Kirk Klasson

Fed Up, IBM Eats Its Own Lunch, Doesn’t Much Care for the Taste

Once upon a time there was a technology company whose prowess was the envy of the world. Their vision could see past horizons. Their imagination could invent the future. The world beat a path to their door just to get a glimpse of the doodles on their napkins. The only trouble was that they couldn’t convince anyone to buy the magic they conceived so it sat in a closet lonely and forlorn.  Anxious to remedy this they sent word and assembled the greatest business wizards of their day to see if they could solve the riddle of their languishing inventions. The wizards looked high and low to find the slightest hint of a solution until one day it dawned on them.

“Your inventions aren’t your problem”, the wizards declared.

“Your problem is the people that you know don’t wish to buy these inventions from you.”

“Then what do they want to buy from us?” asked the technology company.

“Insurance!” said the wizards.

For most students of technology this is a familiar though slightly apocryphal story; one that has been told countless times by countless players about futures that were fumbled, success that was squandered and destinies denied. But this isn’t that ancient story. It’s a brand new one. And it’s all about IBM.

Timing is everything…

So what can you say about a struggling technology company that, at the historic top of the equities market, way over pays to acquire a dated open source services provider for a costless technology that’s been around since the 1990’s?

Desperate? Delusional? Clueless? Much more than we have time for here, ‘cause we gotta keep this pithy.

On paper, IBM’s acquisition of Redhat appears to have a logical rationale; long time partners, complimentary offerings, compatible go-to-market strategies, all the strategic platitudes that routinely make the press release. But the circumstances and motivation surrounding this move have been both obvious and dubious to anyone who has even casually followed cloud computing’s trajectory. By all accounts, when it comes to cloud computing, IBM has been a reluctant player, one who has had more to lose than to gain and one who has struggled to avoid this inevitable capitulation. But the Redhat acquisition is a towel, not a gauntlet, that IBM has tossed into the cloud computing arena and everyone, including IBM, knows it.

The blood in the lists isn’t red. It’s blue.

The cloud computing landscape has always been one of the “haves” versus the “have not’s”, those players with serious legacy businesses and those who have none to defend. The Amazons and Google’s of the world versus the HPE’s, Microsoft’s. Oracle’s and IBM’s. (see Something Weird This Way Comes – June 2015) Cloud revenue to Amazon and Google is mostly clean and new. While it does require investment, mostly in capital amortized as operating expense, it doesn’t require siphoning off existing revenue from other lines of business. But that’s not true for many of the other major players. For Microsoft, HPE, Oracle and IBM every dollar that moves from proprietary platforms to cloud “whatever” revenue is a dollar at risk, one that they may no longer possess or control; something that has put new meaning and urgency behind the “lift and shift” mantra of the “have not” rivals, the new Mongols of the cloud computing world.

If you want to see where the traction in merchant based IaaS and PaaS service providers is you should look no further than their capital outlays for operating infrastructure.


This capital front ends the build out of facilities and infrastructure to host and on-board new cloud clients. Those capturing clients are making these outlays; those who don’t have a reason to spend the capital don’t really have any cloud clients or, like IBM and Oracle, are too busy spending what capital they have on share buy-backs. (see Larry, you evil genius – October 2014)

When originally introduced, the Linux open source service model, pioneered by Redhat, was meant to serve as an inducement for adoption, an assurance of performance and continuity, protecting buyers from not only technical but business risks due to what was then a fragile and poorly understood licensing model. But that was over 25 years ago. Things have a way of changing in 25 years.

If you’re gonna take a bath, get all the way in

Today, open source is not only considered some of the best of breed software on the market, it is also one of the leading competitive advantages behind the build out of merchant-based computing service providers; in fact, it could be argued that without open source software there wouldn’t be a computing services industry (see Openstack: Here We Go Again – April 2013). So by acquiring Redhat, IBM has repositioned the public cloud computing players, the same ones that are anxious to “lift and shift” IBM’s installed based on to their platforms, into one of its primary channel partners.

This makes for an interesting dilemma. Will the Mongols of the public cloud continue to let the Redhat license tributes flow to IBM or will this new relationship cause them to rethink their own business models? Clearly this provides them an opportunity to arbitrage more than just IBM’s hardware sales, revenues that have been slowly declining long since IBM first viewed the Redhat acquisition as a strategic option. Open source software has been a critical component of a much larger value delivery system where public cloud customers enjoy lower costs through its aggressive incorporation.


Source: On Technology//On Strategy blog, Value Based Strategy Formulation post.

The same has not necessarily been true for enterprise adoption of Linux through value added resellers. In most of these instances open source is viewed as a lower cost component to competing proprietary architectures and not as a value added capability of a merchant-based services provider. So, to presume that IBM can add any value to a hybrid cloud deployment beyond what Redhat can natively supply is going to be a stretch.

No doubt the Redhat-IBM tie-up will initiate, by everyone concerned, a much more detailed evaluation of current and future cloud value delivery systems of both public, private and hybrid reference architectures with a special emphasis on virtual machines, containers and single console management models. Current alignments, such as AWS and VMware or Oracle and Redhat, will likely come under increasing scrutiny as the technical and economic incentives to evolve towards more proprietary value delivery systems increase. Instead of forking the code, the Redhat acquisition will probably end up forking the public cloud industry.

