What Will IBM Do?
Back in the 1990’s, Lou Gerstner helped engineer one of the great turnarounds in corporate history. In just a few years, he took IBM from a cash hemorrhaging techno dinosaur on the brink of being broken into little pieces and turned it back into one of America’s most admired corporations.
To help facilitate its transformation into a services-led business, IBM made many strategic decisions but two of them arguably had particularly important impacts on the rest of the IT industry:
- IBM decided it would effectively cede the network equipment business to Cisco via a “win-win” partnership.
- IBM exited the enterprise application business and instead focused on getting ISVs to adopt IBM’s middleware stack.
A Vintage Strategy?
Most would agree that by tech industry standards these two strategies were very successful for a long time. However as we enter the second decade of the 21st century both strategies are also showing their age.
First and most importantly, IBM’s alliance with Cisco has come to a sudden and, at least seemingly to many in IBM, shocking end. For years the writing has been on the wall that the networking and Server/Mainframe worlds were on an inevitable crash course, yet IBM and Cisco still maintained publicly that they did not see conflict as inevitable. It was much to IBM’s surprise then that early last year Cisco launched a line of data center servers. At the time, most of the press ate up Cisco’s party line that this was about competition with HP, but I doubt that fooled anyone in Armonk, NY. Cisco’s server launch was was the tech industry equivalent of Pearl Harbor; it was a public declaration of war against the single biggest technology company in the world by an upstart competitor thousands of miles to its west. Much like the United States in 1941, IBM was unprepared for war with Cisco in 2009, but I suspect that it will have no choice to respond forcefully in the next year or so and its responses may well rewrite the networking industry map because, while IBM may not be fleet of foot, it is the equivalent of a tech super-tanker and once it turns and points its bow, watch out.
The other key strategic decision that IBM made, to stay out of the application business, did indeed help IBM develop a strong “ecosystem” for its middleware offerings, but it also provided Oracle with an uncontested path to consolidate the living daylights of the enterprise application space and that’s exactly what it did. Fast forward 15 years and Oracle has gone from a very small, but pesky competitor focused on a single software product (databases) to a much larger and well diversified competitor with total software revenues just 10–15% less than IBM’s. What’s more, through it’s acquisition of Sun, Oracle gained control of Java, the key technology underpinning much of IBM’s middleware stack and it also gained the ability to sell an entire “stack” of both enterprise data-center software and hardware, something that arguably only IBM could claim before . It’s hard to see how IBM just continues to sit back and let Sun consolidate the enterprise application space, yet getting into that space would violate IBM’s detente with many smaller ISVs.
Thus IBM enters 2010 with two huge strategic problems on its plate: 1. How does it respond to Cisco’s flagrant attack on its data-center turf. 2. How does is deal with Oracle’s continued expansion within enterprise applications, as well as its rapid emergence as a legitimate “soup to nuts” IT provider.
Your Move Sir
At a high level, the enterprise tech industry, ex-Microsoft, is now consolidating around 4 $100BN+ market cap companies: CSCO, HP, ORCL, and IBM. All of these companies, except IBM, have recently made major strategic moves with HP acquiring EDS and 3COM (largely in an effort to catch up to IBM and Cisco), CSCO moving into servers (in an effort to take markets from IBM and HP), and ORCL acquiring Sun (in an effort to compete with IBM and HP).
IBM, the biggest and most established of them all, has arguably yet to make a major move but strategically it appears as though it may be forced to do something big soon. For example, it could bring the fight to CSCO’s heartland by acquiring Juniper or just head-off Cisco in the data center by acquiring EMC. Then again, maybe it will take on Oracle and acquire SAP. I have no idea what IBM will do, but I do know there are a lot of smart people at IBM and I can’t believe they are very happy about the way the playing field shifted last year. Perhaps they’ll do nothing but double down on their services business, and wait for their competitors to be tripped up by their overly ambitious expansions, or maybe they will open up a case a whoop ass and make some stunning moves of their own. Whatever they do it will be fun to watch because IBM is still the super-tanker of enterprise IT and whereever they go they are guaranteed to leave a very big wake.
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The thoughts and opinions on this blog are mine and mine alone and not affiliated in any way with Inductive Capital LP, San Andreas Capital LLC, or any other company I am involved with. Nothing written in this blog should be considered investment, tax, legal,financial or any other kind of advice. These writings, misinformed as they may be, are just my personal opinions.