Empire Building: The Impact of IBM’s Acquisition of SoftLayer Technologies | Gaining Altitude in the Cloud

Posted On June 25, 2013

The cloud services space just got a lot more interesting. Announced earlier this month, IBM paid a hefty price — $2 billion — to buy Dallas, Texas-based SoftLayer Technologies, the world’s largest privately held cloud computing infrastructure provider.

IBM is now well on the way to delivering on the goal stated in its 2012 annual report: to make a key impact on cloud and reach $7 billion annually in cloud revenue by the end of 2015. Clearly IBM wants to participate in the revenue potential from the growth of cloud services. Big Blue has already spent $4.5 billion over the past five years to build its SmartCloud portfolio of cloud services, but those acquisitions were in the private cloud arena. To compete broadly in this lucrative market, IBM needed a compelling offering in the public cloud arena.

A recent report from North Bridge Venture Partners and GigaOM Research predicts the cloud market will reach $158.8 billion by 2014. And Gartner predicts the market will grow to $210 billion by 2016.

The SoftLayer acquisition accelerates IBM’s efforts to establish a footprint in the public cloud arena without having to start from scratch when AWS, Google, Rackspace and others already dominate the space. SoftLayer’s cloud infrastructure platform, and its existing 21,000 customers, gives IBM immediate scale and relevance.

Other than increased revenue, why does IBM want to have a compelling offering in the public cloud space in the first place?

They believe — correctly, I think — that significant workloads will migrate from the data center and private clouds to the public cloud. There is a set of workloads that, quite frankly, are more attractive in the public cloud than they are in a private cloud space (web hosting, application development and testing, and email, for example). It makes more sense to pay for these services on an hourly basis rather than on a monthly or yearly basis.

We believe these types of services currently comprise about 50 percent of the workloads that currently run in IBM customers’ data centers or their private cloud environments. So about half of IBM’s customer workflows are well positioned to move into the public cloud. They won’t all move at once, but we see clear indications that they are starting to move. If IBM is to provide comprehensive cloud services, it needs a smooth path for migrating those workloads. SoftLayer gives IBM the capability to create a glide path.

Thus, IBM’s acquisition of SoftLayer is both a defensive strategy and an offensive strategy. On the offense, they want to increase market share in the fast-growing public cloud space and need a compelling offering to compete with AWS, Google, Rackspace and other cloud players. On the defense, they need to create a migration path from traditional IT infrastructure space into the public cloud.

I don’t think the SoftLayer acquisition is a game-changer. Nor do I think it remakes the cloud space. But it does put IBM into a credible role.

Will this acquisition be enough to secure IBM’s position as a cloud leader? I suspect it isn’t enough, given the role that IBM likely will want to play. I think we will see further acquisitions to build up IBM’s capabilities and scale.


Photo credit: Simon Greig (xrrr)

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