How to Profit from IBM's Cloud Announcement
Dana is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
IBM's (NYSE: IBM) decision to commit its resources to OpenStack is a very big deal in the history of the cloud.
Up to this point, the cloud market has been dominated by proprietary systems, mostly that of Amazon.com (AMZN), whose aggressive price-cutting has made its API a de-facto industry standard.
Now, in an unsurprising move, IBM has publicly announced its intention to fight Amazon with “standards,” in this case the open source OpenStack cloud infrastructure.
The Big Winners
I think this is bullish for IBM, but that's obvious. Who are the other big winners from this announcement?
I call this an unsurprising move because Red Hat (NYSE: RHT) decided nearly a year ago to embrace OpenStack in its own product line, building its own OpenShift platform on top of the cloud infrastructure first pioneered by NASA, then embraced by Rackspace (NYSE: RAX), and now run by an independent foundation.
Red Hat and IBM have long been joined at the hip, and IBM executives are regular speakers at Red Hat's annual summit meetings in Boston. Arik Hessedahl of AllThingsD.com compares IBM's OpenStack move to its embrace of Linux a decade ago, and Red Hat was a key beneficiary of that, since it's Red Hat Enterprise Linux that has become most closely identified with IBM's own Linux efforts.
The OpenShift platform is designed to bring all the benefits of Red Hat Enterprise Linux, and its JBOSS middleware, to the cloud. It's enabling technology for Red Hat, and IBM's embrace of OpenStack could mean that OpenShift gets a huge boost.
But I think this goes beyond that. At the end of the day, a cloud infrastructure, and cloud platform, are merely steps on the way to building services in the cloud. SaaS is what pays for everything else, and it's SaaS where IBM expects to make its money here.
Another big winner here could well be Rackspace, which has been getting hit very hard by Amazon's aggressive price-cutting. Of all those ISPs offering cloud services based on OpenStack today, Rackspace has more OpenStack experts, more programmers who are authorized to commit new code to the project, than anyone. No company, short of IBM itself, probably has more in-house expertise in OpenStack deployments than Rackspace.
So IBM's decision is a real lifeline to Rackspace. It means companies that are delaying their decisions on hybrid or private clouds in favor of the dirt cheap prices of Amazon.com (as well as Google) are now more likely to throw a little business the way of Rackspace, if for no other reason than to access expertise they will want to take advantage of later.
As important as it is to see who wins here, it's also important to see who might lose out from this decision.
The biggest losers have to be those companies that are depending on alternative cloud infrastructures, beyond those deployed by Amazon.com and IBM's OpenStack friends.
This means, first, Google (NASDAQ: GOOG). Google Compute Engine has followed Amazon's price cuts, but has yet to gain significant share because Amazon was so far ahead of it in going after the public cloud market.
Google has grown increasingly serious in the cloud market lately, making its cloud more secure and bringing in resellers such as Rightscale. It's also important to note that only Google can probably meet Amazon on costs right now, and that since Amazon depends heavily on a single center, in Virginia, Google can offer the kind of redundancy and geographic dispersion multinationals should start demanding.
But this can't be good. Google is no more likely than Amazon to book big cloud service profits any time soon, and as private clouds come into their own its incompatibility with OpenStack will become, increasingly, a second strike against it.
A second big loser is Salesforce.com (NYSE: CRM). Salesforce sells its software as a service, deployed on Oracle services, and it calls that a cloud. But it's not really a cloud, although it is the end product of cloud. It calls its cloud infrastructure Force, naturally, and it's tough to see Force becoming compatible with anything – OpenStack, Google Compute Engine, or Amazon.
Thus as cloud becomes mainstream, Salesforce could become increasingly isolated. While CEO Marc Benioff may be steamed at reading this, I think the company's best long-term option might be an acquisition by Oracle itself. You can hope for that to happen, or you can watch CRM run into the brick wall of mass market cloud with an incompatible offering – neither choice is great.
Survival and a Foolish Play
As important as this decision is for the companies previously mentioned, there are some companies for whom this decision by IBM means corporate life itself.
Gartner Group estimates the public cloud market for 2013 at $131 billion, so there are going to be lots of winners, and lots of survivors, as the market continues to develop at the roughly 20%/year clip it has been enjoying.
This means that Hewlett-Packard (NYSE: HPQ) and Dell (NASDAQ: DELL), which have been building their own clouds on OpenStack, may yet turn out to be survivors. With Dell in the process of going private, investors will find they may actually have a reason to take a flyer on HP.
IBM's decision means that HP's longer-term strategy of going with OpenStack is sound. If you believe in the rest of Meg Whitman's turnaround story (I don't) you may find HP to be dirt cheap at these levels, and a great way to rise to the top of the cloud market.
By committing to the same software platform used by many other companies, IBM puts itself in a leadership position, and makes itself the “big dog” in the fight against dependence on Amazon.com. It will have a lot of frenemies in this – friendly adversaries – for contracts, but it has decided it needs their heft in order to make progress.
My Foolish take on the cloud remains what it has been. I'd love to get back into Amazon, but not at these levels. I'm currently invested in both IBM and Red Hat, and have a small stake in Google for reasons that go well beyond public cloud. I don't have to play the whole cloud to make a tidy cloud profit, and this is where I choose to stand.
DanaFBlankenhorn owns shares of Google, International Business Machines., and Red Hat. The Motley Fool recommends Google and Rackspace Hosting. The Motley Fool owns shares of Google and International Business Machines.. 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!