CEO Ginni Rometty of IBM (NYSE:IBM) has written three letters to shareholders. Her initial letter to shareholders in 2011 was relatively brief and included this mention of cloud:
"IBM has helped thousands of clients adopt aspects of cloud computing."
The 2012 annual letter began just like the year before, with lots of talk of earnings and returning capital to shareholders. Cloud referenced on page five:
"Today, another new wave is sweeping in - powered by Big Data, analytics, mobile, social and cloud."
That was the only mention in the 2012 letter; from there Rometty launched into a discussion about how Smarter Computing would help Big Data.
In the 2013 letter to shareholders, IBM's CEO changed things up. Rather than lead with a detailed discussion of earnings, Rometty talked about IBM's "bold agenda," which eventually led to this startling claim on page 3, the first mention of cloud:
"The information technology infrastructure of the world is being transformed by the emergence of cloud computing."
Wow, okay. Late to the party, but it's a start. AWS, or Amazon Web Services (NASDAQ:AMZN) born in 2006, lived under the radar for a few years, then Microsoft (NASDAQ:MSFT) and Google (NASDAQ:GOOG) (NASDAQ:GOOGL), among others, realized the addressable market in the public cloud was vast, and have been pursuing it since 2010.
"Our cloud foundation at the infrastructure level is SoftLayer, the market's premier public and private cloud environment, with 'bare metal' dedicated servers that provide unmatched computing power."
SoftLayer is a niche player, to claim anything more is quite a stretch. I know, I know, IBM is going to package it up into something they can sell to enterprise, but CIOs have an abundance of better, cheaper alternatives nowadays. Bare metal is single tenant and single tenant is not true cloud. It's like telling the electric power plant to cordon off a special section just for you. Less efficient and more expensive, it's hard to imagine dedicated hosting becoming a significant percentage of the market.
Here's what Gartner analyst Lydia Leong said about IBM and SoftLayer:
IBM seems to be trying to redefine everything that SoftLayer does as cloud, although SoftLayer's business is almost all dedicated hosting (bare metal, sold month-to-month), not cloud IaaS in the usual sense of the word. There's abundant confusion as a result.
Whether IBM CEO Rometty recognizes it or not, the real cloud, the one that really matters - the one that most of the world's compute function will eventually run on is this: multi-tenant public cloud. In this all-important market, IBM is not a player.
Oh look, here is a boast by IBM's CEO about IBM's public cloud:
"Our public cloud processes 5.5 million client transactions per day."
If CEO Rometty went fishing for a big number to impress shareholders, she reeled in the wrong fish. To compare: Amazon Web Services "routinely handles more than 500,000 transactions per second and has peaked at close to a million per second." That's according to Jeff Bezos in his annual letter, 2011.
By the way, while IBM has been busy following roadmaps, Bezos and his merry band of builders have been constructing AWS, a platform model which begets more platform models, which in turn (or so it appears) beget still more. AWS dominates the multi-tenant public cloud with over 80% share and $5 billion in revenue. Here is what has been layered on top of the infrastructure base so far.
AWS Marketplace (20% commissions on over 1,500 apps) launched in September, is taking off like a rocket, and looks like it could be a really big ecosystem. More platforms, announced in November, are generating a lot of buzz: Workspaces (desktop virtualization), Appstream (processing for mobile gaming), and Kinesis (the computing backbone for the Internet of Things).
But I digress, let's get back to IBM CEO Rometty for an explanation on how cloud is misunderstood:
"As important as cloud is, its economic significance is often misunderstood. That lies less in the technology, which is relatively straightforward, than in the new business models cloud will enable for enterprises and institutions."
I agree, lots of new business models will be created, no doubt (and many will disappear). However, the technology is not "relatively straightforward." Cloud at webscale is really hard to do, as Google and Microsoft and everybody else chasing AWS will attest.
IBM knows it's behind in technology, and it's on the record. The CIA case revealed "grave concerns" about IBM's ability to do auto-scaling, a critical skill if you want to do cloud at webscale (as opposed to enterprise scale).
Here's another claim from Rometty's letter:
IBM has a "rapidly growing roster," of engagements, including "Honda, Sun Life Stadium, US Open Tennis."
Rapidly growing? I'm not so sure, see my last column for details regarding recent customer losses and controversies: the NFL, Disney (NYSE:DIS), ING (NYSE:ING) (nasty squabble), Bridgestone (OTC:OTC:BRDCF), Iusacell, as well as problems and scandals in China, India, Australia, Texas, Indiana, and Pennsylvania.
Um…the executive team has a plan, right?
Despite all of the issues, IBM continues to tap credit markets so it can "return capital to shareholders" in the form of share repurchases. The capital return added incremental debt of $8 billion to the balance sheet last quarter. According to IBM, it has returned $117 billion in capital to shareholders since 2000 in the form of stock repurchases.
Repurchases function similar to debt: When business value is growing, debt and share repurchases amplify growth. Of course, if business value is contracting, it works the other way. Share repurchases can destroy a lot of shareholder value.
But Armonk understands all of this, right?
Here are a few links, if you're interested: My six-page letter to Warren Buffett explains cloud in non-tech terms. Performance of my published stock picks. Box CEO Aaron Levie in 2011 predicts how enterprise IT will play out, it's spot on and beautifully written. And everybody should read the BusinessWeek piece just out, "The Trouble at IBM."
Disclosure: I am short IBM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.