A Very Cold Take on IBM, Red Hat and Their Hybrid Cloud Hyperbole



I start more blog posts than I finish, due to no shortage of other distractions and at times a near-crippling inability to blog short. When IBM announced they were acquiring Red Hat in October 2018 for $34 billion, I embarked on a deeply intertwined discourse about the continued decline and fall of IBM, the two companies’ mutual irrelevance in the cloud era, the true essence of hybrid cloud, and why people who invest in technology through the lens of financial statements are doomed. After amassing eleven pages but still incomplete, I put the nascent post aside in favor of parody song lyrics about the acquisition (my worst performing blog post of all time, no less). In an attempt to salvage some of this work now that the deal has closed, here are some abridged thoughts on the acquisition.

I valiantly resisted issuing a hot take on IBM’s proposed acquisition of Red Hat, leaving it to others to unpack and analyze. But I have not seen anything that gets to the core of this deal and critically assesses the hyperbolic claims accompanying it. Hopefully takes, like revenge, are best served cold…

IBM says (over and over again) buying Red Hat “changes everything about the cloud market” and means “IBM will become the world’s hybrid cloud provider”. Those are bold claims from a company that has failed to deliver on every big promise it has made in the 21st century. The IBM-Red Hat deal hinges on the notion of “hybrid cloud”. Unfortunately, that term was already a muddled miasma of marketing even before it got the IBM bear hug (they’re now calling it “next-generation hybrid multicloud” because they love that word salad).

There has been little scrutiny of the mechanism by which this combination vaults them from mutual irrelevance to game-changing dominance in the cloud, what they even mean by hybrid cloud, how that relates to the actual seismic shift of computing to the public cloud, and the applicability of their respective and combined product portfolios. Never mind the crazy price tag.


The bar is very high for pithy descriptions of Hail Mary technology combinations, ranging from “two garbage trucks backing into each other in slow motion” (Scott McNealy on the merger of Compaq and HP) to “two turkeys do not make an eagle” (my former and still unindicted co-conspirator Vic Gundotra on Microsoft buying Nokia’s handset business). So I will not overreach for a metaphor and just characterize it as a hookup between two of the biggest losers of the cloud era.

Simply put, IBM as a platform company has failed to make the transition to cloud computing. The company’s streak of successfully traversing multiple generations of computing is in serious jeopardy. They now face an existential threat that not even their cash cow mainframe can salvage (though as we’ll see they’re of course playing the mainframe card). Some predicted this fate (that post missed top-ticking IBM’s all-time stock high by 16 days). The last couple years of playing “hey, look over there” with tangential initiatives like Watson (curing cancer in retrospect might have been a slight overpromise) and blockchain (solving the great mashed potato provenance crisis!) only underscores IBM’s irrelevance on the main stage of cloud computing (and because CAPEX doesn’t lie). Despite the then much-hyped acquisition of SoftLayer in 2013, IBM can no longer even see the public cloud leaders with the help of an orbital telescope and a star map. Meanwhile the cloud continues to relentlessly devour IBM’s business. After shrinking by almost $28 billion in revenue over the last six years, and the current CEO having underperformed the S&P500 by over 15,000 basis points at the time the acquisition was announced, IBM needed to do “something”.

Red Hat has its own challenges (and at the acquisition price, has found a wonderful resolution that leaves IBM and its shareholders holding that bag). Red Hat may look like a gem to IBM (anything that isn’t shrinking would), but they too have a cloud relevance problem. The fact Red Hat is the poster child for commercial open source is an orthogonal irrelevance. Red Hat faces a very traditional technology industry problem: generational obsolescence. The bulk of their revenues come from “infrastructure-related offerings”, namely the Red Hat Enterprise Linux (RHEL) server operating system. As computing shifts from customer data centers to the public cloud, RHEL is not moving along with it. You may have heard that the cloud runs on Linux. It does, it just doesn’t run on RHEL. AWS, Azure and Google don’t pay Red Hat for Linux (they do let customers run RHEL as a guest operating system if desired, but the case for paying grows ever more tenuous – if the hyper-scale clouds don’t need it, why do you?). This shrinking TAM finally started to bite in 2018 as Red Hat’s core growth slowed and they missed Wall Street estimates for two straight quarters, which is considered problematic for a growth stock, as evidenced by a third of their valuation disappearing. Those misses combined with their visibility going forward are likely the catalyst for Red Hat deciding it was finally time to give IBM a call.



