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International Business Machines Corp. Gains a Key Ally in the Cloud

By Leo Sun - May 18, 2015 at 5:03PM

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Let’s take a closer look at the recent IBM cloud partnership with Microsoft.

IBM (IBM -1.14%) recently added Microsoft(MSFT 0.68%) .NET languages and runtime capabilities to its Bluemix cloud platform.

That partnership opens the door to millions of Windows developers, turning Bluemix into the largest deployment of the Cloud Foundry, an open-source cloud framework for popular programming languages like Java, Python, PHP, and Google Go. In return, IBM will connect WebSphere Liberty, MQ messaging system, and its DB2 database to Microsoft Azure, a rival cloud platform.

Source: IBM

The business of Bluemix
To understand how IBM benefits from this deal, we should realize that Bluemix -- like Microsoft Azure, Amazon Web Services (AWS), and the Google App Engine -- is essentially a cloud OS.

The more languages Bluemix supports, the more developers can write applications on its platform, which can be connected to IBM services like Watson and third party cloud-based offerings. In March, IBM invested $3 billion in expanding that presence into the Internet of Things (IoT) market with the new Bluemix for IoT platform.

Bluemix competes against Azure, AWS, and Google App Service, but since each platform must attract as many developers as possible, it is preferable to support the maximum number of languages. That is why AWS started supporting Google Go in February and why IBM is now supporting Microsoft .NET framework languages.

Bluemix. Source: IBM

Major companies are already using Bluemix to power their mobile services. Citigroup is using Bluemix to expand its mobile banking services, while GameStop is using it to merge mobile and in-store experiences in its marketplace.

How does this help IBM?
Bluemix plays a key role in the growing IBM cloud business, which it hopes will eventually offset weaknesses in its technology, business, software, hardware, and financing divisions.

Last quarter, all five units posted top line declines, contributing to a 12% annual drop in revenue. Big Blue revenue has fallen for 12 consecutive quarters, due to weak client spending, sluggish demand for software, divestments of lower margin businesses, and a strong dollar reducing overseas revenue.

IBM believes that five "strategic imperatives" -- cloud, data analytics, mobile, social, and security -- will generate annual revenues of $40 billion by 2018 and account for nearly half of its top line. In 2014, revenue from those businesses rose 16% and accounted for over a fifth of revenue. Bluemix tethers all those higher growth businesses together with a cloud-based OS.

Growing the cloud
To reach more mobile enterprise customers, IBM partnered with Apple last year to sell iOS devices installed with cloud-based enterprise apps tethered to the Bluemix ecosystem. By partnering with Apple and Microsoft, IBM could grow rapidly across both mobile and PC platforms.

More importantly, partnering up with Apple and Microsoft helps IBM keep pace with Amazon, which owns the fastest growing cloud computing platform on the market. Last quarter, AWS revenue rose 49% annually to $1.57 billion with an annual run rate of $6 billion.

By comparison, IBM cloud revenue rose 60% annually to $7.7 billion, but its "as a service" business -- which competes directly against AWS -- only had an annual run rate of $3.8 billion. Last quarter, Microsoft's cloud business had an annual run rate of $6.3 billion, but Azure -- which competes against Bluemix and AWS -- probably only generates $500 million to $700 million annually, according to Deutsche Bank estimates.

Potential pitfalls ahead
The IBM cloud business is well poised for growth, but it could face a lot of competitive pressure. Between Oct. 2013 and Dec. 2014, Google, Microsoft, and Amazon respectively cut their cost per GB of RAM (a measure of cloud-based workloads) by 6%, 5%, and 8%, respectively, to remain competitive. IBM prices remained flat, but that could change over the next few years as competition heats up.

In addition to price cuts, these companies have to match each other's cloud-based features -- such as cold storage and predictive analytics -- to stay competitive. Therefore, adding more services, storage space, and processing power might squeeze margins.

The key takeaway
IBM has significantly strengthened Bluemix by partnering with Apple and Microsoft, using it to help businesses merge on-site and mobile data, and expanding it into the IoT market. Therefore, IBM investors should keep a close eye on the evolution of Bluemix, which could help the cloud business become a major contributor to the top line. 

Leo Sun owns shares of Apple. The Motley Fool recommends Amazon.com, Apple, Google (A shares), and Google (C shares). The Motley Fool owns shares of Amazon.com, Apple, Citigroup Inc, Google (A shares), Google (C shares), and International Business Machines. 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.

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Stocks Mentioned

International Business Machines Corporation Stock Quote
International Business Machines Corporation
IBM
$129.47 (-1.14%) $-1.49
Microsoft Corporation Stock Quote
Microsoft Corporation
MSFT
$282.23 (0.68%) $1.91
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOGL
$117.03 (-0.23%) $0.27
Apple Inc. Stock Quote
Apple Inc.
AAPL
$165.08 (0.13%) $0.21
Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$137.55 (-1.33%) $-1.86
Citigroup Inc. Stock Quote
Citigroup Inc.
C
$51.67 (0.40%) $0.20
Deutsche Bank Stock Quote
Deutsche Bank
DB
$8.91 (-0.22%) $0.02
GameStop Corp. Stock Quote
GameStop Corp.
GME
$40.51 (-6.77%) $-2.94
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOG
$117.78 (-0.30%) $0.36

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