The rise of cloud computing provides many new opportunities for companies just entering the market. The unique and innovative nature of this technology led to changes in how enterprises consume technology. We’re slowing but surely moving away from an “own everything” model, to more utility-based use of computing resources.
However, not everyone is going to be a winner, once cloud computing becomes more the IT norm than the IT experiment. This includes many traditional enterprise hardware and software providers. The rise of the cloud computing tide may put their traditional business models underwater.
This could be the case with IBM. As covered in Forbe’s, “In a note released Monday morning, Barclays analyst Ben Reitzes revises IBM’s price target to $190 from $215 and downgraded the stock to ‘equal weight’ from ‘overweight.’” This downgrade is due larger [sic] to some cash flow issues that IBM seems to be having, as well as the rise of cloud computing within Global 2000 enterprises, which are IBM’s bread and butter.
“Reitzes’ research has found that cloud computing seems to ‘adversely impact all of IBM’s segments in some way,’ and several surveys show that this disruption is only just beginning, with more disruption on the menu for 2014.” While the principles of cloud computing are permeating all of the IT industry in some way, many analysts believe that IBM, in particular, is suffering. In other words, they are not able to grow the cloud computing portion of the business fast enough to cover the decline in the more traditional portions of the business.
“’We believe the cloud is really driving the demise of hardware, services and software revenue throughout IT, including IBM. With each customer that deploys [cloud technology], future revenue streams from IBM become more difficult to tap,’ he writes. ‘We believe the rise of the cloud really hurts growth in IBM’s Software division but also impacts consulting and other services revenue tied to integrating its software stack as well.’”
Of course, IBM is not without knowledge of this risk to the business. In July, IBM purchased cloud computing infrastructure player Softlayer, and they continue to invest heavily in cloud computing services. No matter how many cloud companies IBM acquires, or how many cloud-based data centers they build, the foregone conclusion can pretty much be programmed into the business.
As depicted in Figure 1, the primary issue is that the rate of the traditional hardware and software business decline is due to the shift to cloud computing platforms. However, even if the large enterprise hardware and software providers have a growing cloud computing business (e.g., Softlayer), the cloud computing side of the business won’t grow fast enough to replace the revenue from the declining traditional enterprise hardware and software side. Other linked revenue, such as consulting services, will feel the same effect as well.
Figure 1: The rise of cloud computing services revenue for large enterprise software and hardware providers won’t counter the decline in the traditional aspects of the business. This could lead to declining values over the next several years.
Of course, IBM is not alone. HP, Oracle, Microsoft, and others are dealing with the same issue at varying degrees of impact. These companies are challenged to create a strategy that avoids as much declining value as possible. However, the shift of enterprises as they move to cloud-based platforms seems to be a foregone conclusion. The only question is the speed that this will occur.
The conclusions I draw from this situation are:
- Enterprises are moving steadily from traditional hardware and software platforms, to private and public clouds. This will cause traditional hardware and software sales to decline faster than the rise in revenue of cloud-based services and technology. Thus, most of these companies will experience a decline in revenue, and thus a decline in value.
- Even though the large enterprise hardware and software providers offer some sort of cloud services and technologies, this does not guarantee that their existing customers will move to those services or technologies. In many instances, customers will shift to competitors that offer services and technology that are a better fit. These are not traditional competitors for large enterprise hardware and software sales. They are relatively new players, such as Amazon Web Services, Google, or Rackspace.
- This path could cause a core disruption in the market. We will likely see traditional large enterprise hardware and software providers consolidate. Or, those with more resources may acquire pure cloud computing technology and service providers to add more cloud-fueled high-growth revenue to their portfolio to slow down the rate of decline.
At this point in time, I don’t think we fully understand the disruptive impact the rise cloud computing will have on the large enterprise players that have been a foundation of our technology landscape for the last 30 years. While I don’t see a quick change, a change is indeed coming. Large enterprise players need to be proactive to avoid the negative impact; although it’s very possible the blow can only be cushioned. Enterprise IT needs to be aware of this changing landscape, and carefully weigh new risks as they arise, as well as new opportunities.