So what is this hybrid cloud that changes “everything about the cloud market”? Don’t expect much enlightenment from IBM’s announcement. The release mentions cloud at least 19 times, hybrid cloud 12 times, and multi-cloud 7 times, but doesn’t trifle with definitions. If one were cynical about IBM, one might conclude they were trying to conflate some vague notion of hybrid cloud with the cloud cloud, where they have performed so abysmally.

An industry definition of the admittedly fuzzy concept of hybrid cloud would entail integrating on-premises infrastructure (sometimes and often inaccurately referred to as private cloud) with one or more public clouds so applications and/or data can span a common pool of resources. To manage, orchestrate, and automate this pool as a single entity, you need a common software model that spans both customer data center(s) and the public cloud(s). As is usually the case, software is the critical element (a typically insurmountable challenge for metal-bending legacy hardware companies).

There are two general approaches to a software architecture that provides a management, operations and development model for hybrid cloud. The public cloud providers not surprisingly are approaching it cloud-first and treat hybrid cloud as an on-ramp to the public cloud. They are extending the rich and modern architecture of the cloud back into the legacy customer environment. In the absence of an even modestly competitive cloud offering, IBM and Red Hat are both starting from legacy software running on-premises, and somehow intend to architecturally span and control the vast and ever-expanding array of software that powers the hyper-scale public clouds (a task for which IBM might consider adopting the motto “Benediximus Cum Eo!”, which Google Translate says is Latin for “good luck with that!”).

AzureStack is the most advanced example of hybrid cloud from the public cloud vendors. Because of its vast presence in customer data centers, Microsoft started down the hybrid path early and did it initially with a truly hybrid architecture that bridged on-premises and public cloud but was neither fish (its existing Windows Server architecture) nor fowl (Azure). Recognizing the futility of this approach, they hit refresh (yuck yuck) and embarked upon a cloud-first approach that extended Azure back into the customer data center.

Amazon Web Services, after years of dismissing any form of on-premises computing as “whacky”, “ill-advised”, and “archaic”, has recently gotten hybrid cloud religion. As is often the case with new converts, they’re especially enthusiastic, to the point where they plan to offer not just one hybrid cloud software architecture but two. Their recently announced Outposts product carries the AWS architecture into the customer datacenter. But Outposts hardware can also run a second software stack from partner VMware, which extends vSphere from the customer premises out to a special bare-metal neighborhood (ghetto?) of the AWS cloud running VMware software. AWS is also putting at least some of its higher-level public cloud services (RDS on VMware) on top of that VMware stack as well, providing a second way to get at least some AWS services inside the customer data center. How you decide which stack to run presumably depends primarily to which company’s salesforce you are speaking.

Google also is starting to bring their software on-premises with GKE On-Prem (which I suspect was named by a Microsoft alum…), subsequently rebranded Anthos (not sure who thought naming it after a Greek tragedy was an improvement). Google is the least mature commercially of the big public clouds and have some huge hurdles to overcome in supporting enterprise customers in the cloud, never mind deploying and supporting software running in customer data centers. Google’s hybrid model is all about allowing containers to run on-premises or in the cloud, which we’ll revisit later, as opposed to bringing their broader set of higher-level cloud services (which are the most compelling thing about Google Cloud) into customer data centers.


While IBM is vague and imprecise about what they think hybrid cloud is, they are very specific about its size: $1 trillion. This big and coincidentally very round number takes IBM’s traditional and oft-mocked playbook of investing precisely $1 billion dollars in new initiatives to a whole new four comma level.

Barron’s inquired as to the source and composition of this magical $1 trillion number and received a surprisingly frank answer:

“When I asked IBM about the $1 trillion opportunity, the company said the projection came from the Boston Consulting Group and McKinsey. And it includes private clouds, public clouds, and virtual private cloud spending. The IBM spokesperson said the hybrid definition includes not just servers, but also software, business process, and services.”

So hybrid cloud for IBM is the kitchen sink (and note hardware comes first on the list). It is anything and everything they already sell (or already resell in the case of Red Hat), albeit in ever diminishing quantities in recent years. A catalyst that “changes everything” is notably absent.

