IBM or Amazon Web Services? Place your bets, engines are running

Den Howlett Profile picture for user gonzodaddy November 6, 2013
Summary:
IBM is getting aggressive about the cloud infrastructure space.  A bold play or one that reflects market reality? You choose as we start to place bets on the future.

I received a notification from Bob Enderle about how IBM plans to push back against Amazon Web Services (AWS.) He says:

Amazon Web Services is a lot of things including one of the scariest threats to traditional IT vendors. What they are not is a marketing powerhouse and, as we saw with Apple who could dish it out but not take it, they are vulnerable to a focused marketing attack. IBM has the reputation and brand to hit AWS where it hurts and apparently they plan to do exactly that according to the linked ZDNet piece by Larry Dignan.

Larry used to be my boss on ZDNet and I'm confident he knows his IBM stuff better than most. On this occasion though he seemed hesitant, not offering a strong opinion one way or the other. He says:

The move is interesting since Amazon Web Services (AWS) recently won a deal to provide services for the CIA. IBM was against the AWS win. The other item to note is that IBM's aggressive anti-AWS marketing may just validate Amazon as a go-to enterprise vendor.

Indeed. While IBM capitulated shortly after raising a complaint against AWS over the CIA deal, you can be sure that IBM won't let this kind of thing pass again before taking action. The problem comes: how can IBM realistically compete against AWS in what is rapidly becoming a commodity market and where every startup and his dog call on AWS as their first port of hosting call?

Dignan thinks he has the answer:

As for pricing comparison's IBM's SoftLayer has the most AWS-ish pricing schemes. SoftLayer's pricing is transparent. IBM's other cloud calculators take a bit more work.

I take a slightly different view. Stripping out interest, tax, depreciation and amortization, Softlayer was touting annual revenue in the $300 million range in early 2011 with profits north of $105 million.  By the third quarter of that year, it was reporting quarterly revenue of $85 million and $34 million in EBITDA. That's healthy by anyone's standards although we don't have visibility into the details. IBM acquired SoftLayer for $2 billion. At the time, some think Softlayer was raking in $800 million in top line revenue. That is a little hard to believe but not totally out of the realms of possibility. More interesting is that EBITDA number.

Assuming IBM got the deal right, then they acquired something that dovetails nicely into their portfolio while significantly boosting their cloud 'cred.' Despite the intense competition coming from AWS, I can imagine the slide rules have already been waved over the Softlayer numbers to the point where IBM knows the extent to which it can flex pricing in order to win.

More important, it has done the right thing by keeping Softlayer as a separate business unit that can run under its own steam. So on the one hand it has a moderately sized, profitable asset that it can leverage into the enterprise through judicious advertising and brand management. This of course is a double edged sword because as Dignan points out, IBM's current position legitimizes AWS in ways that AWS itself could never buy into. So what's next?

Verdict

IBM needs to tread very carefully. It's advertising is brash with claims about how it outguns AWS that remind me to some extent of the way Oracle makes claims that don't always turn out to be wholly accurate. IBM itself has come under SEC scrutiny for its claims to 'cloud revenue.'

IBM will come under increasing pressure to man up over its champagne data center pricing. While it will argue security, security and reliability, the fact remains that many enterprises are looking to AWS for enterprise class services. Infor for example has bet on Redshift for some BI and data warehouse operations. Sources tell me that SAP HANA for BW on AWS has attracted 500 customer trials. When you can make easy choices on behalf of the customer, a solution becomes that much more attractive. Can IBM say the same when it is both solution and solution provider?

Amazon for its part will need to figure out what it wants to be. Is the enterprise petabyte scale offered by Redshift a foretaste of where it wants to be? Has the CIA deal accelerated plans to compete in the enterprise space? From this seat in the peanut gallery, I'm betting 'yes' and that the market's long time love affair with AWS will carry it through as the preferred low cost infrastructure provider of the future.

But then I'm not ruling out IBM's ability to squeeze costs out either.

In the end, it could all come down to a matter of perception. Do you want to use the roguish upstart AWS or are you happy with Big Blue's longevity?

Featured image via ZDNet

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