IBM (NYSE:IBM) is in the middle of transitioning from a traditional hardware business to a multifaceted cloud computing company. The cloud computing market is experiencing tremendous growth, but IBM still has lots of work ahead.
Same IBM, new focus
Cloud computing isn't new for IBM. The company has made about 15 acquisitions equaling nearly $7 billion in order to shore up its opportunities in the space. But in its most recent annual report, IBM said that in order to address new growth opportunities it will focus less on hardware and even more on cloud computing.
IBM CEO Virginia Rometty said in the report, "The modern demands of Big Data, cloud and mobile require enterprise-strength computing, and no other company can match IBM's ongoing capabilities and commitment to developing those essential technologies."
The partial transition away from hardware is evident from IBM's announcement in January that it would sell its x86 server business to Lenovo. Though the company is adamant that it is not exiting the hardware business altogether, Rometty went on to say that the sale is "consistent with our continuing strategy of exiting lower-margin businesses, such as PCs, hard-disk drives and retail store solutions."
IBM believes there's more money to be made from the cloud, which is probably true. The worldwide cloud computing industry is expected to be worth $250 billion by 2015, and over the next two years more than one-fourth of the world's applications will be available in the cloud.
To tap into this, IBM offers everything from its BlueMix platform as a service, to its Watson cognitive computing service, to an Amazon.com Web services competitor. BlueMix, an enterprise software portfolio, will be a big part of the company's plans this year. IBM said the platform will allow corporate and Web developers to build enterprise-class cloud applications for consumers.
IBM isn't simply talking about the cloud, though; it's already proved it can make good money from it. IBM's cloud revenue increased by 69% year over year in 2013, totaling $4.4 billion. Aside from its previous acquisitions, the company is investing $1.2 billion into is cloud infrastructure this year to expand into 15 new markets. The hope is that the new expansion will bring more than $7 billion in annual cloud computing revenue by 2015. But additional growth won't come easy.
A few things to consider
Though IBM's new cloud initiatives are a move in the right direction, the company faces some hurdles. The cloud computing market is quickly growing, but there are already strong competitors in the space. The company will have to overcome Oracle, salesforce.com, Hewlett-Packard, Intel, and Amazon in various cloud computing segments. And some of those areas, such as infrastructure as a service, deliver very low margins.
IBM isn't new to cloud computing, but focusing so much of its business on the tech definitely is a new endeavor. I think it's going to be nearly impossible to beat Amazon in the infrastructure space, and very difficult to outpace Salesforce in the platform segment. While IBM has some lofty goals for cloud computing expansion this year, whether that turns into a competitive advantage is yet to be seen.
Investing in the cloud
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Fool contributor Chris Neiger has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Intel, and Salesforce.com. The Motley Fool owns shares of Amazon.com, Intel, International Business Machines, and Oracle.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.