IBM, HP And Salesforce.com: A Week Contrasting Cloud Narratives

This week brought an interesting juxtaposition of events that illustrates the difficulty old tech IT suppliers face in transitioning to the world of cloud services, the distance two important companies, IBM and HP, have traveled on that journey and the disruptive power of cloud-centric firms like Salesforce.com . Cloud services delivered and consumed like a metered utility pose an existential threat to IBM and other old tech firms with business models build upon costly, proprietary systems and equally expensive operations and consulting services. However, I've noted that IBM in particular has no shortage of technology, expertise and infrastructure dedicated to cloud services and that senior management seems aware of and is addressing the threat, although the company's degree of urgency doesn't belie the danger. Events this week demonstrate the same can't be said of HP. Meanwhile the blowout earnings report of Salesforce.com, well on its way to becoming the fastest company to achieve $10 billion in revenues, dramatizes the fact that we're still early in the transition to utility-delivered IT.

Evidence of IBM's broad cloud portfolio was on display at this week's InterConnect event, brimming with news, demos and case studies, designed to highlight the not insignificant resources in IBM's vast enterprise actively engaged in building a future of cloud (and mobile) products and services. This Forbes column has a great summary of the announcements, and while I don't disagree with fellow contributor Ben Kepes that there was nothing "groundbreaking" like things one might see at AWS re:Invent, Google I/O or the OpenStack Summit,  the shear volume of announcements covering new services, data centers, partners and customers shows the company is slowly turning the battleship.

IBM's major commitment to scores of open source projects that are building the plumbing for future cloud services is off the radar of its C-Level customers, however the breadth of talks at InterConnect covering new apps targeting mobile devices and sensors (IoT), PaaS services (Bluemix, containers, DataWorks, Watson APIs) and hybrid cloud infrastructure, suggest that cloud-based projects and strategies are percolating up the IT management food chain to the management levels IBM has historically been most successful in wooing.

It's hard to get specific details about IBM's cloud investment and revenues, however it announced that cloud capacity at SoftLayer has doubled in less than two years and that it's opened five new cloud centers, on four continents, in the past five months. IBM's most recent quarterly earnings release showed that total cloud revenue increased 60% to $7 billion, with as-a-service revenue accounting for about half that. Sure, that's still less than 8% of total revenue, but sustain it for two or three years and extrapolate revenue losses in other legacy segments and it's not hard to see IBM soon generating 25-30% of revenue from cloud software and services.

In contrast to IBM, whose cloud business offers a glimmer of a silver lining amidst the secular decline in business, at HP the clouds are thickening. On top of reporting terrible first quarter results, with revenue down 11% from the same quarter three years ago and having dropped 12 out of the last 13 quarters, the company just kicked its cloud acqui-hire, Marten Mickos, out of the C-suite. Mickos was the head of Eucalyptus, an oft-overlooked alternative to OpenStack and VMware for building private clouds, but one easily integrated with AWS and thus well-suited for hybrid designs, which remain the most common enterprise strategy. Mickos immediately became HP CEO Meg Whitman's top cloud strategist and leader of its Helion organization creating some optimism about HP's cloud prospects, at least until he was unceremoniously reassigned to “customer engagement and advocacy,” a position that sounds one step removed from "spending more time with the family."

As if the chaos in HP's cloud leadership weren't enough, the company reported that revenue in its Enterprise Services segment, where cloud services must start picking up the slack from other declining businesses, dropped again, down 11% last quarter and almost 20% below levels in early 2013. Unlike IBM, which breaks out cloud revenue, the only specifics Whitman provided on the earnings call were to highlight new contracts with large enterprise customers like Alcatel-Lucent, Deutsche Bank and Symantec. Yet despite the hype about its OpenStack component, the Deutsche Bank deal is really a wholesale managed services engagement where HP consolidates and manages dedicated infrastructure in a dedicated data center, with a mere slice of Helion. In fact, even the cloud component will use a customized version of Helion's OpenStack-based service. In sum, it's the same sort of IT services engagements IBM, HP, CSC and others have feasted on for years and that are gradually being displaced by cloud services.

Of course, HP has much more urgent priorities than navigating a generational shift in IT architecture and infrastructure, namely splitting a $100 billion multinational and financially managing the nearly $3 billion, 50% hit to free cash flow due to separation costs and currency changes, a number that surprised analysts on the earnings call.

In contrast to HP's dismal earnings report, Salesforce.com's revenue explosion, with full year sales and operating cash flow up over 30%, was a fount of optimism. Granted, Salesforce is still focused on top-line growth and building a sustainable ecosystem, not profits, but with more than 2 million developers, 2,600 apps, and 2.8 million app installs through its AppExchange, the company is perfectly executing Apple's App Store playbook to become the enterprise app platform of choice.

This week's events illustrate both the opportunities and threats of the migration to cloud IT. In the time HP has wasted billions on acquisitions like Autonomy, EDS, 3Com and Palm trying to buy growth, Salesforce.com has grown to a market cap nearly three-quarters its size. IBM can successfully manage the cloud transition by sustaining its 50+% cloud growth, but on its current path the only thing post-split HP has to look forward to is more downsizing.