1. IBM vs Microsoft andthe battle for the corporate cloudbusiness
It's a year since Microsoftovertook IBMin revenue terms, and now the two
companies are lining up to fight for the corporatecloud. Arethey two fading
giants, or is one of them poised for future success?
One yearago, I wrote a blogpost to mark the fact that Microsoft'squarterlyresultswere betterthan
IBM's, and that whathad beena tinystart-upwhenitsuppliedIBMwithPCDOS hadovertakena
companythat had hada monopolymarketshare of corporate data processingsince the 1930s. Nobody
expectedthat.
Of course,nowadays,bothcompaniesare tryingtomove fromfadinglegacybusinessesintofast-
growingcloud-basedbusinesses.And,like Apple,bothhave beenhitby"headwinds"inthe formof a
strengtheningdollar,whichhasdevaluedtheiroverseasearnings.
IBM hadalsoset itself upfora fall bysellingitsSystemX(Intel x86server) businesstoLenovo.This
boostedIBM's profitswhenthe deal wentthrough,buthurtitsrevenuesoverthe full year.
As a result, IBM's revenues fellby8.5 percentto $22.1 billioninitslatestquarter,anditsprofitsfell by
18.6 percentto $4.5 billion.Inthe same quarter,Microsoft'srevenuesfell by2percentto $25.7 billion,
but itsprofitsgrewby8 percentto$6.3 billion.
Thiswas IBM's 15th straightquarterof revenue declines,andinafter-hourstrading,itssharesfell by4.9
percentto $121.86, the lowestforfive years.After Microsoft'sresults,bycontrast,itssharesjumpedby
"more than 8 percentinafter-hourstrading,butthengave backsome of those gains",according
to CNBC.
In itsfull yearresults,IBM'srevenuesdippedto$81.7bn, a fall of 11.9 percent.Thisisa level IBMfirst
achievedin1998, whenMicrosoft'sturnoverwas$15.3bn anda strugglingApple couldonlymanage
$5.9bn. For comparison,Microsoft'srevenueswere $88.1bnin calendar2015, while Apple managedan
astonishing$235bn.
IBM peakedat$107bn in 2011, and looksunlikelytosee thatnumberagain.

2. Eitherway,IBM's $81.7bn wassome way behindthe $93.6bn that Microsoftachievedinitsfiscal 2015
results,declaredinJune.ThissubstantiatedmyclaimthatMicrosoftreallywasbiggerthanIBM.
But the real questionis: Iseverythingis goingto plan? IBM's statedstrategyisto move outof low-
marginbusinesses(PCs,servers,printers,etc) andintohigh-marginbusinesses.These are whatIBMcalls
its"strategicimperatives":analytics,cloud,mobile,and security.
In the statementaboutitsresults,IBMclaimedthat"strategicimperatives"grew by17 percentto
$28.9bn in 2015, while "cloudasa service"grew by50 percentto $4.5bn. In otherwords,these terrible
resultsdemonstratedIBM'ssuccess.
Fine, butI still see problems.First,IBM's"strategicimperatives"are still onlyathirdof the company.
Second,Ican't see these "strategicimperatives"inIBM'sresults.
The fact is that,in its2015 annual results,everyIBMdivisionshowedadeclineinrevenues.Global
TechnologyServices?Down10 percent.Global BusinessServices?Down12percent.SystemsHardware?
You'd expectthatdivisiontobe strugglingwithoutx86servers,anditwas downby24 percent.
However,Software wasalsodownby10 percent,andthat was supposedtobe growingrapidly.
It makessense that"strategicimperatives"businessesare spreadacrossthe company,butif everyIBM
divisionisshowingrevenuesindecline,where are these fast-growing"strategicimperatives"makinga
meaningful contribution?
It promptsthe suspicionthatIBMis mainlycannibalizingitsexistingbusiness,ratherthandeveloping
newbusinesses.Indeed,itmaybe worse thanthat, because IBMhas triedtobolsteritsstrategy
by buyingroughlyahundredcompanies inthe pastdecade.These include Cognos,whichcost$5bn,
Softlayer($2bn),Netezza($1.7bn),Kenexa($1.4bn) andTrusteer($1bn).
Obviously,Microsofthasasimilarproblem.However,Microsofttakesthe view thatcompaniescanhave
cloudson theirownpremises,andhybridclouds,soitdoesn'treallymatterwhere the hardware is

3. located.Ithas therefore bundleditsserversoftware intoanew "IntelligentCloud"division.Many
customerswill be runningstuff intheirowndatacenters,andsome inMicrosoft's,andtheycan move
jobsbetweenthe two,sowhyshouldtheybe counteddifferently?
Thisapproach makesMicrosoft'sclouddivisionlookbiggerandmore successful thanitreallyis.Butat
leastMicrosoftrunssome veryvisible cloudbusinesses.These includeOffice 365, DynamicsCRM, Skype,
Outlookemail,OneDrive,Bing,WindowsStore,CortanaAnalyticsetc.Second,Nadellaclaimsthat
Microsoftis "the onlyone in thismarketprovidingSaaS,PaaS,IaaSand hybridcloudat scale".Thisis
winningnewbusinessfromplatformsthatMicrosoftdidn'tsupportbefore,suchas Linux.
Duringthe conference call followingMicrosoft'sresults,Nadella said:"The enterprisecloudopportunity
ismassive,largerthananymarket we have everparticipatedin."Thisistrue.It'salsoone of the most
competitive,withrivalsthatinclude Amazon,Google,andIBM.
It's a battle that lookslikelytobe wonby price-cutting- ledbyAmazonandGoogle - and bythe abilityto
supportcorporate customers - ledby Microsoftand IBM. In that situation,IBMwill have toprovide
much betterservicesthanMicrosoftinordertojustifythe highermarginsrequiredbyits"strategic
imperatives"mantra.