This article is part of a series of interviews with IBM. In my first article, I praised the turnaround of the company. I then had the opportunity to conduct interviews with IBM executives. In the first part of my interview with IBM, I tried to understand the long-term vision of the firm. I then elaborated on Watson, IBM's cognitive system. Here I disclosed my discussion with IBM's corporate team. I then had the chance to dig deeper and have a conversation with Rob High, IBM Watson CTO, and tried to shed some light on Watson's performance and business model. In my last article, I interviewed the CEO of InsightNG, a partner of the IBM Watson Ecosystem.
Today, I will elaborate on IBM cloud. I had the chance to interview Don Boulia, VP of Strategy for IBM Cloud. The cloud industry is among the fastest growing businesses in today's environment. Forbes predicts that in 2016, spending on public cloud Infrastructure as a Service hardware and software is forecast to reach $38B, growing to $173B in 2026. Another study by IDC expects worldwide spending on public cloud services to grow from $96.5B in 2016 to more than $195B in 2020. Regardless of the statistics that we take into account, cloud is a big-fast growing industry. Therefore, to better understand the future prospects of IBM, it is vital to understand its cloud business.
Don, could you elaborate on what IBM offers in terms of cloud?
First and foremost, we are the enterprise cloud leader and we focus across three dimensions. The first is our hybrid cloud strategy. As you might imagine with enterprises in particular, there's going to be a mix of cloud capability - whether that is delivered in a public cloud or it is delivered in a private data center or in a dedicated model in between. There are also a lot of existing assets that companies have that need to be connected to the cloud. Our hybrid strategy is a linchpin to start the conversation about cloud and cloud capabilities. The second piece of the strategy is focused on data. As people start to look at where they can gain insight they are considering the notion of data and the cloud, and how, by leveraging cognitive capabilities especially with tools like Watson they are able to get more insight out of the data that is in the cloud. Third is the ability to take the industry expertise that we have across IBM and infuse it with analytics to create higher value solutions, especially for things that more directly address industry needs in a cloud context. So we're not just providing the base capabilities from a cloud perspective but actually delivering value that is very close to the industry that we serve.
Don mentioned that IBM is the enterprise cloud leader. I tried to investigate this further. There are a few rankings available and each of them reaches different conclusions. The general differentiation between these rankings seems to be the final user. When we look at services for consumers or small firms, companies such as Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOGL) (NASDAQ:GOOG) or Microsoft (NASDAQ:MSFT) seem to have a larger share of the market. However, when we talk about large companies, IBM is in a strong position. Gartner found IBM to be a market leader in terms of ability to execute and vision in the Data Center Outsourcing and Infrastructure Utility Services. Synergy Research's findings around Infrastructure-as-a-Service, Platform-as-a-Service, and hybrid and private cloud, point to IBM as a market leader in the cloud space. Forrester considers IBM to be a "strong performer", just behind the "leaders" Amazon and Microsoft, and ahead of companies such as Oracle (NYSE:ORCL) and Salesforce (NYSE:CRM).
You mention that IBM is focusing on the hybrid cloud. I understand that hybrid clouds are in between a private data center and the virtual cloud?
Yes, there is a range of options here and really what we try to provide to help people make decisions about where to run their workloads is this notion of choice with consistency. What I mean by that is the ability to take a workload and decide what is best for that particular workload. Whether it runs in a private cloud on premises, or in a dedicated cloud where the resources are not on premises but they are dedicated to you, or in a multi- tenant public cloud. There are different reasons for each of those choices: sometimes it is based on industry regulations, sometimes on personal preferences from the enterprise perspective… sometimes it is based on the performance needs, or security concerns. So the ability to offer that choice across those environments is a big part of the hybrid story. Already major enterprises are migrating key processes onto the IBM Cloud and more importantly, building new apps on the IBM Cloud platform. Our partnership with VMware is a great example as it has one of the largest enterprise platforms. And our SAP partnership is another example. IBM has signed many hybrid cloud deals including Etihad Airways, Anthem, AIG and EVRY.
Do you see the choice of cloud options changing over the time? Do you see a trend toward a particular option or is it just random?
Our goal is to be able to give people that choice and have a consistent set of options for them. We have certainly seen the attitude towards a specific kind of cloud solution vary depending on the industry; but I would say that the public cloud certainly has gotten more interesting even to some of the enterprise clients that we deal with over the last twelve to eighteen months. People are investigating whether public options are a valid option for them, even in industries where traditionally they were fairly conservative or even limited by regulations in the industry. So if there is a trend, it would be that we see everybody going to hybrid. None of the enterprises that we partner with are 100% in either direction. As they look at and evaluate public cloud, they can make that decision and, as you pointed out, they can change that decision and that will be our goal to give them the ability to decide where that workload should run based on the business need.
You mentioned analytics in association with the cloud. So, a company could potentially use the IBM analytics without being in the cloud? For example, a company could give you a bunch of data and ask you to provide insights without actually getting your offerings in terms of cloud?