The entire IT market was about $3.65 trillion in 2018 per Gartner, so this is simply reclassifying vast swathes of the existing market to be “hybrid cloud”. IBM is belatedly catching up to its legacy peers with the latest incarnation of cloud-washing (savor the irony of fellow-cloud-also-ran HPE defining cloud-washing in that link), whereby vendors dub their Same-Old-On-Premises-Shit (SOOPS) to be cloudy because it is so much easier than actually building a product portfolio for the cloud era.

And what kind of an aspiring industry leader has to go out of house to figure out the size of their market opportunity? McKinsey should be your go-to for propping up authoritarian regimes, CEO insider trading, and pioneering the Enron business model, but not for forecasting technology markets.

IBM has a long and glorious history of playing fast and loose with their cloud numbers. First they classified a big chunk of their existing revenue as cloud (i.e. they were hybrid cloud before it was cool!), but were then forced to break out what was and wasn’t subscription revenue, which resulted in IBM’s ridiculous cloud and not-cloud cloud revenue lines. Then, they revised their reporting segments and tried to draw attention away from across the board revenue declines with their so-called “strategic initiatives”. Cloud was one of their strategic initiatives, but it turns out they were stuffing mainframe sales into it, at least until it was no longer beneficial to do so (if you click on just one link in this post, it should be the previous one). Bottom line: numbers from IBM are not to be believed.


While it is disappointing that this deal appears to be a legacy-first, cloud-washing exercise to sell SOOPS, lets try a thought exercise to prolong this post. Pretend IBM actually understands software and further presume they realize they need a coherent software platform spanning both on-premises and the public clouds to have any real hybrid cloud strategy or relevance. What about Red Hat, combined with IBM, “changes everything?”

Red Hat is a nearly $3 billion dollar revenue stream and still growing modestly (though slowing). They grew 15% in FY19 which ended in February (in contrast, AWS and Azure grew roughly three and five times as fast respectively on larger revenue bases in the same time frame). RHEL and other infrastructure products aren’t cloud assets although Red Hat does assert with a seemingly straight face that just running the RHEL operating system makes you hybrid cloud (by that standard, Windows must be a game-changing cloud asset too!). The infrastructure products were 72% of revenue and grew by less than 10 percent. Beyond cloud irrelevance, RHEL also suffers from an aged distribution model for its bits, doing waterfall distributions that roll up a forked set of patches. The rest of the software industry has moved past this to continuous delivery and/or SaaS. RHEL does give IBM some revenue (and software that is certainly more modern than anything from IBM), though how much incremental opportunity it provides is unclear as IBM has been reselling RHEL since 2002.

Beyond RHEL, the other 28% of Red Hat’s revenue is in their grandiosely named “Application Development-related and other emerging technology offerings” other bucket. They have been pushing this business hard as a source of growth as the core RHEL business has slowed. This is an amalgam of acquisitions including “Red Hat JBoss Middleware, Red Hat OpenShift, Red Hat Cloud Infrastructure, Red Hat OpenStack Platform, Red Hat Ansible Automation, Red Hat CloudForms, Red Hat Storage technologies and Red Hat Mobile Application Platform.” Some of this is outright legacy (JBOSS) and some more properly infrastructure (OpenStack, Storage), but these products include what Red Hat believes are its best claims to cloud relevance.

The problem is they are small, undifferentiated, incomplete, non-strategic, and overlap significantly with IBM products based on the same underlying open source products. OpenStack remains a punchline when it comes to public cloud. Ansible is a configuration tool that competes with Chef or Puppet, but is hardly a decisive cloud asset. OpenShift is a container platform and, if the narrative is to be believed, is the hybrid cloud asset, core rationale for this deal, and IBM’s salvation.

After more pivots than I can count from the early days of Platform-as-a-Service (PaaS), OpenShift has settled as a container platform that “brings Docker and Kubernetes to the enterprise”. The challenge is this is a very crowded space, OpenShift is far from the clear leader, and just being able to run containers on-premises or in the cloud isn’t remotely competitive with the full range of services offered by the cloud vendors. The Cloud Native Computing Foundation has certified over 80 Kubernetes distributions as of this writing, including OpenShift and at least two from IBM (as well as from offerings from AWS, Google and Microsoft). Buying OpenShift is yet another ringing endorsement for IBM’s software development capabilities, or lack thereof. At best, OpenShift is in a three-horse race with Docker Enterprise Edition and Pivotal Cloud Foundry (never mind the dozens of other Kubernetes distributions). OpenShift is closer to just being a Kubernetes distribution while Cloud Foundry and Docker offer a broader range of functionality. Forrester puts Docker EE ahead of OpenShift. And my backchannel data suggests both Cloud Foundry and Docker have more paid customers than OpenShift.