Here too, it is far from certain that Redhat will afford IBM any significant advantage, however, it will cause potential customers to give greater consideration to their own cloud roadmaps. For the past year or so IBM has been marketing its own private cloud environment eponymously named IBM Cloud Private. Clever, no? It’s stated goal is to be a robust, merchant-based enterprise native cloud environment. In this context, the term merchant-based means that it can be purchased by other than existing IBM clients but one would have to seriously wonder why anyone would. The basic idea is that an enterprise could achieve cloud-like attributes while maintaining their existing IBM components that have been containerized as invocable Docker images, kind of a cloud emulator that preserves the MQSeries rat’s nest that you first put in place back in the 1990’s. Doesn’t really sound all that native, after all, but certainly something that Redhat could help remedy.

This alone wouldn’t necessarily be an impediment to a successful Redhat-IBM merger if they could somehow become a preferred hybrid cloud management console for non-IBM customers. Here, they may have a shot, albeit a really long one. According to IDC, IBM was ranked third in 2017 cloud system management software revenue, a market growing at a compound annual rate of 18% where IBM’s share was only growing at 4%, so, essentially, losing share year over year. At the time, Redhat didn’t make the top ten in cloud system management software and its growth was also lower than the market average.


Source: IDC

Further complicating these considerations is the recently introduced move towards the Common Clause, an open source license specifically crafted to prevent computer services companies from nakedly profiting from the open source projects that they choose to employ. Nearly every competitive computer services entity, IaaS, PaaS, SaaS, incorporates various open source software, some more aggressively than others. For instance, AWS is considered one of the public cloud players that exploits this tactic extensively, making billions of dollars in the bargain, none of which goes to any of the open source projects they employ. While there are only a handful of open source projects that have announced their intention to force service providers to ante up under the Common Clause license, should more projects join this initiative, cloud providers will likely make more of their infrastructure proprietary either by acquiring open source projects or writing more code of their own. Either way, cloud costs will be going up.

As was pointed out in a previous post, “Forecast, Partly Cloudy”, the motivation to move from an incumbent proprietary architecture to one predicated on cloud techniques or service-oriented time sharing is as much a function of future options value as it is application dependencies and exit and acquisition costs. However, once you begin the evaluation there comes a moment of realization that by embracing native cloud development philosophies, the so-called Twelve-Factor Apps, there’s little room for changing course; you will have been “lifted and shifted” and your future options value will largely depend upon whose cloud environment you end up in.

So, those inclined to make this journey should consider several factors. First, the pressure the Redhat deal and Common Clause licensing puts on the open source technical infrastructure of existing public cloud providers and whether it will be sufficient to cause them to adopt a more proprietary offering.  Next, a sober assessment of the future of the underlying economics of service-oriented time sharing, a technical phenomenon born in an age of quantitative easing and near costless capital leasing, an aberration that will also eventually revert to the mean. And finally, what customer value accrues through a post-Redhat-IBM relationship other than a bunch of MQSeries customers rapidly abandoning ship and instructing others on how best to follow?

No matter where you go, there you are…

It seems that IBM gave up on the notion of Market Value Added right around 2006, well before the ascension of the current CEO.  And this is by no means the first time that IBM’s future has been in doubt. The last time this happened analysts joked that IBM wasn’t facing a strategic crisis, instead, they had a real estate problem, one too many Akers.


But in recent years it has become glaringly apparent that its practice of comparing share buy backs to shareholder returns just doesn’t hold up. In fact, IBM has become the technology poster child for employing a technique that is little more than shareholder three-card monte.

This makes IBM the only play in technology where you can actually short the stock by buying it, and arguably the biggest buyer for the last 10 years has been IBM. Along with announcing the Redhat acquisition IBM indicated that it will suspend share buy backs, something it might have considered back in 2007.


Whatever happens next, a few things appear obvious. This move will be the capstone and final initiative of Ginni Rometty’s reign at IBM. From a leadership, capital, cultural and strategic perspective IBM is spent. And this acquisition will do as much if not more to usher IBM from its current status as an also ran to that of the next GE in the Dow Jones Industrial Average. The Redhat acquisition will provide as much if not more impetus for existing customers to abandon IBM’s proprietary architecture than to renew existing relationships. In this context, IBM’s Cloud Native offering looks a lot like the interim step that EDS and CSC provided mainframe users on their way to client/server deployments.

The primary feature of IBM’s last couple of chapters has been a conspicuous lack of imagination when it comes to nearly every dimension of its business; leadership, culture, innovation, execution, you name it. The only question that remains is will there be enough of a foundation left to undertake a new direction or will selling insurance, in the form of open source services, be all that’s left for a once great technology company.

Years from now, in the case studies that will inevitably ensue, we will all be left to ponder whether IBM’s fate was a function of inept executive execution or just a bunch of trendy board-level virtue signaling gone horribly awry.

Either way, don’t expect shareholders to be all that sanguine about the conclusion.


Graphic courtesy of SuZQ Art and Images all other images, statistics, illustrations and citations, etc. derived and included under fair use/royalty free provisions.


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