NelsonHall recently attended a cloud computing event hosted by IBM, its first such event in Europe since it introduced a new segment structure at its investor briefing in February. With this new structure in place, plus the recent addition of revenue disclosures for cloud from each segment, we were interested in the extent to which IBM is combining its relevant cloud capabilities across segments.

• The focus on IaaS and on Bluemix continues apace
• There is also accelerating focus on IOT from Watson IoT, the second industry focus for Watson after Watson Health, and The Weather Company: expect new offerings leveraging these over the next couple of years
• Cloud for streaming video is also a new area of focus
• For cloud intiatives, GBS continues to lag.

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"we are becoming a cognitive solutions and a cloud platform company"

As it undergoes a corporate reinvention, not for the first time in its history, IBM is positioning as being more than a “hardware, software, services” company; its current mantra is “we are becoming a cognitive solutions and a cloud platform company”. This positioning is reflected in the new segment structure:

• Cognitive Solutions: solutions software (incl. analytics, security, and social) and transaction processing software
• Global Business Services (GBS): the consulting, GPS and AM units, as before
• Technology Services and Cloud Platforms: the Global Technology Services (GTS) unit plus IBM’s cloud infrastructure and platform capabilities. This segment now includes WebSphere and related integration software products
• Systems: z Systems, Power and storage hardware offerings, and now also related operating systems software
• Global Financing, as before.

The priorities for investment clearly will continue to be Cognitive (e.g. the acquisitions of The Weather Company and of Truven for Watson Health) and Cloud Platforms.

Meanwhile, the GBS business, which has been kept very much in the shadows in recent years, has been increasing its focus on ‘Cognitive Solutions”, including setting up a cognitive consulting practice, and also strengthening its industry capabilities. Looking ahead, IBM has stated it intend to combine some Cognitive Solutions and GBS offerings in what it calls “Cognitive Solutions and Industry Services”.  

IBM asserts that this new structure is in support of its drive to both transform existing businesses and also address new opportunity areas (even build new markets) in areas such as Watson Health and Watson IoT.

IBM is also now providing additional revenue disclosures for revenues from “strategic imperatives” (analytics, cloud, mobile security, social), cloud, also as-a-service within each segment.

This provides a little more transparency on, for example, on the nature of its cloud revenues. Thus IBM reports it generated ~$10.2bn in cloud revenues in FY15, a growth, of which $4.5bn in as-a-service, of which approximately:

• $1.4bn from the Cognitive Solutions segment
• $1.8bn from GBS
• $4.0bn from Technology Services and Cloud Platforms
• $3.0bn from Systems

IBM is generating significant cloud revenues from:

• SaaS, with a range of IP
• Analytics/cognitive software: various IPs, with Watson key to the future of IBM. And IBM now sells Watson only on the cloud
• PaaS, with Bluemix fast becoming the platform of choice for developers
• IaaS, IBM claims its IaaS business grew by double digits in FY15

Continued Focus on IaaS and Bluemix

IBM continues to focus on IaaS (Softlayer and IBM Cloud Managed Services). In spite of the dominance of AWS, IBM still believes the potential for growth is huge, given the low proportion of applications hosted on the cloud currently (IBM estimates 10-15%). Inorganic growth continues to be part of the IaaS strategy, in particular for hybrid cloud, with moves like the June 2015 acquisition of Blue Box for its OpenStack capabilities.

In line with this hybrid strategy, IBM also recently signed a significant agreement with VMware to deploy VMware technology in its cloud datacenters to simplify the integration between clients’ private clouds and IBM cloud datacenters. Also relevant is the acquisition last October of Cleversafe for Internet-based object storage (for storing relatively inexpensively unstructured data and media files).

With PaaS, IBM continues to expand the functionality of Bluemix, which now has ~150 services and is onboarding 20k new registered users a week. Of course, the model of Bluemix relies on massive adoption; it is relatively inexpensive and will not materialize into revenue flows before many quarters. But the importance of Bluemix should not be downplayed. In many respects, IBM has produced with Bluemix a disruptive approach with its financial and product power. This is great news for client organizations.

Watson IoT and the Weather Company

IBM has several priorities for Watson IoT:

• Continue to develop the platform in terms of functionality, including expanding on communication protocols, on data provided by devices, on gateways (for ingesting other sources of data), real-time data visualization. IBM is applying cognitive APIs to its IoT platform: the intent is to detect sensors that are transmitting abnormal data and of course, understand the cause for those abnormal data.
• Driving its IoT effort towards verticalization: with use cases in telematics for the automotive and insurance sectors, and client examples across industries. The recently announced IBM-Cisco partnership on IoT analytics is looking at situations where devices have limited access to connectivity (e.g. containers in boats) and focusing on providing analytics at the device level, rather than within the datacenter
• Blockchain technology is also in IBM’s IoT horizon. IBM is helping a Finnish municipality creating a decentralized database, based on blockchain technology, for registering data across forestry and logistics firms. There is a security element to the blockchain approach. However, the business case for blockchain (vs. a centralized registration system) was not made quite clear in this use case. Expect to see an increasing focus by IBM on blockchain technology in the near future.

The Weather Company is another cornerstone of IBM’s IoT strategy. IBM expects a major differentiator will come from the combination of weather data with all sorts of external and internal data, which will drive use cases for many sectors, including the retail industry. This clearly makes sense at a high level but it is not obvious why IBM needed to spend $2bn in acquiring the assets of the Weather Company, rather than partner with it. It is not yet clear if competitors of IBM will be able to access data of the Weather Company.

We expect to see specific offerings that leverage the Weather Company start to be launched before the end of FY16.

Cloud Video

This January IBM launched IBM Cloud Video Services (services, analytics and software), enhanced by the acquisitions of Aspera, Cleversafe, Clearleap and streaming video service Ustream. Like weather, video is one of the richest and fastest-growing data sources, with some sources expecting it to comprise 80% of internet traffic by 2019. IBM is looking to benefit from the increasing use of video:

• In the media & entertainment industry. IBM is combining in IBM Cloud Video Aspera (for sharing large files such as videos) and Cleversafe for storing large data volumes.
• By marketing departments: positioning Ustream and Clearleap to help marketing departments stream videos as part of events and create buzz. This is the next phase for IBM Cloud Video.

Integrating IBM’s Cloud Initiatives

IBM provided us with consistent messaging for its many cloud computing initiatives. It has been acting fast on cloud computing (as indeed in all its “strategic imperatives”), using acquisitions as development accelerators. This approach provides speed and is indeed helping to strongly differentiating IBM but it is also expensive and requires integration work.

IBM is aware of this challenge and is aiming to bring together its platforms. It has created a Cloud Platforms unit, initially focused on Softlayer and Bluemix. The rationale is that IBM clients start their cloud adoption with IaaS and then expand to other offerings including Bluemix and then Watson. IBM released a new console/portal for Bluemix in February and is progressing on integrating the portals and service catalogs.

No mention of GBS

However, there was no mention of IBM GBS in the event, and the extent to which IBM GBS is aligned with any cloud computing initiatives from other segments is not clear. That could be a mid-term focus in IBM’s reinvention.

By Dominique Raviart and Rachael Stormonth