IBM Needs To Rethink The Hardware Business For Infrastructure-Based Cloud Computing

Jan.28.14 | About: International Business (IBM)

It shouldn't be a surprise that IBM (NYSE:IBM) has struggled with its sales for at least the last five quarters as corporate clients shift from deploying onsite self-managed IT systems to using remote on-demand cloud computing services. Amid this transition, IBM's traditional revenue from providing business software and installing it on clients' servers is undoubtedly experiencing continued disruption. Meanwhile, its new sale from the so-called software as a service, or SaaS, as the result of cloud adoption by some corporate clients has yet to really pick up. It's not certain that even with wider uses of cloud computing, IBM can just automatically reap the benefit and see sale increases. It depends on how IBM may reposition itself to align its service-focused business better with cloud computing that requires massive infrastructure of hardware support systems of interconnected data centers of servers, storage and so on.

It won't be the first time that Big Blue has to rethink about its rightful position in a changing business environment during its 100-years-plus company history. Last time was in 2005 when IBM made a successful transition to becoming largely a business computing software and service provider by exiting the low-margin personal-computer business. Current changes in the market of business and enterprise computing, brought on by the Internet and cloud applications, will force IBM to make yet again business adjustments. News of IBM selling its x86 server business to Lenovo, the company that picked up IBM's PC business some eight years ago, is just an ongoing indication that IBM is trying to restructure its business and fit it better with the changing needs of corporate clients in the era of cloud computing.

Used by corporate clients as part of their in-house enterprise computing systems, the x86 server has increasingly become a legacy business-computing program as more companies are coming in to compete in this part of the enterprise-computing market. PC makers such as H-P (NYSE:HPQ) and Dell have been all restructuring their business by branching into the more promising enterprise-computing market because of the radical shift and less demand in the PC market. Similar to increased competition in the PC market from low-cost PC makers a decade ago, the currently more crowded enterprise server market presents a resembling challenge to IBM and thus, getting out of the x86 server business is just another logical choice for IBM. However, unlike the PC hardware business before, there's a lot at stake with the hardware part of the enterprise-computing market as a whole, and IBM can't afford not to play any role in it.

Without any control over cloud infrastructure, the foundation for Web-delivered application and service offerings, IBM may sometimes find itself softly footed when delivering its own software offerings from the cloud. The company's Systems and Technology segment, one of the four business segments at IBM, is said to deal with advanced computing power and storage capabilities, but according to the company's annual report, "approximately half of Systems and Technology's server and storage sales transactions are through the company's business partners." What all that means is that IBM claims to provide clients with business software and solutions that require enormous cloud infrastructure, but in many cases it doesn't make or manage the hardware elements of the underlying network. A so-called business partner could be someone like Amazon (NASDAQ:AMZN) Web Services, now a primer cloud infrastructure provider, that may not necessarily hold firm IBM's best interests.

There can be different layers in cloud computing services: infrastructure as a service (IaaS), platform as a service (PaaS) and software as a service (SaaS). Understanding this dynamic in cloud computing, IBM has to think about making inroads beyond its much focused business software services to have the ability of providing vertically integrated cloud-based business solutions. Microsoft (NASDAQ:MSFT) Azure already provides cloud users an operating platform that leverages its widely adopted Windows operating system, seemingly a source of competition for IBM. Without its own operating system for cloud uses, IBM can still resort to Linux, an open source operating system. But IBM may not want to rely too much on others for cloud infrastructure. Unlike in personal computing, hardware making of servers and storage systems can be at the heart of enterprise clouding computing, even though the essence is to deliver software applications, but ultimately through hardware infrastructure.

It's reasonable to assume that IBM may only see meaningful sale increases from cloud computing when it can do a better job in managing cloud infrastructure and platform so that it will have the support systems in place to help deliver its business software and other services. In the public cloud, IBM may rely on companies like Amazon and Microsoft to lay out the infrastructure and set up the platform. But in the private cloud, IBM must be able to provide clients integrated hardware systems and software services, which ultimately requires certain hardware making capability from the company. Besides, hardware making for cloud infrastructure seems to be a business in demand, and it would be counter-intuitive that IBM is not involved in this kind of hardware business.

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.