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IBM bets its future on the cloud

Peter Griffin, Contributor. 13 October 2020, 9:57 am

It has been a fixture in the government and corporate IT space for decades, but now IBM is planning to break itself up, spinning off its IT infrastructure business so it can focus on cloud computing and artificial intelligence.

Big Blue will next year create a new publicly-listed entity that will run its managed IT infrastructure business, which currently generates around US$19 billion in annual sales, a quarter of IBM's overall business. 

Some of those sales are reflected in IBM's New Zealand business, which generated $258 million in revenue in 2019 and profit of $20 million.

It will be a lengthy and expensive separation process that will ultimately rack up an estimated US$2.5 billion in costs. But ultimately, the move is about jettisoning a shrinking IT business so IBM proper can focus on cloud computing and leveraging its Watson supercomputing capability and AI tools.

IBM has endured a decade of quarterly revenue declines as traditional IT projects move to the cloud and to IBM's competitors.

"IBM is laser-focused on the US$1 trillion hybrid-cloud opportunity," said IBM's recently appointed CEO, Arvind Krishna, who previously led the company's cloud computing division.

"Client buying needs for application and infrastructure services are diverging, while adoption of our hybrid cloud platform is accelerating," he added.

"Now is the right time to create two market-leading companies focused on what they do best. IBM will focus on its open hybrid cloud platform and AI capabilities."

The question is whether IBM has left its cloud play too late. It trails AWS and Microsoft as cloud providers and is seen as more of a niche player with expertise in hybrid cloud solutions - serving those organisations that have infrastructure and applications spread across on-premises equipment as well as cloud platforms.

Still, last year's US$34 billion acquisition by of Red Hat by IBM has given the company leadership in cloud software, particularly around Kubernetes and cloud-container management. It has an opportunity to leverage that capability while growing cloud services to rival AWS and Microsoft. 

We have seen these types of spin-offs before, such as with Hewlett Packard, which in 2004 revealed a plan to split into two entities HP and HPE respectively focused on the personal computer and printer businesses and technology services.

While the market received the move favourably as it was announced last Friday, IBM has a mountain to climb to gain market share in a competitive cloud computing market where other players such as Alibaba Cloud are also looking to increase their footprint.

IBM's bread and butter business in New Zealand is in managed IT infrastructure and major outsourced government and corporate IT projects. Its cloud business is relatively small compared to Microsoft with its Azure platform and market-leader AWS. With both of those companies recently investing in local infrastructure, Microsoft with an upcoming $100 million investment in data centres, IBM will need to leverage its hybrid cloud specialities and the Red Hat capabilities it now has.

A crucial factor is IBM's deep R&D capability that is producing advances in AI and quantum computing. That innovation could give Big Blue an edge against rivals as it seeks to leverage tools in the cloud.

 


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