscore what we've been pointing out in IDC's last several years of IBM earnings analyses: IBM needs to dramatically accelerate its transformation to a "3rd Platform-centered" supplier, crafting its offerings and organization around cloud, mobile, big data and social technologies and solutions. As we noted in IDC Predictions 2014, spending in the 3rd Platform portion of the market will be around 15% this year, while the rest of the (legacy) IT market will grow less than 1%. Trying to drive strong revenue growth without a large and growing footprint in cloud, big data, etc. is virtually impossible.
In the earnings announcement, we saw some signs that IBM's investments in the higher-growth 3rd Platform areas are getting the company closer to critical mass. IBM claimed $4.4 billion in Cloud revenues in 2013 ($1.7 billion in cloud services, $2.7 billion in IT enabling cloud services), an increase of 69%. And IBM stated that its big data/analytics business drove $16 billion in 2013 revenues, up 9%; this is important, as IDC predicts that big data/analytics technologies will be at the heart of 80% of new 3rd Platform solutions. But in spite of this progress, it's clear that these high-growth areas need to become much bigger, much faster, in order to make a bigger impact on IBM's overall revenue growth.
The good news for IBM and its customers is that, in the last 6-8 months, the company seems to have become much more serious about the need to scale up much faster in these growth areas, in order to migrate IBM and virtually all of its offerings onto a 3rd Platform, cloud-centric foundation. The most notable moves in recent months have been:
- Putting a "Real" Cloud Foundation in Place. IBM's $2 billion acquisition of SoftLayer last Summer has given IBM a highly competitive cloud services delivery infrastructure platform, one architecturally capable of competing with Amazon, Microsoft and others.
- Massively (and Globally) Scaling Up that Foundation. This month IBM announced plans to dramatically scale up the SoftLayer global footprint, committing $1.2 billion to more than double the number of SoftLayer data centers by the end of 2014 (from 13 to 28).
- Re-casting Watson as a Big Data Cloud and Innovation Platform. This month IBM also announced a $1 billion launch plan for its "big data"-focused Watson business unit, including a $100 million venture fund aimed at stimulating the development of a large innovation community (and solutions) around Watson's advanced analytics capabilities.
These three moves alone amount to $4.2 billion dollars of investment announced in just the last seven months - all with a common goal of moving IBM more quickly into a leadership position in the high-growth 3rd Platform marketplace. In the next several months, we expect to see many other important transformational moves from IBM to support this same goal, including:
- "Blue Mix" PaaS/Marketplace. Next month, IBM will launch the open beta release of IBM's "Blue Mix" Platform as a Service (PaaS) and Marketplace. As we've discussed many times, PaaSes and related Cloud Marketplaces are the most strategic "real estate" in the Cloud. They provide a destination for developers looking to create the next generation of killer apps. The PaaSes that can successfully attract these developers, will also host these killer apps that attract customers. Blue Mix will be the IBM offering that competes with Microsoft's Azure, Salesforce.com's force.com, Amazon's expanding portfolio of developer services, and others PaaS/Marketplace platforms. Watch this space very carefully: it's critically important that Blue Mix attract a large number of developers, and host a growing number of cloud, mobile, big data and social solutions. We expect Blue Mix to be out of beta, and fully "open for business" by mid-year.
- Migration of IBM's SaaS portfolio to SoftLayer. This year IBM will also quickly migrate and consolidate most of its (over 100) SaaS/Cloud offerings over to the SoftLayer cloud. 70-80 of these migrations are already underway.
- More IBM software turned into SaaS. 2014 will see many of IBM's traditional software products made available as SaaS offerings.
- Double the number of Smarter Planet cloud solutions. Part of IBM's differentiation in the Cloud will come from the company's focus on high value, "competitive advantage" Smarter Planet solutions, such as Smarter Commerce, Smarter Workforce, Smarter Cities, etc. IBM is moving its 15 such solutions to the Cloud, and in 2014 we expect to see another 20 of the industry-transforming, cloud-based solutions to market - targeting more line of business executive agendas, across multiple industries and within specific industries.
- Many IBM offerings will become API-enabled. IBM has begin to "API-enable" many of its current applications and solutions, in order to allow other developers to integrate with, and add value on top of, IBM's solutions. This strategy of opening up one's own offerings to large communities of co-innovators, is an essential element of competing in the 3rd Platform marketplace.
- Re-vamped developer and partner ecosystems. IBM is overhauling its developer and partner programs, to be more integrated and to be more "in tune" with the cloud, mobile, social and big data worlds. This includes more outreach to smaller, entrepreneurial innovators who may not have been on IBM's radar in the past.
- More consistent and "consumery" IBM user experience (UX). In the first half, we expect IBM's new Design and User Experience (UX) team, based in Austin, to roll out new IBM UX standards, with much more of an Apple-inspired (in my opinion), "consumery" look and feel for IBM software and cloud services.
- Revamping Sales plans, contracts for a 3rd Platform world. Very importantly, IBM is transforming its sales compensation to become more cloud-friendly. Sales reps who sell cloud services are now given quota credit for two years of monthly payments. The company has also radically simplified its contract documentation for cloud services, with a 2-page cloud services contract.
With all of these strategic initiatives in motion, this year's migration of IBM to the 3rd Platform has the feel of a massive, company-wide mobilization. Indeed, one of IBM's senior executives told me, with strong emotion in his voice, that "any IBM exec who is not moving very quickly to get their products and services on board [this cloud/3rd Platform] will be fired."
For the past four years, IBM has made many investments and acquisitions in the high-growth 3rd Platform technology and solution areas: it's not like IBM has ignored this market shift. But the question has been whether the scale and pace of IBM's transformation to the 3rd Platform has been sufficient. The most recent revenue results have given a loud answer to that question. IBM's urgent pace - and massive investment level - suggest that, at last, a real "bet the company" transformation to the 3rd Platform is underway. With its big plans for 2014 -- the test will now be how quickly, and how well, IBM can execute this ambitious transformation. And, of course, competitors are not standing still - so the commitment, the pace and the innovation will need to be sustained for many years to come.