Yes, historically we have had and still have a set of offerings that provide software and in some cases appliances that do data and analytics in a private data center. In the context of cloud, this is really accelerating as more and more data is starting to be stored in the cloud particularly for new applications and new workloads. So, rather than move all of this data back into the private data center to do the analysis, it starts to become attractive to do the analytics right where the data is located. And data tends to collect very rapidly. We say it has some sort of gravity around it: when other things get collected and more and more data is there, the idea to move it to other places is not very advantageous. So you can provide the analytical capabilities directly in the cloud and do it right there; it just saves time.
In terms of competitive advantage vis-à-vis other companies such as Amazon or Microsoft, could you elaborate on why you think that a customer would choose IBM over a competitor? For example, my understanding is that IBM is not really the cheapest option, while your research says that 64% of customers would choose the low cost provider.
When we start talking about IBM's strategy, we are really talking about being in a race for value, not a race for size. What we mean by that is really being able to provide a set of services that more directly address what our enterprise clients need, closer to the solution and providing the solution where possible. The cloud is maturing into a platform for innovation and business value. Clients are building new workloads on the public cloud and leveraging existing investments with a hybrid cloud approach. So, certainly there are computer networks and storage services that every vendor is going to provide, including us. As we look at our strategy and our differentiation against competitors, IBM provides clients with choice and consistency of deploying their cloud applications across public, private and hybrid cloud environments on a global scale Our clients like being able to decide when they can do things and on what time table and when they can assign workloads to the cloud; as well as being able to receive industry expertise in content.
But hybrid cloud is also offered by other companies…
We have a comprehensive hybrid strategy. Other vendors don't have the same capabilities, whether that is from a consistency perspective, or from an openness perspective. We try to make sure that everything we offer is based on open standards or open source to give people the maximum amount of flexibility. And we have superior integration capabilities - linking existing assets to those in the cloud. These are all things that we think differentiates us from competitors and that are unique to IBM.
You mentioned the race for value, I assume you referring to the value for IBM?
Well, I actually meant the value in our cloud for our clients. It is not just the size of the cloud here but actually what we can provide in value to our clients. Certainly, we view ourselves to be high value partners for clients as well but the content in our cloud is really what I meant by how we provide unique business value to our clients.
You have been in IBM for a long time. A few people argue that the culture at IBM is changing for the worse and that all the layoffs are damaging employees' morale. Can you comment on that?
I think what's interesting about the technology industry for IBM is that the industry is always changing. And from our perspective that means having a culture focused on continuous transformation, always looking for that next thing and orienting the company around these grand challenges. This is something that I personally value the most and is certainly part of the reason I have been here, as you said, as long as I have. The thing which is interesting here as we go forward is we really have once again the opportunity to transform the company and to look at some of these new opportunities. So when we start talking about what IBM is known for, both internally and externally, we talk about it in terms of being a cloud platform, cognitive solutions company. And I think what is amazing about that is that those are things that were not on anybody's radar a decade ago, including ours. And now that is something that we really have as a cornerstone.
This does not really answer my question but I assume it was difficult to say something different. In general, I believe that as IBM is going through a heavy transitional period, a part of the company is dissatisfied while a new generation of employees is joining. These new employees are obviously less attached to the company compared to their long tenured colleagues, but they also offer fresh perspectives and access to new skills necessary to move into the new phase.
Can you comment on your long-term vision for both IBM and the industry? What will happen in five to ten years in the industry and in IBM?
So, one of the advantages of being in this industry for a long time is that I have been able to see a number of new trends and transformations. In my personal case, I was here during the transition to the internet and IBM's move to e-business. If you look at how that evolved as people started to embrace the internet and understand what the value was, it became much more ingrained in how they did business. It went from being just a fairly static webpage that a company would put up to advertise themselves, to a very dynamic experience and ultimately, for those who do commerce, something that actually grows a business. So, I think we see a lot of the same progressions occurring as we move forward to the Cloud. In the initial phases companies are adapting within their enterprises, experimenting trying to find out where they can see the value but then as they mature and progress, it starts to become ingrained in everything they do. And so we see that already starting now with almost every industry we are observing. Whatever that next project is, whatever that next endeavor they are going after, the assumption is that it's going to be done in the cloud. It is not really a question of if, it is just a question of when. As more of their business processes and transactions are actually done in the cloud or on the cloud, that's when it really starts to evolve. That is why we have this progression moving into analytics and cognitive. And we will see this being done industry by industry.
In separate conversations, talking about the future of the cloud industry, IBM reiterated some of these points:
In much the same way that the internet in the mid 1990s began to evolve from simple browsing to higher-value e-business engagements, cloud is evolving from simple public infrastructure engagements aimed largely at cost saving toward increased private/hybrid implementations for higher-value applications such as data, analytics and cognitive solutions driven by enterprise client demands.
So you expect that enterprises will be 100% cloud in the future?
