Mad Dog 21/21: Boiling Points
August 27, 2018 Hesh Wiener
A three-minute egg cooks consistently most anywhere near sea level; boiling that egg will take longer up in the Himalayas. Water, like just about every other pure liquid, has at any particular atmospheric pressure a consistent boiling point. At sea level, water boils at 100 degrees Celsius; it can get no hotter. Similarly, IBM apparently cannot grow beyond $100 billion in annual revenue. Lately, its business vaporizes at a somewhat lower point, about $80 billion, like water on Mount Everest. Whenever the company adds revenue here it manages to lose it there.
The boiling point of water is a physical property. The point at which an enterprise reaches its revenue peak is a characteristic of its corporate culture and the conditions it faces. Just as the boiling point of a liquid is affected by the pressure of its surroundings along with its inherent nature, so the size of a corporation’s revenue is shaped in part by its environment and its character.
Not all substances have liquid and gaseous states. Some, for instance carbon dioxide, are either a solid or a gas at one atmosphere. CO2 doesn’t appear as a solid, a liquid or a gas the way water does. Instead, as solid carbon dioxide, dry ice, becomes warmer, some of it leaps directly from its solid state to a gas, a phenomenon called sublimation. And there are other behaviors that differ from that of water. Wine is a mixture of liquids (plus some solids) that includes water and methyl alcohol. When you add wine to your cooking, the alcohol will evaporate sooner and faster than the water. Mixtures, then, can change state one component at a time.
Corporations, like stew to which you have added wine, are a mixture, and their various business segments may each have a characteristic point at which its size seems to stabilize. Moreover, entire companies, with their several business segments, may have an inherent limitation that caps the size of the aggregate.
A decade ago, when IBM’s revenue first passed $100 billion, its various activities were undertaken under much different conditions than IBM faces today. IBM’s systems business and the portions of its software and services activities that they dragged along were pretty strong, as were corresponding segments of its strongest rivals’ operations. IBM’s services business, which transformed internal computer support groups of its large customers into projects performed by IBM, was booming. Lou Gerstner, who made IBM a giant of computer services, is said to have saved IBM from doom with his services success. IBM added thousands of employees to profitably serve its customers’ growing needs. Some of the people added were formerly employed by IBM’s clients, absorbed as these clients reduced their staffing in favor of IBM’s services offerings, but most were new hires, by far the majority of them in India. Today, IBM’s Indian employees constitute about a third of the company’s total roster.
During the past ten years IBM’s competitors in the upper echelons of the services segment, mostly firms that, like IBM, are based in or staffed in India, have grown stronger. Today they may match IBM when it comes to skills, versatility, talent pools, and even experience. They also can usually deliver services at a lower cost than IBM, settling for smaller profit margins and other disadvantages compared to Big Blue.
Additionally, since 2008 cloud services entities, including portions of firms such as Amazon.com, Microsoft, Google, and some of the more powerful legacy IT companies, have emerged to challenge IBM’s ambitions with efforts of their own, creating a vibrant cloud computing industry that offers computing capacity at compelling prices. Some of these entities are extremely clever, and have become notably rich and powerful. Amazon and Microsoft are particularly effective. Cloud computing is an across-the-board challenge to legacy IT vendors. It supports corporate efforts, replacing in-house server farms; third party services alternatives that use cloud capacity as a foundation; and software vendors whose products can be ported to cloud platforms in ways that make them more affordable to users and more lucrative to their creators. It is a young and versatile way to deliver IT power, giving spirited and intrepid providers of services and software a lot of clout. Little young companies can, boosted by cloud facilities, compete with large mature entities. Cloud computing has shaken up the entire information technology universe with as much surprise and power as did the PC in 1980 and, later, the Internet and related networking technology.
The advent and subsequent rapid rise of cloud computing has shaken up IBM, Hewlett-Packard, Dell, Oracle and other mature vendors. Among the established giants of computing, at the moment only Microsoft has managed to deploy products, services and marketing strategies in ways that show the cloud is a challenge that can be met. Other powerful technology companies, notably Apple, have managed to avoid an explicit struggle against cloud technologies. Apple is in the cloud and uses the cloud but does not sell the skills and capacities it uses to power its own services.
IBM, by contrast, has been stunned by the speed with which cloud computing has become supremely attractive to the large corporate and government users that have loomed large in IBM’s audience for the entire century of its existence. IBM has seen some of its legacy opportunities disappear, replaced by cloud offerings from rivals. Even when IBM can provide the cloud services that replace legacy hardware, software and traditional services, it has not yet figured out how to generate the large profits it had earned by providing goods and services in prior generations of computing. IBM’s rivals have been similarly shaking up by the success of Amazon Web Services and its ilk.
As IBM has foundered, it seems to have reached a state in which it can no longer sustain revenue north of $100 million. Its intake is in the vicinity of $80 billion. This appears to be the company’s economic boiling point in the current competitive atmosphere. IBM, financially smaller than it was ten years ago, is still a very big, very strong company. But it is far from the largest enterprise in high tech. Apple’s annual revenue seems is heading toward $250 billion, Amazon’s total revenue is more than twice that of IBM, Google takes in more than $120 billion and Microsoft’s intake is around $110 billion. All of these companies seem to be growing; it looks like they have not reached their economic boiling points.
Making matters even more challenging, IBM is now approaching the point in its current mainframe product cycle where revenue growth tapers off, possibly to the point where intake from hardware actually diminishes even if sales of related software and services keep growing. IBM may be at a better point in its Power hardware cycle and possibly able to fill in any revenue gap caused by the passing of the peak in this generation’s mainframe sales. If IBM can remain effective in its systems business and derivative software and service offerings, it may be able to maintain its current boiling point, even though it is doubtful that systems will enable the company to return to the growth it enjoyed in the past.
Similarly, IBM’s services business can probably hold its own as long as Big Blue can find ways to provide the industry’s highest quality and thereby justify premium pricing. In services, IBM’s largest rivals are pretty good but none enjoy the reputation and other intangible gifts that only IBM can provide. Still, IBM will have to work pretty hard to preserve equilibrium in the services segment. It may have to accept that perhaps it cannot grow except by shifting its service offerings towards cloud technology based on industry standard platforms rather than proprietary IBM systems.
IBM’s largest services rivals, such as Accenture, Tata, and Wipro, are also trying to leap the hurdles between their legacy methods and the significantly different shape of services wedded to cloud computing. All of these companies and the many more fighting for a slice of the services segment will have to adapt if they do not wish to fade away or be absorbed by more nimble participants. Some may discover they can only grow to some particular size, that they have reached their economic boiling point. And it may be that in services IBM has grown as much as it can or that it may even have to cool down a bit as its legacy services opportunities are replaced by cloud-oriented possibilities . . . or by more attractive offerings from competitors.
IBM will have to offset any diminution in its services business by increasing revenue in other segments where it doesn’t face dwindling opportunities. IBM may have to rescue its stumbling Watson operations and other activities it dubbed “strategic” that have not grown as well or as rapidly as the company’s management apparently expected. Either that or IBM may have to adapt to a future in which its revenue cannot be made to grow above the current level, and profits will have to be squeezed from the changing mix of activities required to keep Big Blue on the boil.