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Will IBM’s Big Bet on Cloud and AI Pay Off?

IBM

Another Indian has taken over the reins of a global tech giant. While this news would warm the cockles of every Indian across the world, the real story behind the move is that the appointment of Arvind Krishna as the successor to Ginny Rometty could well be the last throw of the dice for the original tech giant called IBM.

Why so? Well look at the facts starting from the five percent jump in IBM stock prices when it was announced that the curtains were coming down on the Rometty era that lasted eight years. Because, if there was one company that appears to have missed the soaring demand for computing power and applications during this period, it was IBM.

A report by CNBC.com nails it while pointing out that under Rometty, the company’s stock dropped 24%, making it the only US tech giant valued at over $100 billion to lose value during that period. In comparison, shares of the 16 other companies in this bracket gained between 64% (Qualcomm) to a whopping 3468% (Netflix).

If one were to compare IBM and some of its contemporaries, the story appears to pan out rather obliquely for the Big Blue:

  • Google, Microsoft and Amazon are now the big three on the cloud business
  • Microsoft, Adobe and Salesforce are the big three in the SaaS business
  • Post IBM selling off its processor business, Nvidia, TI, Qualcomm and Intel rule
  • Accenture has quadrupled its IT business revenues in eight years. IBM stagnated

Given that US enterprises pride themselves on creating stakeholder value, Virginia ‘Ginny’ Rometty era wouldn’t be remembered as a golden period for IMB stock. Of course, IBM did make several acquisitions, chief among them being Red Hat through which it is now attempting to reinvent itself as a cloud company, which is where Krishna becomes critical.

In the past IBM has trumpeted its artificial intelligence related work (courtesy of IBM Watson) but till date it’s been a case of more sound and some fury. As the head of the company’s cloud and cognitive software unit, Krishna’s elevation is suggestive of where the board is placing its bets, especially since competition like AWS haverocketed ahead.

It isn’t as though the 109-year-old company has progressed over the past decade. It has placed its bets on cloud computing and artificial intelligence ever since the $34 billion Red Hat acquisition last July but has been virtually bypassed by other tech companies which broadened their play on content, online ads and social media.

Efforts my Rometty are bearing fruit as was evident by their most recent earnings bettering market expectations though in absolute numbers their annual revenue of $77 billion appears awkward when juxtaposed with those of Apple ($261 billion), Microsoft ($128 billion) or even that of the fledgling (by IBM’s standard) Facebook’s $70 billion annual numbers.

In other words, IBM’s current numbers just about place it at the 1998 levels when revenues were around $81 billion, which when taken into consideration with inflation, would amount to much less. Blogger Jack Schofield writing on ZDnet.com last year had put their current revenues on par with what they achieved in 1985!

Of course, to lay the blame firmly on Rometty’s doorstep would be unfair as IBM appears to be on a painful, albeit steady journey to modernize, not because they lack will but due to the sheer size of the organization that anything starting from the top takes an inordinately long time to percolate down.

Though IBM waxes eloquent about agility in software development, when it comes to ringing in changes and following through, the company seems to be averse to practicing what it preaches. Which is possibly the reason that Rometty couldn’t really convince the world that IBM was on the cusp of another growth spurt in spite of taking some sound decisions.

For example, the company’s cloud and cognitive software division (headed by Krishna) grew by 9% year on year and generated $7.2 billion in revenues over October-December quarter. Similarly, they took the cue from Amazon launching AWS in 2002 and veered off from its lower margin hardware and software sales into “strategic imperatives” such as cloud services.

In fact, it was barely seven years ago that IBM stepped into cloud space with its acquisition of SoftLayer and when they struck the deal for Red Hat five years later, it opened up a new avenue of growth but also demonstrated to the tech community that the company was moving towards a modern and flexible cloud platform the open-source way.

However, the problem that IBM faces now is that though the cloud initiatives have taken flight, revenues from these new offerings aren’t compensating for the slump in other areas, suggesting a bureaucratic approach elsewhere. Look at the numbers – revenues from Red Hat grew 24% in Q4 while the global tech services saw a decline of 5% in the same period.

Just because some of the businesses are large and firmly ensconced in the IBM psyche, these are feeding off the newer ones and in many ways countering growth. And this is possibly where Krishna would have to wield the magic wand once he officially takes charge in a few months’ time.

Would it mean lopping off some of the low-margin divisions and focusing exclusively on new technology? Or should it go after modernization of some of these such as datacenter infrastructure could start contributing with higher margins in the medium term. There could be many such decisions that IBM would have to make in the short-term so that they can rightfully reclaim the pride of place of the original tech giant.

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