IBM is having a Kodak moment. The erstwhile photo-industry leader was done in by digital's transformation of the imaging business. Now it’s Big Blue, another New York-based giant of industry that grew rich and fat in corporate America’s post-war heyday, that has to adapt to a paradigm shift. Businesses are ditching their multi-million dollar mainframes in favor of low-cost, highly efficient cloud systems developed by disrupters like Amazon and Google. IBM’s biggest move of late? On Wednesday it kicked off a round of layoffs that will likely see 10,000 or more positions cut, with more redundancies likely in the months ahead.
The question is just how small and lean IBM, still one of the country’s most important tech players and employers, needs to get as it looks to survive and thrive in the cloud comp
Eastman Kodak filed for bankruptcy in 2012 after dominating the film business for decades. The company, under a succession of leaders, was slow to recognize and react to the emergence of digital technologies that ultimately destroyed its market. IBM, though nowhere close to insolvency, is at a similarly perilous juncture in its history. Its corporate customers are shying away from purchasing and managing their own mainframes and servers -- big iron on which in the past they would typically have spent tens of millions of dollars. Instead, they’re embracing cloud-hosted computing environments on which companies can rent processing power and software on a monthly basis, as needed.
Pioneering much of this cloud technology is, wait for it, Google. It’s no stranger to introducing disruptive technologies that have taken down legacy tech giants. Microsoft’s Windows sales have been falling ever since the emergence of tablets and phones that run Google’s free Android operating system. The search giant has also introduced cloud-based productivity apps that poses a serious threat to Microsoft’s Office franchise. Now it has turned its attention to making cloud systems as efficient as possible. Its MapReduce programming model, which grew out of a seminal, 2004 internal research paper, is a key part of the open source Apache Hadoop framework.
Hadoop allows cloud providers to rope together hundreds, or even thousands, of cheap generic servers for data processing for customers in industries like finance, healthcare and engineering. It’s the type of work that in the past would typically have been done on expensive Unix servers or mainframes from IBM. Chief information officers “are now broadly comfortable with the technology and see it as a significant part of the future data architecture,” Deutsche Bank said in a recent report on Hadoop. The market for Hadoop and other so-called Big Data tools will reach $41.5 billion in 2018, according to International Data Corp.
Among the big names using Hadoop for data processing are Bank of New York Mellon, Cirrus Energy LLC and Western Union. While some companies run Hadoop internally, it's geared to hosted environments and is offered in that form by a growing list of private-equity darlings, including Cloudera, which is backed in part by Google Ventures. There’s also Hortonworks, which counts Yahoo tech whiz Jay Rossiter on its board, and MapR, also backed by Google.
As if Google wasn’t enough to contend with, IBM also has to face off against Amazon. Jeff Bezos’ company famously disrupted the brick-and-mortar retail industry with its massive e-commerce site. Lesser known, but equally key to its growth, is its Amazon Web Services cloud unit. AWS offers cheap, online computing infrastructure -- available for hourly rentals like some hot-sheet server farm -- for corporations and government agencies. The extent of its threat to old-line tech companies was made clear when the CIA, a longtime IBM customer, tapped AWS for a $600 million contract in 2013.
“Amazon is so far ahead of everyone else in the cloud that they can’t even see number two,” Daryl Plummer, a vice president at research firm Gartner, told International Business Times. “They are well ahead of IBM in terms of cloud adoption.” On Wednesday, Amazon rolled out a new, cloud-based email offering for corporations.
The cloud’s impact on IBM’s sales and bottom line is unquestionably dire. The company’s hardware sales were off a whopping 39 percent in the fourth quarter, with mainframe sales in particular down 26 percent. In an effort to reduce its dependence on hawking metal, IBM sold its low-end System x server business to China’s Lenovo Group last year for $2.1 billion. Also last year, in a deal that reflected the diminishing value of hardware, IBM actually paid Globalfoundries Inc. $1.5 billion to take its chipmaking business off its hands.
As it sheds hardware units, IBM is ramping up its own cloud efforts under CEO Ginni Rometty. It acquired privately held SoftLayer for $2 billion in 2013, and has made a series or smaller, cloud-related deals in the months since. Former SoftLayer CEO Lance Crosby on Wednesday said he was leaving IBM.
Beyond an acquisition war chest of about $8.5 billion as of the fourth quarter, the company is putting a significant amount of its $6 billion annual research and development budget toward the cloud. The company in 2014 received a U.S. record 7,534 patents, about 3,000 of which were related to growth areas like the cloud, mobility and analytics. “These are foundational technologies,” IBM Chief Innovation Officer Bernie Meyerson told IBTimes. “We have this incredible investment in R&D. It’s a genuine focus on fundamentals that I believe over the long haul will hold IBM in good stead.”
For now, however, it’s the short term that IBM and its employees have to worry about. IBM says its cloud business now produces about $7 billion in annual revenues, but that’s a small fraction of its $92 billion in yearly sales, most of which are tied to legacy hardware and services that will diminish as the cloud gains popularity. “The starting gun went off half an hour ago and the other runners are already half way down the track,” Gartner’s Plummer said of IBM’s cloud efforts.
Tech pundit Robert Cringely last week predicted that IBM would ultimately cut 26 percent of its worldwide staff, or about 112,000 workers, in the coming months as it adjusts to the cloud. IBM immediately dismissed the report as “ludicrous,” but there's no question the company needs to get significantly smaller than its current complement of 431,000 workers worldwide.
That process has begun. IBM on Wednesday started handing out pink slips to thousands of employees in the U.S. and other countries, according to union sources. “IBM needs to turn around the business and that’s going to take some guts,” Plummer said. “You’re talking about letting go of businesses that were the cash cow.”
Former IBM CEO Louis V. Gerstner Jr. described his successful efforts to turn around IBM in the mid-1990s in his book “Who Says Elephants Can’t Dance?” To compete in the cloud, and perhaps to keep her job, Rometty must prove they can also fly.