IBM says it’s tapping SoftLayer for more of its cloud biz


IBM(s ibm) is starting to consolidate more of its diverse cloud offerings, including its business role-specific SaaS products, around SoftLayer, the company it bought this summer for about $2 billion. At the time of the deal, IBM vowed to make SoftLayer the focal point of its cloud strategy and wants to show progress there.

“In a nutshell  we’ve moved several of our SaaS capabilities onto the SoftLayer platform and new things like our new Social Learning application — which is being used at Boston Children’s Hospital — are powered by the underlying SoftLayer platform for real-time video,” said Dennis Quan, IBM’s VP of cloud infrastructure services, in an interview.

Quan also noted that SoftLayer has added 1,600 new customers to the 21,000 it already had. But it was unclear how many of those new SoftLayer customers might have already been IBM customers. Clearly, net new customers to team IBM/SoftLayer would be better news than just shuffling existing customers from IBM to SoftLayer.

IBM also trotted out lots of facts and figures to bolster its cloud case — that it has invested $4 billion in more than a dozen acquisitions over the last 6 years, that it fields 37,000 cloud experts, etc.

That’s all fine,  but it’s unclear whether all those factoids will allay concerns over just how much IBM really does “get” the cloud in an era where Amazon(s amzn) Web Services is grabbing business not only from startups but in enterprise accounts as well. Amazon, much to IBM’s chagrin, won the $600 million contract to build the CIA’s secure cloud — a disputed contract that a federal court just upheld.  But, it’s not just Amazon. All the other legacy enterprise IT players including Microsoft(s msft), VMware(s vmw) and Hewlett Packard(S hpq) are spending big time to build out cloud services — so the race is on.

Meanwhile, IBM, more than most of those players, has a ton of long-time customers — including many still on mainframes. These companies may be slow to move to cloud but, perhaps worse for IBM, if they do move, it could be in a way that dings IBM’s bottom line even if they stick with IBM’s cloud.

In a note in which he downgraded IBM shares to hold, and cut his earnings estimates for the company, Barclays Capital analyst Ben Reitzes touched on such concerns. He wrote that IaaS and SaaS adoption often “substitutes for on premise hardware and labor, but there is a multiplier effect as well. Each dollar spent in public cloud arguably means that multiple dollars are not spent at multiple corporations to duplicate that capability on premise. That’s why rather small projections have an outsized impact and we believe the cloud is really driving the demise of hardware, services and software revenue throughout IT, including IBM.”  

And, it doesn’t help that the U.S. Internal Revenue Service is looking into how IBM reports cloud-related revenue. Asked for comment on that, an IBM spokesman would only say that IBM is still on track to hit $7 billion in cloud revenue by 2015.

IBM’s third quarter earnings call is slated for October 16. It should make for interesting listening.


David Mytton

If the legacy workloads are moving to the cloud then this sounds like IBM getting into that market with a compelling product. It might eat away at existing revenue with cost savings and changes in deployments but they’ll retain customers. Apple always say they don’t mind new products eating into existing product lines so this sounds like a good long term strategy for IBM, with the revenue losses being made up by new customers they can attract that previously wouldn’t have been appropriate for IBM.


I don’t think any of the “legacy” IT giants are in great shape in regards to cloud. However, IBM is better off in some ways and worse in others. I don’t think the cloud disruption in hardware will affect IBM that much. IBM only gets around 15% of their revenue from hardware now and most of that is mainframes which are probably not going to lose customers very quickly.

IBM gets most of their money from software and services, roughly 50/50. I think IBM’s software business will be fine. They don’t have the same risks that Oracle and SAP have. Most of IBM’s software is around analytics and there aren’t any competitors of the same caliber as workday and salesforce to go up against.

Where I think IBM could really lose a lot of money is in services. For example, I think all the IT outsourcing business is going to be displaced by the cloud.

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