NEW YORK – It would appear that storm clouds are on the horizon at IBM (NYSE:IBM). In the company’s most recent advertising campaign claims that IBM powers 270,000 more websites than Amazon (NASDAQ:AMZN) does, via big blue’s cloud computing service. However, this is a not entirely true as IBM has been a major laggard in the cloud rental market, only having bought their way into the sector this past July with the acquisition of SoftLayer Technologies.
In fact, IBM has spent a lot of time in recent years downplaying cloud services such as Amazon’s as insecure, low-margin business of little interest to a ‘serious’ computing company. In 2011, IBM executive Ric Telford told Bloomberg’s Ashlee Vance, ‘you can’t just take a credit card and swipe it and be on our cloud.’
IBM value proposition was that it new their customers better and that their cloud system was safer. However, hundreds of big-name internet companies including Dropbox and Netflix (NASDAQ:NFLX) were more than happy to let Amazon handle their ‘credit cards’.
Further complicating IBM’s cloud strategy were questions about the company’s accounting. In July, IBM disclosed that the U.S. Securities and Exchange Commission was investigating IBM’s cloud-revenue figures. IBM also lost a key CIA bid to Amazon; this will make IBM’s security pitch tougher to sell. Moreover, IBM’s $ 2 billion purchase of SoftLayer, and their use of SoftLayer’s cloud tech instead of their own appears to strike a final blow to IBM’s old cloud strategy.
Overall, IBM’s reluctance to get into the credit card-swiping end of the cloud is keeping with their strategy to avoid low margin businesses. However, the market seems to be moving towards infrastructure as a commodity and IBM is ill equipped to handle this transition. While there is plenty of market for the company to chase, IBM’s revenue will keep falling as long as this strategy remains in place as other companies turn to it less and less.
In the company’s most recent quarter, hardware sales fell by 17 percent and service sales dropped by nearly 4 percent, as did total revenue, which fell to 23.7 billion. The contraction was just as bad in ‘growth markets’ which fell by 9 percent, and the company did not itemize sales in non-growth markets.
Whilst the SoftLayer acquisition shows that IBM knows it needs to engage in some hand-to-hand industry combat if it wants to remain relevant it remains unclear how they will turn around the trend across operating units. Eventually, IBM might have to give up margin to chase revenue, or push innovation to define new markets.
Shares of IBM closed at $ 182.31 on Thursday.
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