But the biggest problem for IBM and Red Hat’s hybrid cloud software ambitions is not Cloud Foundry and Docker, but cloud hyperpowers AWS, Azure and GCP. Containers are fun and irresistible in the Lego-like metaphors they evoke, but they provide no higher-level services, and many will argue are just a brief layover on the way to serverless computing as the native programming model for the cloud. The hyper-scale clouds can sling containers back and forth just as well and probably better, plus they also have an incredibly rich and every-expanding array of higher-level services (e.g. things like databases which many customers find useful). IBM Cloud has struggled both to keep up with the real clouds’ portfolio of services and to just keep IBM Cloud’s minimalist services up and running. Gartner cautions: “IBM has, throughout its history in the cloud IaaS business, repeatedly encountered engineering challenges that have negatively impacted its time to market.” Red Hat brings no services DNA nor higher level services to help with this problem. OpenShift doesn’t “change anything” about IBM’s ability to compete with the hyper-scale public clouds.

But, you may say, as long as we’re setting aside disbelief, why couldn’t OpenShift really take flight under IBM? (Ok, set aside an extra dollop or two of disbelief given they haven’t been able to make this happen for their own comparable container products AND that they are competing with the real clouds every step of the way). Imagine IBM takes some open source cloud middleware and goes big with it? Shades of Linux in the late 20th century! Oh wait, remember BlueMix? We’ve seen this playbook before. It was IBM’s attempt to take the open source Cloud Foundry bits and go big with them in the same space. We’ve seen that playbook and it didn’t work. What “changes everything” this time around?


$34 billion is real money (the total price is actually more than that as IBM originally was going to stop their stock buyback for two years to help finance the deal, but had to reinstate it after their stock dropped to nearly decade lows after the deal was announced due to what can only be interpreted as a lack of enthusiasm for the transaction). The deal also saddles them with $20 billion in new debt (a sum perhaps better spent on cloud infrastructure if you are a member of the CAPEX über alles club).

Beyond the financial outlay, acquisitions are hard. Most fail. Big acquisitions are really hard. Execution and integration risk go up with the size of the deal. This is the biggest acquisition ever in technology software. IBM has done 182 acquisitions in the 21st century and have very little to show for their $52 billion. IBM’s CEO crows that her experience buying and integrating PWC for $3.5 billion mitigates the risk (she neglects to mention her experience buying and vaporizing SoftLayer for $2 billion). Conflating an order-of-magnitude smaller professional services acquisition with a product and technology acquisition might be the deepest insight into what IBM has become (not a product company).

But if the strategic logic is to “change everything” thereby “resetting the cloud landscape”, they’re really paying over $34 billion for OpenShift. Which is a vanilla container runtime. That is open source. That IBM already had at least one of (as does everyone else in the industry, including the hyper-scale clouds). And one that isn’t a dominant brand or implementation. IBM could have bought both Docker and Pivotal at a nice premium for a quarter the price of Red Hat and gotten better assets if that is the strategy.


IBM knows they can’t compete with the hyper-scale cloud providers, so their current aspiration is to become some kind of gatekeeper whose busloads of offshore consultants in inconvenient time zones will intermediate enterprise customer interactions with the public clouds which will somehow give IBM both strategic leverage and pricing power. Red Hat, despite the lack of any relevant or dominant cloud software assets for achieving this fantasy, is evidently the best option they could come up with (or, perhaps in another post, we can speculate on even more cynical reasons for this deal…). Benediximus Cum Eo!

In reality, this is a strategy much more akin to becoming an MVNO for the cloud (and to be clear, MVNOs are terrible businesses) and hope to stall the cloud transition for as long as they can to sell the same old legacy stuff for a few more years (or at least let the current CEO exit stage right). Meanwhile, IBM’s whole business is up for grabs. Their remaining customers are the disrupted, not the disruptors. Any company in a market where technology matters that is dependent on IBM has a immense, self-inflicted liability (shorting IBM’s top ten customers seems like a strong investment thesis).

And if you actually read this far, please click here. I’m trying to see if anyone actually reads my posts to the end.

