IBM Best Bet for Serviced Cloud

Dana is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Editor's Note: This article originally misstated IBM's current role in computer hardware. The error has been corrected below. 

One reason to doubt the amazing cloud growth rate predicted for this year, as reported by Macquairie analyst Brad Zelnick recently at Information Week,  lies in what has to be the nature of this year's cloud market.

Self-service is great for the start-ups and small businesses that have made Amazon's EC2 the industry leader, but real enterprises need a lot more hand-holding than that. As David Linthicum of Infoworld wrote recently, “customer service is cloud's Achilles Heel."

What does service mean in the cloud era? It means, for scaled enterprises, the kind of help they're now getting from enterprise software companies like Oracle (NYSE: ORCL) and Microsoft. Dedicated salesmen working their account, top programmers on call, and a willingness to get into the nitty-gritty details of application migration.

Why Oracle is Cloud Washing

Critics claim that Oracle is “cloud washing” existing enterprise applications, and cost structures, that they're delivering a “fake cloud” to clients. When you look at the bottom line, this sounds right. But when you look at things from the point of view of a CIO, who is already paying X amount, and sees that he or she might pay 0.9 times that by staying with existing vendors, it starts to make sense.

While Oracle is engaging with its enterprise customers in this way, of course, it's also working internally to deliver a more “real” cloud experience. That means adapting existing applications to cloud architectures, complete with virtualization and distributed computing, as well as rewriting all the tools that go with those systems so they work seamlessly on both cloud and client-server environments.

Even enterprises that love cloud as a concept are unwilling to move mission-critical workloads without this kind of support. Amazon doesn't have it, although they have low prices. Oracle does, although they have high prices, and don't represent much real change.

Hewlett-Packard and Dell (NASDAQ: DELL) insist they have. Both are “betting the company” that they can deliver what you might call the “serviced cloud” to their enterprise customers, and gain more customers along the way.

Dell Sees Cloud as Survival

Dell, for instance, is building a large cloud consulting practice from the remains of its old Perot Systems unit, along with software pieces put together by John Swainson, who came to the company from Computer Associates, another old-line enterprise software outfit.

Dell is currently in the market's bargain bin, priced at $10.91 per share, an earnings multiple of 7.4. Its average top-line results that have shown no positive movement in five years, and its bottom line is finally recovering from previous depths. I might consider a small speculation at these levels.

Why IBM is the Serviced Cloud Bet

But if you want to make money on the serviced cloud, look at IBM (NYSE: IBM). It has actually been doing cloud computing for several years; it uses standard cloud technologies; it can build you a private cloud or give you access to a “hybrid cloud,” including IBM resources; and it has a lot more consulting experience than Dell, HP, and Oracle combined.

The risk lies in IBM's habit of grabbing clients, even large ones, in an all-encompassing embrace. Cloud, based on open source market standards like Open Stack and Hadoop, is designed to reduce this kind of embrace, which some CIOs see as threatening to their own jobs.

If IBM can satisfy itself with just a portion of a client's business, in the medium term, it has a huge opportunity with the serviced cloud. You're paying a multiple of 13.86 of earnings for the shares, but that's still below the present S&P 500 median, and the rest of the company is much less troubled than Dell is.

IBM could deliver a real earnings surprise this year, if enterprises decide they need a trusted ally before making the cloud move.  

DanaFBlankenhorn owns shares of International Business Machines.. The Motley Fool owns shares of International Business Machines. and Oracle.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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