IBM's Existential Crisis

NEW YORK (TheStreet) -- After being a loyal IBM (IBM) shareholder for several years, I took the opportunity of a rising market to unload my shares this week.

The reason is simple. I believe IBM is facing an existential crisis the likes of which it hasn't seen in over 20 years. And I don't think IBM management even knows it.

The reason for this crisis is cloud computing. It's not that IBM can't do cloud. It can. IBM may be better at cloud than anyone else, with more cloud capacity, better cloud tools, even a greater depth of cloud expertise, than anyone in the cloud industry.

The problem is that, at this point, cloud won't grow the company.

That's because cloud economics threatens most everything that makes IBM a reliable profit-maker. IBM servers can be replaced by commodity products. IBM software written for those servers becomes obsolete. Even IBM mainframes can be replaced by server clouds.

This is similar to what happened in the late 1980s, when IBM lost control of the personal computer market to Microsoft  (MSFT) and its original equipment manufacturers such as Hewlett-Packard  (HPQ), Compaq (now part of Hewlett-Packard), and Dell. It took IBM years to find a way out, because it was being led by nice marketing people, and had been, at that point, for over 20 years.

Vincent Learson. Frank Cary. John Opel. John Akers. They could all keep the trains running on time, they all had marketing and financial discipline, but they were not visionaries. They hired visionaries. IBM paid the price for that, until Lou Gerstner was hired as CEO from RJR Nabisco of all places, in 1993.

We in the computer press called Gerstner the "Cookie Monster" when he came on board, but he may have been the most visionary leader the company has had not named Watson. (Thomas Watson Sr. built the company before computing, and his son Thomas Watson Jr. rebuilt the company through the mainframe era.)

Gerstner refocused IBM on software and services. The product line was unified under the Linux operating system. Thousands of people were let go, and thousands more arrived through acquisitions such as Lotus Development, Sequent, Informix, Tivoli Systems and PricewaterhouseCoopers' consulting business.

Gerstner was able to hand off power to an operations man, Sam Palmisano, in 2002. Palmisano in turn was able to hand off last year to Virginia Rometty, then the head of marketing.

When Rometty was named, I tried to write a cautionary piece for another Web site, but it was rejected by the pay side of that site and eventually came online as a mere blog post. No one wanted to listen.

But the world has changed. As was the case 20 years ago, value is moving "up the stack," toward the companies that imagine and run applications, away from the companies that write them and manage them.

So IBM needs a new vision. The company understands where the computing world is heading, but it's losing more on its older lines than it can make on its newer ones. The loss of the CIA's cloud contract to Amazon.com (AMZN) should have sent alarm bells ringing throughout the executive offices.

Instead of hearing those alarm bells as an attack on its vision, IBM fought the award and lost.

The problem for IBM is that everywhere it looks in cloud it finds commodities. Cloud services are a commodity. Cloud management, cloud software and cloud operations are all becoming commodity, with dirt cheap prices that are only going to get cheaper. You can't maintain IBM's human infrastructure on commodities. You need enormous value-add.

My own view is that IBM needs to start running the services created by cloud. But I'm just an old reporter.

I would be buying transaction processing companies and business-focused cloud services. I'd be building a system for writing, deploying and managing apps quickly, and making app developers my new OEMs. I'd be selling anything that didn't fit this vision, even spinning out the mainframe division.

I'd be finding ways to productize cloud, creating a "cloud in a box" that any organization could buy, holding the crown jewels while maintaining compatibility with public cloud infrastructure. I'd be advertising a bridge from client-server to the new, cheaper infrastructure, one in which computing is managed, like electricity, rather than sold as a product.

IBM needs to rush "up the stack," and that will take a visionary, not a marketer.

At the time of publication, the author owned no shares in companies mentioned in this story.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

 

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