When I first saw a CNBC report stating Facebook's (FB - Get Report) WhatsApp unit plans to stop using IBM's (IBM - Get Report) cloud infrastructure in favor of Facebook's, my first thought was "What took them so long?".
Facebook runs giant data centers in Oregon, North Carolina, Iowa and Sweden, and with the help of a $7 billion-plus 2017 capital spending budget is building several more. This is a company that develops its own servers and switches, and also much of the software used to manage its infrastructure. It has even invested in creating novel, energy-efficient, data center designs that make it easy to carry out hardware upgrades and deal with component or service failures.
Throw in the fact that Facebook is three years removed from migrating Instagram's content and services from 800-pound cloud gorilla Amazon Web Services (AWS), and the fact that IBM is (reportedly) set to lose WhatsApp is hardly anything for Big Blue to feel embarrassed about. But Facebook's move will hurt the scale of an IBM cloud infrastructure (IaaS) business that already has its hands full competing against Amazon.com (AMZN - Get Report) , Microsoft (MSFT - Get Report) and Alphabet/Google (GOOGL - Get Report) .
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CNBC's sources state WhatsApp, acquired by Facebook for about $22 billion in 2014, plans to migrate its services from IBM's SoftLayer web hosting/cloud infrastructure unit to Facebook's infrastructure. IBM shares slipped following the report, and are currently down 0.8% to $151.19. They're down 9% on the year, after having sold off in April due to a disappointing Q1 report.
A broader Facebook effort to have WhatsApp rely primarily on Facebook's own infrastructure might not bode well for Twilio (TWLO - Get Report) , the top provider of cloud-hosted communications services for web and mobile apps. Twilio, which tumbled last month after disclosing Uber would rely on its services less going forward, got 9% of its 2016 revenue from WhatsApp.
The WhatsApp migration comes as the messaging app, which now has over 1.2 billion monthly active users (MAUs) and handled 63 billion messages on New Year's Eve, takes initial steps towards monetizing its services. Having those services run via Facebook data centers could make it easier to integrate them with Facebook's ad infrastructure, whose performance the social media giant takes pains to optimize.
It could also help WhatsApp roll out demanding services such as live video streaming. Instagram, which now runs on Facebook servers, rolled out live streaming for its Snapchat Stories clone last fall. WhatsApp's Stories clone, known as Status, doesn't yet support. Nor, for that matter, does Snapchat Stories itself.
One CNBC source notes an off-the-record IBM case study indicates WhatsApp relies on over 700 high-end IBM servers located in San Jose and Washington data centers. Another says Facebook was at one point "spending nearly $2 million per month on the IBM cloud."
That last figure suggests the revenue impact of losing WhatsApp will be pretty small for a company of IBM's size. In its Q1 report, Big Blue said its total "cloud-as-a-service" revenue, which covers not only IaaS services but also cloud app (SaaS) subscriptions and cloud app platform (PaaS) services, was on an $8.6 billion annual revenue run rate. That suggests WhatsApp's contribution to the business is likely well below 1%, even if its IBM spending has risen lately due to WhatsApp's continued traffic growth.
Nonetheless, WhatsApp is said to be one of IBM's top five public cloud clients, and -- as CNBC's mention of the case study shows -- has been a nice reference account for IBM to cite as SoftLayer deals with tough competition from IaaS rivals with more scale, more features and greater developer support. In its 2016 IaaS Magic Quadrant report, Gartner placed SoftLayer in its "Niche Players" quadrant, along with five other firms. Amazon and Microsoft were the only companies in the "Leaders" quadrant, and Google the only one in the "Visionaries" quadrant.
It's worth noting that of the five other firms labeled "Niche Players," one (VMware (VMW - Get Report) ) recently sold its IaaS business to French hosting firm OVH, and another (Rackspace) is now focused to a large degree on providing consulting and implementation services for Amazon, Microsoft and Google's clouds. A third (CenturyLink (CTL - Get Report) ) still offers cloud services, but has sold the data centers they rely on. And the cloud sales of the other two (NTT and Fujitsu) skew heavily towards Japan.
With the top-3 IaaS players continuing to take share thanks to their competitive strengths, many smaller vendors are clearly in a tough spot. And losing WhatsApp's business certainly doesn't make things easier for SoftLayer.
That said, as IBM's $8.6 billion cloud-as-a-service run rate shows, the company's cloud offerings go well beyond IaaS, and include a number of differentiated offerings. These include cloud business apps, cloud-based analytics services for verticals such as healthcare and weather and PaaS solutions (offered through IBM's Bluemix platform) for doing things like developing mobile apps, securing cloud services and building services that analyze IoT data. Many of these offerings leverage Watson's machine learning abilities.
These cloud solutions face real competition as well. But by and large, their strategic positioning is much better than that possessed by SoftLayer's IaaS services. If IBM's more differentiated cloud apps and services began seeing big customer losses, that would be a much larger concern than seeing a cloud giant with a massive data center footprint stop using SoftLayer.
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