In my conclusion of this three-part series, I’ll talk about IBM (IBM, Financial) and Microsoft (MSFT, Financial).
In the first article I wrote about how both Apple (AAPL, Financial) and Alphabet (GOOG, Financial) (GOOGL, Financial) were pushing their boundaries to find new streams of revenue that can take the burden off their respective core businesses of devices and advertising. In the second piece, I pointed out why Amazon (AMZN, Financial) and Facebook (FB, Financial) were both discovering strengths they already possessed and how they were going about monetizing them in their own ways.
Here, I’ll talk about another pair that have similar needs. Both IBM and Microsoft have heavy legacy businesses that have kept them at the top of their games for years but are now declining because of disruptive technologies – specifically the proliferation of cloud. In each case, the company is losing revenue from its older businesses, but its newer ones are showing promise. To be more precise, the companies' newer businesses are actually starting to counterbalance losses from legacy lines of business.
International Business Machines Corporation
Though all talk of IBM’s growth keeps revolving around its cloud business, Watson is the real trump card for the company.
Think about this for a moment: During the second quarter of this year Strategic Imperatives, IBM’s group of business units that are focused on the future, reported revenues of $8.3 billion. Of that, $4.9 billion is from analytics and only $3.4 billion comes from cloud.
Moreover, the company’s as-a-service exit annual run rate of $6.7 billion represents a current quarterly revenue of $1.675 billion worth of analytics services that are delivered in the cloud. Health care analytics is just one such service, and IBM has several more.
IBM’s cloud business is growing at a 30% year-over-year rate, but a portion of that is driven by cloud-based analytics, which is actually growing at 50% year over year. At some point in the future, analytics will actually start bringing in the bulk of revenue for IBM.
Another factor that points to this is the competition in the cloud infrastructure space. IBM has working relationships with most of the Fortune companies, but its reach in the middle market is not as deep as that of Amazon’s AWS (Amazon Web Services), for example. And this is really where the money and growth are over the next few decades. In fact, nonenterprise commercial cloud is where we’re going to see the maximum growth in the next few years.
The final clue is that Watson’s as-a-service offerings have little to no competition from other tech majors. Yes, Microsoft, Amazon, Facebook, Google and Apple all have their pet machine learning and artificial intelligence projects working on the sidelines, but Watson is the only turnkey analytics and deep learning solution that works with every industry and vertical from health care to consumer appliances to the Internet of Things to cybersecurity.
If cloud is important to IBM’s future growth, then analytics is crucial to its sustainability. By permeating multiple industries and going deep into each, the company is sinking its hooks and creating anchors for its long-term survival – something that cloud infrastructure alone cannot do. Where other companies are creating products and applications then “renting” them out to users (SaaS is a perfect example), IBM is providing the technology and the APIs with which users can create their own applications on the Bluemix platform and integrate them to whatever systems they already have.
By using its existing strengths, IBM is building new ones. Watson isn’t new, and neither is cloud. But the company is only now mastering the art of using what it had in the past to build out its future.
And that brings me to the other tech major that is crafting its future based on lessons from its past. In a way, it’s similar to what IBM is doing.
Microsoft Corporation
With its mobile first cloud first philosophy riding at the front, Microsoft is being guided by an able leader into its future.
Like IBM, Microsoft is also going the way of offering nearly everything as a service rather than as stand-alone products. Licensing worked well for Microsoft in the past when the PC market was booming and there were few alternatives to its Office suite of applications, but in today’s world of evolving business demands, the subscription model is where the money is.
Again, like IBM, Microsoft is using its skills in software to deliver superior performance on the cloud. Not only is it moving the bulk of its existing software applications to the cloud, but anything new it launches will inevitably be a question of getting on the Internet and signing on for it.
Its cloud business has been growing fast, but what’s more important is that its Office suite subscription – led by Office 365 – is growing at a breakneck pace. As the total number of business users on Office 365 rises, it will eventually “spill over” to other products such as Skype, Azure, Stream and even physical products like the Surface range of mobile and other display units.
The biggest advantage that Microsoft is building for itself is the bundling concept – an old retail trick but highly effective with any type of consumer. Think about a company signing up for Microsoft Azure for its IT infrastructure needs. Once they’re in, all it takes is a click of a button to get access to Office, then Skype, then perhaps Yammer for team collaboration and possibly a few Surface Hubs in their conference rooms.
Now see that happening for thousands of businesses around the world and you’ll see the true potential for Microsoft.
Why do you think it finally embraced open source in its Universal Windows Platform? Why do you think it acquired Xamarin with its million-plus developer community that develops Android and iOS mobile applications? Why do you think Windows 10 is a simple download instead of a complicated licensing deal?
The purpose of all these individual moves is to collectively form an ecosystem where users can keep adding services they need. Whether it’s a mobile or cloud requirement, whether it’s for personal use or for the office and whether it’s for entertainment or business, Microsoft either has it or will soon have it.
That’s the way the company is thinking right now, and it is this type of thinking that will take it safely and profitably into the future despite the current decline of Windows and Office licensing revenues.
Should the Big Six feature in your portfolio? Why?
I hope I’ve been able to capture the essence of the world’s largest tech companies in this series. For investors interested in the tech space, it’s important to know what these companies are up to and what their future prospects are.
Don’t base your investment decision on what each company achieves or misses this quarter or the next. Instead, look a few years down the road and try to see where their technologies and strategies will finally take them.
Too many investors depend on quarterly earnings and news reports to make their decision, with the result that they drop the stock like a hot potato when things go wrong – and then regret that decision a few months – or even years – later.
My advice – know your quarterly numbers and what the company is doing now but use a longer time period as your reference point for investing.
Understand the impact that their current actions will have on the future of their top line.
And that’s the bottom line.
Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.
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