Perhaps the most important rivalry in IT is the one between Red Hat and VMware. If the future is the hybrid cloud (which it is), and if realization of that future involves the creation of a unified hybrid-cloud platform for development and deployment (which it does), then these are the players who could provide it. Red Hat was acquired by IBM, who released its first consolidated earnings last night. The numbers were good, but to decide who’s ahead in that great strategic rivalry, we need to look deeper.
IBM beat modestly on revenue and EPS, and guided higher than expected for the year. Red Hat was up 24% year over year, and that was a major contribution to IBM’s position overall. However, IBM’s own stuff, including its AI and cloud, was also up. Even this tantalizing summary raises some interesting questions, the second-most significant of which is whether Red Hat’s growth was in any way related to the IBM acquisition. The most significant, of course, is whether IBM actually bought Red Hat for strategic reasons it’s prepared to develop.
In their earnings call, IBM’s Jim Kavanaugh, Senior Vice President and CFO, said “the next chapter of cloud will be driven by mission-critical workloads managed in a hybrid, multi-cloud environment. This will be based on a foundation of Linux, with containers and Kubernetes.” This is as good a summary of the real-world IT future as we could hope for. IBM’s past success was generated by two things, a perception that it had the best strategic grasp in the industry, and its influence in major accounts. IBM’s decision to essentially exit the hardware space (except mainframes) reduced its influence in both depth and breadth. Their lack of a clear cloud strategy was obviously proof against their strategic grasp. Lose-lose. Maybe they’re getting that back.
IBM has clearly made strides in exploiting Red Hat, not just milking it for revenue. Their entire cloud strategy has turned to focus on OpenShift. They’re introducing Red Hat into professional service relationships, with more than double the number of engagements versus the last quarter. This statistic bears out my limited data on the source of Red Hat’s upside this quarter; most of IBM’s initiatives have only started to bear fruit, and so the majority of their wins in the new hybrid cloud arena are not going to be seen till later this year. I think this is why IBM has been cagy regarding future guidance; they offered an “at least” EPS upside in the earnings call.
Another interesting data point from the call is that their cloud revenue was up 23%, and IBM says they’re focusing on the “financial cloud”, targeting a market segment where IBM has largely retained its strategic influence. This indicates that IBM actually has a plan to maximize near-term symbiosis while they prepare more strategic options.
The likely vehicle for that is the “Cloud Pak”, which IBM announced last August. The package was always intended to be a form of a cloud PaaS, an ecosystem that could support unified hybrid cloud development. It was missing any realistic model of hybrid cloud deployment and management until the Red Hat deal, and OpenShift has now filled that in. It would be premature to say that IBM and Red Hat had created that unified platform for hybrid cloud that I’ve been saying we needed to get, but they obviously intend to do just that. To quote the call, “Cloud Paks bring together IBM middleware, AI, management and security, and Red Hat’s OpenShift platform.”
They actually could do more than that, though that’s plenty. In fact, what they “could” do is both an opportunity and a risk for IBM.
The opportunity side is that Cloud Paks now become an ecosystem-as-a-product offering, something that CIOs can look at as the total solution to their hybrid cloud challenge. The early focus on financial services, which plays as I’ve said to IBM’s strategic influence strength, means that Cloud Paks are likely to get early traction, which means that they could become a de facto approach to hybrid cloud unless somebody else (VMware, obviously, would be a candidate) makes a major and successful counterplay.
Another opportunity for IBM is that Red Hat’s software is often integrated with open-source applications, both horizontal and vertical, through partnerships. It would be easy for IBM to leverage Red Hat’s position here to create a quick set of Cloud Pak application solutions. These could then seed Cloud Pak through a broader market, perhaps even broad enough to overcome IBM’s loss of strategic breadth resulting from exiting most of the computer business.
The single most important theme I get from the call is that IBM is now seeing the hybrid cloud as the virtual computer of the future, and they are on the way (via Cloud Paks) to defining its architecture. Everyone can have one, use one, depend on one. That’s the subliminal message, and the message that creates the biggest upside for IBM. If they play this right, then they own hybrid cloud.
Which opens the question of the “risk side” of this. If IBM boots this, then they discredit themselves, discredit Red Hat, and probably end any chance of being a leader in hybrid cloud, or much of anything else. This is the ultimate desperate toss of the dice, the all-in bet, and there’s a very good reason why it might not work…NIH.
Cloud Paks are credible hybrid frameworks for one reason, which is OpenShift. While there are things IBM can bring to the table to enhance them, the technical platform of Cloud Paks is either OpenShift or it’s irrelevant. Right now, OpenShift is the last in the list of Cloud Pak components; “IBM middleware, AI, management and security, and Red Hat’s OpenShift platform.” Functionally, it’s the piece that matters, and the question is whether IBM’s organization can accept that. All the IBM contributions to the Cloud Pak universe have been part of it, and of IBM, for a long time. They didn’t shake the earth in that period. What’s new is OpenShift, and that’s what needs to be the focus for IBM now.
Not Invented Here (NIH) has killed more M&A than I can remember, and crippled even more. Alcatel and Lucent fought each other more than the competition for years and years after the merger, and as a result lost some monumental opportunities. IBM and Red Hat can’t afford that kind of relationship.
Here’s proof positive of that risk from the call transcript: “As I mentioned, IBM’s Cloud Paks include the OpenShift platform, and so as we sell Cloud Paks, this drives additional Red Hat OpenShift revenue. The transactional nature of Cloud Pak sales accelerated the revenue growth of OpenShift and total Red Hat, reflecting IBM’s seasonally strongest quarter.” See how Cloud Paks are driving OpenShift revenue? Baloney. It’s OpenShift that can make Cloud Paks the platform of the future.
The primary speaker for IBM on the call was their CFO, which isn’t usually the case for the “technical meat” of earnings calls. We could read this as a positive; CFOs are interested in the bottom line, and because they’re not on a product team, they suffer less from NIH. We could also read it as a negative; the CFO might be talking because none of the product-line executives were willing or able to. The implications of that don’t need to be laid out.
I’d like to see this work for IBM and Red Hat, because I’ve worked with IBM and its gear for my entire professional career and because I think they have a shot at giving the industry what it needs, which is a total hybrid cloud platform solution. They have a shot, too, unless VMware gets itself moving in a total strategic direction.