I think that they will be moving into the cloud and it will take time for everybody to get 100% into the cloud. But, we want to be able to provide our clients with choices to move from where they are today and progress along that journey - whether that is a private cloud or a public cloud. But if you look at where any new projects are being done from an enterprise perspective, almost entirely the assumption is based on the fact that they are going to be built on the cloud.
Do you have any estimate on how much the industry is going to grow for the next ten years?
Certainly, we are looking at our clients and what they are deploying, and what they are doing for all their new projects. All the anecdotal data that we have in terms of our interaction with clients would indicate that all their new projects are going to be based on the cloud, and in fact, the real question is 'how quickly they can get there'.
After the interview, IBM provided some analysts' estimates that indicate that the industry is expected to grow twofold in the next four years and fivefold in the next ten years. IBM also mentioned that:
While we don't forecast revenue, it's clear that clients' deployment of cloud as an emerging platform for development and innovation is likely to continue and drive overall growth.
In terms of risks. The first risk is related to the users: online security. Do you see that being a threat for your customers? Online security is of course more relevant when the data is in the cloud.
I think certainly from IBM's perspective we have very strong security services, and from a cloud perspective as well. Historically, security has been something that many of our clients look to us for. When you see security from a cloud perspective, at the end of the day, it ends up being very much the same story as what would be good internal security practices for a company. The difference of course is that if you start talking about things like a public cloud, you are potentially exposing things to a much wider audience if you don't have the right security model and the right security practices in place.
The good news is for cloud and certainly for IBM as the cloud provider is that we deliver a lot of those tools and best practices as part of the offering that we bring to the market. We build in a lot of security and a lot of security considerations into the services that we offer and so, what we have found is that clients can actually get a very secure environment from the cloud. And, in fact, in many cases, we have had our clients actually comment that the security posture that they get from us as the cloud provider, can actually be better than what they were implementing in their enterprise data centers. IBM's cloud security portfolio enables clients to demonstrate compliance, prevent unauthorized access, and defend against the latest threats using advanced Security Intelligence. The portfolio is backed by IBM's cloud security services - together they're the foundation for enabling secure adoption of public, private and hybrid clouds. So, in a lot of cases when we deliver a service, we can deliver it with a set of security built in that makes it good to go from the start, with all our best security practices.
Do you see any risk for the future of IBM cloud and if so how you are dealing with it?
I don't know if I see a risk here. Certainly there is a set of actions that we are taking, you mentioned security. What we are really trying to do is mature the cloud and make sure that we educate our clients with what are the right best practices, how the cloud can help them in getting what they need done and really make sure that we provide all our technology in a way that is consumable via the cloud. It's something that we see as a big priority for us to make sure that all the relevant capabilities that we have within IBM can be delivered on the cloud. And so, internally, that is certainly our road map - to make those capabilities available to our clients, effectively on the cloud.
I personally find this answer quite shallow. I asked IBM if they wanted to add further comments but none came through. I hope that IBM considers risks from a broader perspective since in a rapidly changing technology and crowded market such as the cloud, risks are always around the corner. Competing products might come to the market at any time, start-ups, changing customers' preferences. These risks might not materialize, but being aware of them is important in my opinion.
Looking at the last financial statement, you differentiate between cloud and cloud as a service. Can you please explain the difference?
Total cloud includes public, private and hybrid engagements, whether delivered on premises or as a service. Cloud as a service, which is a subset of the total cloud revenue, includes infrastructure-, platform-, process- and software-as-a-service, all of which are delivered via an annuity/subscription model with clients.
You also include cloud in cognitive solutions, and then also in Technology Services & Cloud Platforms. Can you explain why?
In addition to providing an overall IBM cloud revenue figure - $12.7 billion over the last 12 months through the end of the third quarter 2016 - IBM also reports the cloud revenue component of each of its segments. In 3Q16, total cloud revenue was $3.4 billion-$0.6 billion in Cognitive Solutions, $0.8 billion in GBS, $1.5 billion in technology solutions and cloud platforms, and $0.5 billion in systems. Cloud revenue as a service reached an annual run rate of $7.5 billion at the end of 3Q16 - $1.6 billion in Cognitive Solutions, $0.8 billion in GBS and $5.1 billion in technology solutions and cloud platforms. This provides investors with a granular view of IBM's cloud business.
As always, thank you for reading. If you wish to follow my future articles and interviews about IBM, just click the "Follow" button next to my name at the top. I would also be interested to know what you think about IBM current earnings' release and its future prospects. Finally, if you are would like me to cover a particular company please let me know in the comments. Thank you for reading!
Elsewhere on Seeking Alpha
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- A Closer Look At IBM's Future (Part 5) - An Interview With InsightNG CEO Neil Movold
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Disclosure: I am/we are long IBM.
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.
Additional disclosure: I would like to thank Akshay Hooda for his help with the interview transcription. I would also like to thank Katy Brown for her help in writing this article. All errors are my own.