Although IBM’s recurrent revenue streams and financial performance are still strong, they are facing cloud-computing as a disruptive threat, especially the commodity-hardware-based, software-driven cloud services promoted by Google, Amazon, VMware, etc. With compute power doubling faster and faster and price getting cheaper and cheaper, cloud services quickly nudge into the large enterprise IT and scientific computation space where IBM used to dominate. Because most of IBM’s software and service business are also chained to their specialty high-end servers, the threat is definitely looming larger for IBM’s once prized niche markets. It’s hard for IBM to compete in the low-end cloud service market without some fundamental changes for such a huge company.

To counter the disruptive threat, IBM adopted several strategies simultaneously.

First, IBM is offering its own cloud platform, but in a different fashion. In January 2014, IBM announced to sell their low-end server (mostly x86 based) units to Lenovo of China In order to focus on other strategic goals including cognitive computing, Big Data and cloud. IBM is also trying to acquire more cloud software companies to help migrate their existing software and services to its own “distributed” cloud platform in order to keep its existing lucrative customers who still offer the largest profit margins. Timing and luck still yet to play out, but this strategy may or may not serve to sustain long-term advantages for IBM.

Second, instead of competing head-on in the low-end cloud services, IBM invested $1 Billion from January 2014 to form a 2000-people new business unit in a new location, separate from the corporate headquarter, to transform IBM’s super machine “Watson” onto cloud. Targeting to provide cognitive machine learning technologies and services to enterprises, this strategy is to compete at the higher-end value chain of the cloud services. It’s common for a new initiative to adopt an independent division to avoid being aversely impacted by existing non- efficient corporate culture or playbooks, but a new organization of 2000 headcounts seems overly extravagant. It’s hard to be interpreted as a bold innovative move with due efficiency. On another note, the original famous Watson, IBM’s super intelligent machine built on IBM’s DeepQA Technology (somehow sounds very similar to the Deep Thought of the movie The Hitchhiker’s Guide to the Galaxy. 🙂 See our earlier blog on Machine Learning) was a room-sized giant “machine being” on a costly cluster of 90 IBM high-end servers, with a total of 2880 processor cores and 16 Terrabytes of RAM. Now it is said that by switching to cloud-based computing platform and software, its speed increased 24 times, 2300% performance improvement and a new size of a pizza box. Still this seems to be another tweaking of the existing, a middle-road strategy for dealing with disruptive innovations, which was not generally favored by many past business lessons.

Third, few companies have been able to flex the R&D muscle like IBM does. It has a long tradition of investing heavily on R&D which has paid great dividends over the history of IBM. IBM has invested in many obscure ideas, including building neurosynaptic (to mimic the brain) and quantum (to mimic subatomic particles) machines, replacing silicon with carbon nanotubes and carbon films, etc. IBM just announced in July a $3 billion R&D budget in chip research to further shrink the size of the circuitry and seek new materials for chip designs. If these ideas succeed, the landscape of intelligence market could be changed dramatically. For example, parallel to the prevailing trend of a future all-encompassing super intelligent machine being on cloud, a neurosynaptic machine of a small size could well be positioned in a different value network for the intelligence market of the future. Although many of these ideas are still a bit far from commercialization at the moment, TriStrategist thinks that these ideas may truly be IBM’s savers in the near future. They in fact have the true potentials as the type of innovations that generate the next industry leaders.