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IBM has been a laggard in the cloud market due to the following reasons:
- The boom in the cloud growth has been driven by growth in public cloud, while IBM’s stronghold is in the data center (or private cloud) markets due to its strong position in mainframe computers. IBM is estimated to have a 90% share in the mainframe market.
- While Amazon’s growth has been driven by AWS getting significant business from Amazon’s growing consumer business, Microsoft has been able to host most of its offerings on its cloud platform.
- One of the reasons for IBM to undertake the $34 billion acquisition of Red Hat was to strengthen its position in the $1 trillion hybrid cloud or cloud integration market, where IBM’s revenues have largely been flat.
In order to understand IBM’s position in the cloud market, we compare the company’s cloud revenues with Amazon’s and Microsoft’s cloud revenues. We have not included Google Cloud in this comparison, since Google does not report the size of its cloud business.
Comparing Cloud Revenues
- Total cloud revenues appear to be comparable across Amazon, Microsoft and IBM.
- However, the growth in cloud revenues appear to be the strongest for Microsoft and weakest for IBM. IBM’s cloud revenue growth has been declining and has been the slowest among peers.
- Part of the reason could be IBM’s overall growth, which is much slower than that of peers. The combination of slower cloud and overall growth has also resulted in contribution from cloud revenue beginning to stagnate for IBM.
In order to understand the weakness in IBM’s cloud business, we dig deeper into:
- contribution of cloud revenues at a segment level
- growth in segment cloud revenues versus that of the overall segment
- change in contribution from cloud revenues to segment revenues
Our note What Are IBM’s Key Revenue Drivers And Highest-Growth Revenue Streams? contains more details about IBM’s revenue streams.
- Cognitive Solutions Segment: Over the last two years (2016-18), Cognitive Solutions revenue from cloud grew faster than overall Cognitive Solutions revenues. In 2018, cloud revenues from the segment reached $2.6 billion (11.3% y-o-y) versus segment revenue of 18.5 billion (0.8% y-o-y). Cloud revenue contribution from Cognitive Solutions has stagnated, partly due to limited uptake of the company’s Watson platform.
- Global Business Services Segment: Over the last two years (2016-18), Global Business Services revenue from cloud grew faster than overall Global Business Services revenues. In F2018, cloud revenues from the segment reached $4.7 billion (25.2% y-o-y) versus segment revenue of 16.8 billion (0.3% y-o-y). For the segment, contribution from cloud revenue is already closer to 30%.
- Technology Services & Clout Platforms Segment: Over the last two years (2016-18), Technology Services & Cloud Platforms revenue from cloud grew faster than overall Technology Services & Cloud Platforms revenues. In F2018, cloud revenues from the segment reached $8.8 billion (22.1% y-o-y) versus segment revenue of 34.5 billion (-1.2% y-o-y). For this segment, contribution from cloud revenue is already over 25%.
- Systems Segment: Over the last two years (2016-18), Systems revenue from cloud grew faster than overall Systems revenues. In 2018, cloud revenues from the segment reached $3.1 billion (7.2% y-o-y) versus segment revenue of 8 billion (2.1% y-o-y). Cloud revenue contribution from Systems has declined due to IBM Z product cycle nearing an end.
We also note:
- Cognitive Solutions and Systems are two segments where the business is naturally amenable to cloud revenues due to the nature of segment offerings. Yet, IBM has not been able to achieve much traction with its cloud offerings in these segments.
- Even after removing the declining revenue from these two segments, revenue growth from the remaining segments come in at 22%, which is still well below the 45-50% growth rates as witnessed by AWS and Microsoft Commercial Cloud.
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