36 responses

  1. always a delight Charles
    bob kelly

  2. Terrific take.

  3. Fact Rich, insightful and smart.

  4. I discovered this article and you on Twitter.

    What great insight. I work in tech and this deal comes up in conversation once every few weeks. I’ve always been hesitant to answer on how I feel about it. On one hand, IBM doesn’t have a track record of being successful in the modern tech landscape, but I wanted to be optimistic about the Red Hat brand.

    I wasn’t aware of how badly Red Hat was doing as a company. It makes sense. I run CEntOS in data centers for legacy applications and Container Optimized Linux in GKE, no RHEL subscriptions here. I know lots of people running CEntOS or Ubuntu On-Prem and in the public clouds. I’ve never worked with Openshift or know anyone who has. It appears this deal does hinge on Openshift.

    Do you think IBM tried to buy Docker or Cloud Foundry before Red Hat and were turned down?

    We will see if two poorly performing companies can get their acts together.

    You speculate as to what you think they are doing a why at the end. Let’s say Ginni Rometty, “exits stage right” and you are tapped as CEO, what would you do to make IBM and Red Hat players in the cloud/hybrid-cloud platforms?

    Great read. Will be back for more.

  5. Don’t know what else IBM looked at or tried to buy. My guess is given their dire situation, they wanted something big they could position as game changing.

    Let’s hope I avoid the fate of being named CEO of IBM (would not wish on anyone). But I think their best option is to keep managing their decline and make some bets on what comes next as opposed to destroying more capital chasing the cloud. Some think this deal was about getting their next CEO (Whitehurst). Pricey if so.

  6. Extremely detailed and readable article. I appreciate the take you’ve provided. Very funny in an ironic way for me. I worked at HP in Linux and then Helion Cloud (RIP). I marketed Red Hat (SUSE, and Debian) on multiple form factors. Oh, how Linux on big metal was the future :D.

    Many of my former colleagues and some high-level managers have ended up at Red Hat over the last ten or so years. As a current jobseeker, I’ve been particularly envious of them. I find myself less so lately, and reading your article, even less than that. But I would love to see Red Hat come out well.

  7. The other great analogy for two companies coming together without a strategy is “two drunken sailors trying to hold each other up.”

    Good read.

  8. I usually cannot read such a long blog without losing my concentration. But this reads like water and I have always been anticipating the next joke.
    The are two things I do not understand:
    1st: Why the title “a cold take…”?
    2nd: why the title “a VERY cold take…”? Isn’t a “cold take” enough?

  9. Glad to hear it flows. Cold take is presumably the opposite of a hot take (deal was announced last October). And it is pretty cold about their prospects. And I am a little verbose…

  10. I was waiting for you response to IBM’s latest move in buying Red Hat. You did not disappoint Charles. Wonderful read.

  11. Just don’t hold your breath waiting…

  12. Luke Iggleden Avatar

    Great article filled with facts and an awesome read.

  13. Charles,

    Thank you – I came across your article on Twitter and found it both interesting and insightful.

    I’ve worked in the open source community for many years and would be interested in your thoughts on the following.

    Your article highlights “the Public Cloud runs on Linux”.

    My interpretation of the open source data (note: with trepidation), indicates the combined (current effort) would make them the number one contributor to the Linux Kernel (i.e. to all Linux distributions). Taking this one stage further, the data indicates they could be the single largest contributor to KVM (i.e. AWS’s Hypervisor for VM’s) and a close second to Goolge on all Kubernetes development (i.e. AWS, Azures & GCP’s container orchestration).

    Source : https://www.stackalytics.com/ and Git

    As neither a business person, nor an analyst, I’d be interested if this positions them to sell software and services directly to the cloud providers (i.e. under the covers, as it were).

    Thank you again.


  14. Maybe we should think of “This changes everything” similarly to how the Delphic Oracle advised Croesus of Lydia in 560 BC. As Wikipedia notes, “Croesus then asked if he should make war on the Persians and if he should take to himself any allied force. The oracles to whom he sent this question included those at Delphi and Thebes. Both oracles gave the same response, that if Croesus made war on the Persians, he would destroy a mighty empire.”

    And that was true.

    He neglected to ask “which empire?”

  15. Making open source contributions doesn’t mean revenue. The fundamental issue for Red Hat is their on-premises server market is slowing/shrinking and they’re almost irrelevant on the growth server market (public cloud).

  16. Chris Phillips Avatar

    Thanks again Charles for the entertaining read!

    It takes a long time to circle the toilet bowl… