A review and analysis of IBM Test & Development Cloud, and opportunities

IBM finally GA'd its Development & Test Cloud last week: http://www.ibm.com/cloud/enterprise
In addition to a public cloud service offering, IBM is also providing an option to deploy such an infrastructure-as-a-service model on-premise (private cloud): http://www-935.ibm.com/services/us/index.wss/offering/midware/a1030965

I believe Cloud Computing is critical to IBM’s future growth.  It may even be the only solution to declining revenues in some of IBM’s business segments.    I will share some opinions below after a quick solution review.

The IBM cloud is built on Rational & Tivoli components.  Rational provides design, development, testing, and application lifecycle management & governance, and Tivoli enables automated resource provisioning & service management (self-service request management, performance monitoring, usage metering, billing):

IBM Test & Development Cloud

I think there is an opportunity for IBM’s Cloud to be a huge success for the following reasons:

Virtualization
For IBM public cloud, KVM powers the virtualization layer.  The on-premise solution is virtualization technology agnostic: KVM, PowerVM, and VMWare.

• In a previous post, I made the observation that most large enterprises cannot standardize on a single virtualization infrastructure.  They have to deal with multiple virtualization technologies.   While there seems to be some gaps in IBM’s on-premise solution (ex. no Xen or Hyper-V support), I think IBM is in a much better position than VMWare or Oracle to unify management across different virtualization technologies.   This would be a a big competitive differentiator and value to the enterprise.
• Secondly, in the world of Cloud Computing, vendors are primarily focused on x-86 platform.  All other platforms are ignored.  If IBM can extend their public cloud to support pSeries and maybe even zSeries (mainframe-as-a-service ?), this would also be a huge competitive differentiator.  This would allow more workloads to be moved to the Cloud and benefit customers.  As an example, customers would be able to move some of their mainframe batch jobs to the Cloud to save MIPS.

OS Coverage
The initial set of OS images are limited. In the initial public offering, IBM only offers Red Hat & Novell images.  There are no Windows images (yet ?).  I think it is just a matter of time for IBM to offer Windows images on their public cloud.

As I said above, the on-premise solution can support AIX images now, and maybe zOS in the near future (why not?).  If IBM were to offer AIX & zOS VMs in the Cloud, it would not only be able to realize a new revenue stream and possibly revive that segment, but keep customers from migrating to other platforms.  I think this could open new opportunities.  The challenge is how to do this in a balanced way without cannibalizing the existing customer base, and creating incentives for IBM sales teams to execute after those opportunities.

Pricing
IBM’s cloud “infrastructure pricing” is competitive to AWS.  However, for IBM software, there are different licensing & subscription options:

Customer scenarios	Software	Infrastructure
	Charge	Charge
You "bring your own IBM license" ("BYOL")	Prepaid for software license	Per VM per hour
You own an IBM software license and can use the pre-built IBM images in the portal catalog
You "pay-as-you-go" ("PAYG")	Per Image per hour	Per VM per hour
You choose the desired software, accept the license terms online, and receive a monthly usage bill
You "bring your own software and licenses"	Prepaid for software licenses	Per VM per hour
You bring your own software or software for which you hold valid licenses and install them on the servers you provision
You want to test "pre-release" software	No charge for restricted use	Per VM per hr
From time to time, pre-released software images will be made available on a temporary basis for test (non-productive) use
You are an eligible ISV/SI developer	No charge or by usage	Per VM per hr
You can use selected IBM "development use only" ("DUO") software for development, test, proof of concept and sales demos on the IBM Cloud
Options available vary by software package.

IBM hasn’t published detailed pricing on their software subscription pricing (PAYG), but it would be a fair to assume it will be less than what they charge on Amazon.  [N.B. on AWS, IBM only offers a very small subset of its software primarily targeting ISVs for development & testing as opposed to enterprise customers.]
Now, let’s talk about the market and the opportunity for IBM.

Market maturity, opportunity & customer addressability
Since the recession a couple of years ago, Cloud Computing has gained more momentum in the enterprise.  IDC estimates spending on Cloud services in the range of $42B by 2012. 
If you look at early Cloud providers such as Amazon or Google, while I have enormous respect and appreciation for the innovation and technical design and delivery of the services, I argue they haven’t been able to gain traction in the enterprise space.  The only exception is SalesForce.com [take a look towards the bottom of this post.].  They have done well, because the founder had an enterprise software background.

As an example, if you look at Google’s enterprise business in 2009, it booked around $209M (that includes revenue from their search appliance + Google Apps).  In a previous post, I estimated AWS revenue to be around $200M / year.    If you compare these numbers with IBM SWG, MSFT or Oracle software revenues, I think it would be easy to conclude they haven’t captured a big marketshare in the enterprise space.  I think this is fundamentally due to their lack of business relationship, partnerships, and investments in sales & marketing.

So, I think this is a good time for IBM to enter the market.

In terms of opportunity and access to market, IBM is a global company with delivery centers around the world. It has business segments that align well with customers considering or transitioning to Cloud Computing. To understand the potential opportunity for IBM better, let's look at some numbers. 

