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As its legacy software stalls, IBM cloud service revs engine

IBM's cloud service, thanks to SoftLayer and subscriptions, is making some headway but hasn't made up for lagging legacy software sales.

IBM's newest Web-based software has made strides into enterprises, but not enough to counter the slow decline of...

some of its legacy applications and tools.

The company's recent financial statement showed overall software revenues dropped 10% to $5.8 billion, or 3% adjusting for currency.

The dip in some of the core software products follows the more dramatic declines that IBM has seen in its server hardware, most notably the Power series of servers, although revenues for that server finally appeared to stabilize in the most recent quarter. Revenues from Power Systems were only down one percent for the quarter, compared with the same period last year.

"I was expecting the software group's performance [to perform as badly this year as IBM's Systems and Technology Group did last year]," said Geoff Woollacott, software and BI practice manager, for Technology Business Research, Inc., (TBR) in Hampton, N.H. "The revenue decline has been more severe on the infrastructure-management side than the applications side, but both are down."

The company's middleware products, which include WebSphere, Information Management, Tivoli and Rational tools, were down 7%, or flat adjusting for currency. Operating systems revenues plummeted 17%, or 9% adjusting for currency.

TBR projects a 7% decrease in overall software revenues for the current quarter.

Even sales of DB2, long a stalwart in IBM's enterprise software lineup, declined 4% in 2014 and is projected to decline 8% in 2015, according to TBR.

"Out of all the declining product portfolio, [DB2] is one of the crown jewels," Woollacott said. "But there is a lot of legacy investment tethered to it, so IBM should be able to support and maintain it for a long time."

One reason IBM's legacy applications are down is the growing number of businesses preferring the greater convenience of acquiring IBM's Web-based software including its SoftLayer cloud environment and Bluemix development environment through subscription plans offered by the company, most notably its cloud unit.

[Users] want all the managed services they were getting from IT outsourcers, but they want them in a cloud style.

Carl Brooks, IT analyst, 451 Research

Users want to choose software on a project-by-project basis and not be locked into proprietary platforms with longer term licensing deals such as those typically offered through IBM Global Services.

"[Users] want all the managed services they were getting from IT outsourcers, but they want them in a cloud style," said Carl Brooks, an IT analyst at 451 Research based in New York. "And they want them tomorrow -- not a week from now, they want it on demand and they want someone to hold their hand yet still feel like they are in charge."

IBM cloud service moves quickly

IBM's cloud wins in the past few months, which includes Marriott, the U.S. Army and Coca-Cola Amatil, can be attributed to the IBM cloud unit's ability to respond faster to market opportunities, along with the ability to build corporate data centers significantly faster than IGS via SoftLayer.

"If you take a business that can provision infrastructure in minutes and hours, and you introduce it to IBM's enterprise pipeline with all this pent up demand, you will sell a lot of it and quickly," Brooks said. "This is what happens when you can move at the speed of the market."

One IT professional who is engaging with IBM to expand his company's data center believes it should be a priority for IBM to get more of its software portfolio to take full advantage of SoftLayer, thereby  giving its cloud unit more leverage with users.

"Global Services is a pretty slow-footed organization, it takes them a lot more time to line up all the pieces and put them in place," said an IT professional with a large Minnesota-based manufacturing company. "It could take them the better part of a year to set up a data center where [IBM's cloud unit] can do it in less than a month."

What should bolster the competitive chances of bread and butter software products such as DB2 and Websphere, are versions that better exploit SoftLayer. The company however, has not clearly spelled out its plans to deliver such versions.

"They haven't taken a hard core approach yet to making of their core products hybrid [cloud exploitive] yet," said Frank Dzubeck, a consultant in Washington, D.C. "I think they have been working on it for a while but it is a hard thing to do. So you could see them taking some hits until they get that done."

Some believe IBM may decide not to deliver fully exploitive versions of some of its core software offerings. IBM may prefer to manage some of those properties down and develop or acquire offerings born on the Web as it did with the Cloudant database as a service buy last year and Compose, another database as a service startup.

"When you move, you box up the stuff you are keeping, but there is a bunch of stuff you put out for a yard sale," TBR's Woollacott said. "IBM could retire and milk the maintenance base on some of those big legacy tools apps and just support it for a few years."

What may hold the IBM cloud service back is the internal competition with IGS, some analysts said. IGS still accounts for the bulk of IBM's overall revenues, offers similar managed services to the cloud unit, but can't move nearly as fast.

"The 18-month app dev lifecycle is gone, we are talking six months or less now for developing a Web-based app and launching it," said one analyst. "Under the traditional [IGS] sales model, six months is still in the wine-and-dine, getting to know you stage with users. At that point you are just switching from martinis to Scotch."

Ed Scannell is a senior executive editor with TechTarget's Data Center and Virtualization media group. Contact him at escannell@techtarget.com

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Will IBM's cloud service be Big Blue's saving grace?
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I will say this: From an article I read yesterday, IBM is making huge strides in the cloud market just from a patent perspective. If IBM continues to get cloud patents, it might just take them over the top. 
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Thanks for pointing that out, Michael. IBM has lead the industry in patents approved just about every year for the past couple of decades or more. Not sure how much they are making yearly from them, but it is a big $$$$ number. But that is just supplementary money, they need to grow revenues from their long-time legacy applications. Otherwise they will never compensate for the server hardware losses they have incurred the past three years. Although just in the past quarter the Power series numbers appear to have actually inched up year over year.
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