What Does the Soaring Cloud Business Mean for HP and IBM?

Cloud computing concept with copy spaceFirst, the good news. The cloud market will enjoy double-digit growth over the next three or four years. In dollar terms, most of those hundreds of billions will be spent on SaaS. But in terms of growth, enterprise spending on cloud architecture and services is expected to increase at a higher pace: 30%, maybe 35% over the next three years. In this case, don’t follow the money, follow the demand.

The bad news? The equal and opposite reaction is that sales of servers, storage and network equipment are in decline. That’s a problem for HP, IBM, Oracle and Cisco as businesses start replacing their hardware and data centres with cloud services.

It gets a little worse. As these big vendors try to recoup revenues by introducing more robust software and services, they have a sobering profitability problem. Hardware profits are around 15%, while services profits are closer to 7%. To replace revenue lost in the declining hardware business, they’ll have to generate twice as much revenue in services.

Of course HP and IBM could see this happening, but are they far enough ahead of the game to respond?

Last October, HP CEO Meg Whitman divided the company in two, creating HP Enterprises to “define the next generation of technology infrastructure, software, and services.” The fourth quarter results she announced the next month showed a miss in year-over-year revenue.

Let’s be patient, though. It takes a little time to define a generation.

Similarly, IBM is rebalancing itself from a legacy hardware and software company to a provider of cloud services, business analytics and mobile solutions. In October, CEO Ginni Rometty scrapped “Roadmap 2015”, a commitment made by her predecessor to hit $20 earnings per share by 2015. Three months later, IBM’s fourth quarter results were announced, falling 12% short of last year’s numbers and short of analysts’ predictions. Year-end revenues were down 7%.

What is encouraging is that their revenues in cloud services, business analytics and mobile are increasing. Still, Rometty expects 2015 revenues to be flat.

The one to watch is Oracle. Last week, none other than Chairman, Chief Technology Officer and Hawaiian island owner Larry Ellison announced the fifth generation of Oracle Engineered Systems. Previous releases of these integrated hardware, software, networking and storage bundles offered customers high performance. This time out, Oracle has aimed for a low price. Maybe that’s what the industry is looking for: complete sets of enterprise technology products and services that are easier on the budget.

While the Engineered Systems are designed to complement Oracle’s cloud offerings, they are not a “cloud-first” solution. Ellison sees the debate over cloud versus on-site systems a little differently. “Clouds are going to get bigger, clouds are going to get more popular…but data centers are not going to go away.”

The question is: will price, innovation or brand loyalty win out? Who will have the best story to tell at the end of the year?

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About johnjblair

John J. Blair is the President and CEO of Blair Technology Solutions responsible for technology, innovation, and providing customized IT strategies to strengthen operations for enterprises across various industry verticals. His reputation is renowned as a results-driven leader, whose effective team-building skills and strategic development expertise have helped his clients achieve IT business success with cost-effective solutions. With almost 35 years in the IT industry, John has established a highly skilled team with expertise in providing personalized and customized IT solutions to a variety enterprises across Canada. Under his tutelage, his company is committed to customer service excellence, providing IT professional technicians to support the ongoing growth and needs of any IT department. Always on the leading edge of emerging technologies, John entered into the Managed Services field early and developed a Managed Services division under the Blair brand. John holds a Bachelor of Commerce from Concordia University and has many industry certifications.
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