The Info Tech Services Tipping Point: CIA Chooses Amazon Over IBM For Private Cloud

| About: International Business (IBM)

The Tipping Point: How Little Things Can Make a Big Difference is a book by Malcolm Gladwell, and is described in this overview by Barnes and Noble :

The Tipping Point is that Magic Moment When an Idea, Trend, or Social Behavior Crosses a Threshold, Tips, and Spreads like Wildfire. Just as a single sick person can start an epidemic of the flu, so too can a small but precisely targeted push cause a fashion trend, the popularity of a new product, or a drop in the crime rate.

In this article I will discuss the vast significance of the announcement that the Unites States of America's Central Intelligence Agency, or CIA, chose Amazon over IBM for their private cloud service.

Relative to IBM's $100 Billion of annual revenue, some would call the CIA private cloud contract a "little thing"

When I first heard about the $600 million CIA private Cloud contract with Amazon (NASDAQ:AMZN), I did not think much about it. But, when IBM turned that contract loss into a huge legal harangue, I started to pay attention. When a US court ruled in Amazon's favor last week, I really started to think hard about this situation.

Back when the contract was originally granted by the CIA in mid June 2013, The Register wrote this:

The CIA picked Amazon over IBM for a lucrative government contract not because of price, but because of the company's "superior technical solution" - a view that contrasts with IBM's vision of itself as the go-to tech organization for governments.

Then on August 6, 2013 CIO online wrote this:

First, the contract is for a lot of money, so it's attractive from a commercial point of view. Second, and more important, the endorsement implicit in the CIA-the CIA!-choosing AWS is that it provides Amazon a trump card in all discussions about security, trustworthiness and so on.

Of late, much discussion has moved to IBM's protest of the award of the project to Amazon-specifically the fact that the CIA planned to award the project to AWS despite Amazon's bid being more than 50 percent higher than IBM's.

Then on Oct. 10, 2013 Business Insider wrote this:

This is Amazon's first-ever "private" cloud and a real game changer in a fledgling market that's already generating about $131 billion this year and growing 47% All the big enterprise IT companies are pursuing the cloud: IBM, HP, Citrix, Microsoft, Dell,, Intel, Oracle, VMware, etc. They want to snag lots of enterprise cloud customers. They view it as a big opportunity for growth. Amazon's cloud, called Amazon Web Services (AWS), is the biggest player in the cloud market market by far. AWS, has more than five times the combined capacity of its next 14 rivals, according to market research group Gartner. But, until this contract, it only provided "public" cloud services, meaning its users shared Amazon's data center.This CIA contract is for a "private" cloud, meaning Amazon will build a cloud in the CIA's own data center that's not shared with others.

IBM, which had put in a competitive bid, protested the CIA contract. From court documents we learned that Amazon's bid was a whopping $54 million higher than IBM's, but the CIA chose Amazon because it thought its tech was better." Many of Amazon's competitors have been offering private clouds as a way to lure enterprise customers away from AWS. They position their tech as more secure and reliable than Amazon. But other enterprises now know that Amazon's tech is secure and reliable enough for the CIA, which has a very high standard.

This contract also means Amazon is ready to compete for big private cloud contracts. That's not good news for its competitors either.

The CIA contract with Amazon will be viewed as a "tipping point"

Many of the world's largest organizations with easy access to funds, tend to choose contractors based upon their reputations and proficiencies, rather than going with low-end cheaper vendors. IBM has greatly benefited from this tendency, because of their heritage as the bluest of the blue chips.

One of the biggest concerns from organizations about cloud services is security and reliability. Large companies and government agencies realize that the price of allowing outsiders access to key intellectual property and state secrets, will greatly overwhelm any savings from moving to the cloud.

Most people, including myself, thought that while Amazon could grow their cloud service dramatically by attracting smaller companies, large companies, and especially governmental agencies, would stick with their old IT service vendors, when they wanted to transition to cloud services.

That Amazon won a private cloud contract from the CIA, and at a higher price, is a tipping point moment, in my opinion.

Who knows more about security than the CIA? Who has one of the most sophisticated IT operations on this planet, outside of the NSA and the US Armed Services?

IBM's legal maneuvers are enhancing and leveraging this tipping point event

Tipping points are enhanced as more people are exposed to information regarding the product or service in question. The more often people hear about something new and great, the faster the uptake.

