Financial presentations, the things that companies give to Wall Street analysts at conferences, can represent a very useful way of gathering insight on companies and markets. Unlike earnings calls, which have to follow a pathway that’s heavily influenced by regulatory oversight, conferences can be free-form and often more revealing of current thinking and future directions. IBM is a tech company that’s stood the test of time better than almost any other, and in today’s world seems to have anticipated a number of very important developments. They made a presentation at a UBS Global Technology Conference in November, and there are some highly relevant tidbits revealed there, which we’ll now explore.
I think that the key to the whole IBM position is the concept of leveraging platform multipliers to create financial success. Jim Kavanaugh, IBM’s CFO, made the point very early that “platforms carry a very attractive multiplier effect of every dollar that you land on a platform we get $3 to $5 a software, $6 to $8 of services overall.” Hybrid cloud and Watson are platforms, as IBM sees it, and I think it’s pretty obvious that both of them have been paying off for IBM in 2023.
This, of course, raises the question “What is a platform?” and the term (like many in tech) doesn’t always get a single definition. My own, which I think is consistent with IBM’s, is that a platform is a technology foundation on which applications, services, and experiences can be built. The key thing about the platform concept is the “foundation” notion; it’s the bottom layer of a multi-layer structure. By promoting a platform effectively, a company can gain control of the things that build the higher layers, and as IBM has done, raise revenue at each step up the ladder. In today’s world, a platform is most likely to take the form of middleware, a toolkit built above the operating system, running on generic hardware, and exposing valuable features in the form of APIs.
It’s useful to contrast this with the way the Street describes Cisco’s strategy, or that of other network or IT vendors. Most often, particularly for network vendors, you hear about a move to a subscription strategy, which essentially says that you’re selling the software elements as a recurring payment rather than a one-off payment. There’s a broad move in this direction, but it’s a move that both people and companies resent because it raises their cost. A platform strategy says that you first create a value source in the form of a platform, a kind of middleware set, and then you start to exploit it by building both applications and services on the platform framework.
This to me suggests that vendor “subscription” strategies are inherently self-limiting. Once you’ve converted everything from one-off to subscription there’s no way to increase your revenue. That suggests that vendors, particularly network vendors, need to promote a platform, which may well mean turning their software model into something that is based on a platform. Most often that could be done by redirecting what’s already offered in some way.
The next point relates to the platform position. IBM guides their M&A based in no small way on their platform strategy. You can buy companies to create a new platform, augment a platform you have, or build onto one of your platforms. This approach keeps your strategy from going off in too many directions; it lets your acquisition team spot opportunities that are symbiotic rather than divisive.
I think that Red Hat and hybrid/multi-cloud are an example of acquisition symbiosis. Red Hat created a platform for the cloud mission. While IBM presents the multi-cloud concept as being inevitable and their decision to tout their credentials there as exploiting that, it’s also true that IBM simply isn’t big enough in the cloud to be the exclusive cloud provider for giant enterprises. IBM, remember, has its greatest success and most strategic account control in those giant enterprises, past or current mainframe customers. They need to promote and not just exploit multi-cloud or they don’t really have a cloud story.
That doesn’t mean Red Hat wasn’t insightful. Enterprises wanted the cloud as an agile front-end to the data center, not as a new place where everything ran. IBM saw that, probably because they had the strategic engagement with customers to drum it into them. They also saw that to make that model work as a platform, they needed the kind of software that could bridge cloud and data center, and do so in a way that supported any public cloud, meaning multi-cloud. Red Hat and VMware were the only two companies that could do that, and IBM saw more symbiosis with Red Hat because it was also a provider of application software that could then leverage the hybrid/multi-cloud platform that Red Hat itself created for IBM.
The fact that IBM has been successful with a platform approach is in part responsible for my views on the Broadcom deal with VMware. A conglomerate business model, lacking any real symbiosis among the elements, is simply a defense against commoditization. You can create efficiency by combining the administrative elements of all, to improve margins, but where do you go from there? Would IBM, who has been a power in information technology since the 1950s, have been able to hang onto their laurels as a major strategic player seventy years later, as a simple conglomerate?
I remember the mainframe computer, and IBM owned that concept. They were also strong in the minicomputer space, and it was the IBM PC that made the personal computer into the driver of our most recent wave of worker productivity investment. IBM’s position in networking, the System Network Architecture or SNA, was the strongest and most secure network model devised, and we’re still trying to glue some of its features and capabilities onto our networks today. But IBM has moved from hardware to software platforms. Is that what it takes to live in IT for seventy years?
That’s a question I think every vendor has to answer, in some way or another. Some new players have been successful by finding a niche, but niches don’t last forever either. The market is changing, and evolutionary opportunities don’t create dynamic market conditions. Do we believe that AI will be the next wave? How many next-wave claims, large or small, have been touted? Could the right strategy for the future be the creation of platforms to match the conditions of the time, and the agility to jump from platform to platform as times change be the thing that gets you to that future? IBM seems to offer a possible proof point.
