Turning a supertanker: Is IBM heading for the rocks?

200px-IBM_logo.svgIBM’s revenues are falling. Yesterday’s results were the thirteenth quarter in a row where it posted revenues lower than a year ago. Worse, it appears that the new lands they are trying to conquer, Cloud and Business Intelligence, aren’t doing that well. Has the super-heavyweight left it too late to turn the ship away from the rocks?

I, Cringely, writes in a blog, “IBM is so screwed” that the indicators are looking all bad:

  • Even with a 30% increase in strategic imperatives, mainframe sales, and power system sales; total revenue is still dropping!
  • There will be workforce rebalancing every quarter as IBM cuts its way to prosperity. The quality of products and services will continue to decline, and then so will sales.
  • In IBM’s software segment, its highest margin business, sales are dropping. IBM will have a hard time developing SaaS for its Cloud.
  • IBM is now losing business in every world area and almost every country.

It is possible that this is just the pains of moving to a Cloud world, something that IBM and others have done later than perhaps was wise.

“We are concerned about IBM’s Software business may see increasing pressure from the transition to a SaaS business model,” wrote Jefferies equity analyst James Kisner in a note last week reiterating the investment bank’s underperform rating and $130 price target on the stock. “Recall, Oracle ORCL -0.9% reported very light license revenues driven largely by an accelerating transition to Cloud (SaaS).” – Source

That’s because as you turn the tanker from a solid business stream with revenue, to a new one, you’re going to be burning cash by the bushel. Worse, your competitors have got there before you and let’s not forget that Cloud margins are small compared to the old tried and true models.

Once again, the Systems Hardware division saw the steepest decline at 31.7 per cent, with total revenue of $2.06bn. Recall, though, that this time last year IBM was still selling x86-based System x servers, but it sold off that division to Lenovo in January.

Still, system Storage revenue was down 10 per cent, continuing the trend. And this time around, even mainframe sales seemed lackluster. Revenue from System z was up an astounding 118 per cent annually in the first quarter, but it only grew by 9 per cent in Q2.

The Software segment, likewise, was down 10.1 per cent from last year’s quarter. Every major category of IBM software was either down or flat. Operating systems revenue, in particular, was down 17 per cent, at just $400m.

And Global Services, the divisions that saved IBM’s bacon the last time it needed a major turnaround and which still contribute around 60 per cent of its total revenue, are also in the doldrums. Combined, Global Business Services and Global Technology Services brought in $12.4b in Q1, which was down 11 per cent annually. Global Business Services fared worse of the two, down 12 per cent. – Source

But you can’t count big blue out just yet.

Watson is likely to be a grand revenue stream in the future with it’s brain being back ended into a lot of systems worldwide. Time will tell just how effective it is, however it could be used as a front-line automation tool for repetitive human tasks. The real question is, will we let it, or is that step toward AI just a little too early? The “uncanny valley” affect may force Watson to stay in the background.

IBM still owns the third largest chunk of the traditional software market behind Microsoft and Oracle. If they can translate that into SaaS, as Oracle is doing and Microsoft has pretty much done, then they will be in the game. But, that is going to take time and it’s difficult. Because if you have to migrate from an in-house IBM software product to an IBM SaaS product, then you would probably look at other options along the way.

There is also a question of openness. Will IBM Cloud be fully open? Oracle’s isn’t, in fact, Oracle doesn’t actually meet the standard of Cloud as they are widely accepted. Oracle is just more Oracle being run out of their datacentre, not yours. Microsoft is relatively open and is aggressively pushing their product.

The thing that will keep IBM alive is its size. It can sustain losses for a long time in order to arrive at the competition field. The question is, when it arrives there, will there be any field left to compete on?


  1. AI as a service will be huge. If they can turn it into applications that are useful to a greater number of businesses (in the way that the old IBM was able to put computers into every large, then small business) then success is very likely. There’s a lot of contingency between this point and that however. And they won’t be without competition, as Google, Apple, and Amazon (and likely Chinese competitors) take them on.

  2. IBM has a lot of hard work to do (and cash to burn) before it can re-engineer it’s business to target the more relevant future markets and be competitive. No doubt right now they are struggling with the dilemma of the transition to cloud services eroding their previously solid enterprise software license revenues and actually ‘service enabling’ legacy products. Watson is a great initiative, but it is not AI – it is a very efficient natural-language machine-learning tool. It is making progress now in healthcare, but has a very long way to go still before becoming part of a SaaS suite. Training from new data-sets takes time to be productive, and much human input still. Healthcare is a long term game – IBM need to find a way to internally continually sell this investment if they eventually want to see the gains. AI will come from a different area that companies like Numenta are pursuing.

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