If IBM had said nothing about their contract loss to Amazon, then numerous articles, including this one, would probably not have been written.

It appears to me that IBM is caught in Quicksand, in relation to the CIA cloud contract. The more IBM fights and maneuvers around, the faster they will sink. In other words, the more publicity that Amazon gets from the CIA contract win over IBM, the worse it is for IBM's reputation.

Since IBM depends upon their reputation for so many contract wins, the more the loss to Amazon is in the news, the worse it is for IBM, and the better it is for Amazon.

The Cloud is the biggest paradigm shift in Info Tech since the PC

Just about 30 years ago, IBM made a huge bet by introducing and backing what they called the Personal Computer, or the PC. Unfortunately, IBM never made a penny off the biggest info tech revolution of all time. Nevertheless, the huge growth in demand for info tech products and services worldwide has benefited IBM greatly over the last 30 years.

The growth of the cloud is having the opposite effect upon old line info tech companies, even if though they aggressively tout their growing cloud revenues. Even though IBM has a fast growing cloud services division, it is only about a single percent of total revenues. Meanwhile, its significantly larger equipment divisions are shrinking dramatically because of the cloud.

Cloud companies such as Google (NASDAQ:GOOG), Facebook (NASDAQ:FB), Amazon, Verizon (NYSE:VZ), etc, are increasingly designing and building their own customized equipment, rather than purchase from old line info tech companies, such as IBM.

IBM Personal Computer introduced August 12, 1981

In August 1981 IBM's stock was trading at about $16/share. Intel (NASDAQ:INTC) went public at a split adjusted price of about 50 cents a share. Microsoft (NASDAQ:MSFT) went public at a split adjusted price of about 15 cents a share. Oracle (NASDAQ:ORCL) went public at a split adjusted price of about 6 cents a share.

12 years after they introduced the PC, IBM's shares were trading at a lower price than on the day the PC was introduced. Meanwhile in 1993 the 3 companies mentioned above had seen their stock prices appreciate from five to twenty fold.

While IBM has done a much better job of creating shareholder value over the last 20 years, they are again positioned to lose dramatically from another huge paradigm shift in info tech.

Why the cloud is a huge net negative to IBM

Even though IBM is touting their next "Watson" supercomputer as a personal assistant, IBM appears to be a huge net loser from the growth of cloud services for the following reasons:

1) Cloud providers are increasingly choosing to design their own networks, instead of buying from old line equipment suppliers such as IBM. The demise of IBM's equipment sales is the canary in the coal mine for the rest of their businesses.

2) As companies and governmental agencies transition to cloud services, they greatly reduce their use of IBM info tech consultants.

3) As companies and governmental agencies transition to cloud services, they no longer need to buy as much software from IBM.

4) As companies and governmental agencies transition to cloud services, they no longer need IBM's traditional info tech services.

Software and services are IBM's cash cows, and will be the last to roll over, and start shrinking.

But, when they do, IBM's stock price will collapse.

While IBM has been able to goose per share profits through a tremendous reduction in the number of shares outstanding, they have not been able to grow the actual enterprise.

The increase in IBM's profitability has come from milking the very profitable IT service contracts, while hard selling software to large organizations.

When a company/organization switches to a cloud service model, they greatly reduce purchases of software, and no longer require the old IT services of IBM.

Most of the early users of cloud services have been smaller companies, which are not IBM's traditional customers.

The substantial reduction of IBM hardware sales is a precursor to customers switching to cloud services, combined with cloud providers designing their own equipment.


The most self-evident events to watch concerning tipping points, is the self-reinforcing feedback loops. Contracting feedback loops are simply the exact opposite of expanding ones.

As the New York times reports about IBM s Q3 earnings :

The International Business Machines Corporation is the world's largest technology-services company. Revenue for its services business fell 3 percent.

If the world's largest technology services company loses a key cloud contract to a relatively new entrant into IT services, that would appear to be a tipping point.

More importantly, companies and organizations all over the world will be greatly influenced by the US Central Intelligence Agency choosing Amazon over IBM, for their own personal cloud.

If IBM's cash cow businesses follow the lead of their hardware businesses, because of the paradigm shift to cloud services, IBM will not be able to continue to fund share buybacks to goose their earnings per share.

The CIA cloud services contract would only account for a fraction of a percent of IBM's annual revenues, but it appears that this "little thing could make a big difference".

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.