IBM Development & Test Cloud is an offering from Global Technology Services (GTS):

The numbers above are in millions.  In 2009, GTS revenue was around $37B with a gross margin of around 35%.

There are several business lines in GTS:

• Strategic Outsourcing (SO) – This segment offers outsourcing services to commercial and public sector.  In 2009, IBM’s SO revenue was $19.3B.
• Integrated Technology Services (ITS) – This segment offers different IT services (project based) from IT strategy –> middleware services –> infrastructure services.  In 2009, ITS’ revenue was $8.7B.
• Business Transformation Outsourcing (BTO) – This segment focuses primarily on business process outsourcing (BPO), and “IT transformation” services.  In 2009, BTO’s revenue was $2.2B.
• Maintenance – This segment offers product maintenance and support services.  In 2009, GTS maintenance revenue contribution was almost $7B.

IBM has C-level relationships in Fortune companies in all industries.   Some of these companies have already entrusted IBM with their IT infrastructure and mission critical systems.  This puts IBM in a huge advantage over other service providers. 

As SO contracts are renewed, and as ITS engages customers in IT strategy and middleware services, IBM should also be able to harvest opportunities for both private cloud as well as public cloud. 

[N.B.  The cool thing about Cloud services is that they are not like SO contracts (i.e. fixed).  Once you sign up a customer, as long as you’re meeting your SLAs, and manage the offering in terms of features/capabilities, you should be able to maintain a profitable recurring revenue stream (i.e. reduced sales & marketing costs, reduced infrastructure costs through efficient multi-tenant delivery).]

Consider this....If IBM were to convert 10% of 2009 GTS revenue from existing base to Cloud, let's say over the next 3 years, they would make about $3B in Cloud revenue by 2013…Now, that’s revenue & marketshare.

Here is another reason why Cloud could help IBM.    IBM Software Group booked $22B of revenue in 2009:

SWG revenue breaks down as follows:

• Cross-brand middleware:  This is combined revenue from WebSphere, Tivoli, Lotus, Rational, Information Management worth over $12B.  IBM doesn’t break down the revenue by brand. 
• Other middleware: This include legacy middleware such as CICS & IMS.  IBM made over $4.6B there.
• Operating Systems: This includes software such as zOS, AIX, AS/400, & TPF.  In 2009, the OS revenue was > $2.1B.  This is dependent on how IBM’s hardware group (Systems & Technology Group) performs.
• Product Lifecycle Management (PLM): I think it is a joint venture with Dassault Systems.
• Other: This includes all IBM Software Group services (aka Lab services).  In 2009, the revenue for this part was $1.4B.

As you can see above, except for lab services, x-brand middleware is the only segment that’s been reporting growth. There are two reasons for this:

• Acquisitions: IBM has made some big acquisitions in this space: (i.e. Cognos for $5B, FileNet for $1.7B, Sterling Commerce for $1.2B…).  Acquisitions help IBM book new business.
• Renewal rates: This is recurring revenue from existing customers.  I was told by a software sales exec, average renewal rates for a successful enterprise software company is around 98% (depending on the product, maturity, etc).   So, this is helping IBM SWG maintain revenue and marketshare.

I haven’t heard of any new notable products out of SWG lately.  So, looking at the above, I think it is fair to conclude acquisitions have been the primary vehicle for growth in SWG.  So, with Cloud Computing, SWG  should be able to develop a new revenue stream.

So, for SWG, I think Cloud Computing can offer the following benefits:

• Use Cloud as a sales & delivery channel for SMB.  This would be very helpful to IBM.
• Offer a viable alternative to clients looking at other sourcing options
• In the beginning, I think Cloud can offer a parallel revenue stream for SWG particularly for WebSphere, Tivoli, and Rational
• Compete with other private cloud vendors and public cloud service providers
• Partners and alliances help IBM realize almost a third of its total revenue.  SWG gains a lot from these GSIs and ISVs.  SWG can offer new solutions to these partners to help grow its revenue.  Also, help ISVs cloudify their solutions.

All of the above should help IBM sustain growth.

[N.B. There is some difference between private and public clouds in terms of revenue.
Software is a high margin business.  In the case of IBM SWG, the gross margin for SWG was 86%.  The reason for this is software licensing & maintenance costs.  With public clouds, this is radically different. It is a volume business.  For IBM to be profitable in the public cloud space, they must sign up more and more customers.  On the private cloud side, they should be able to do better.]
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IBM is building a good story here.  From SWG side, with WebSphere CloudBurst, the recent acquisition of Cast Iron, and Rational Software Delivery Services, IBM is putting together all the asset to enable Cloud Computing for the enterprise.  On the GTS side, IBM is in a good position to create opportunities, and work with enterprise customers to help transition to Cloud.

Finally, from a competitive perspective, in the enterprise space (as opposed to consumer space), I don’t think IBM needs to worry too much about AWS or Google.  As long as IBM prices its public cloud offerings from GTS, Lotus, etc competitively, and maintain a close relationship with enterprise accounts, I think they should be able to do OK.

In the enterprise space, I think SWG should keep an eye on Oracle and VMWare on one side, and MSFT on the other.  GTS will have to worry about the usual competitors such as CSC, HP/EDS, etc...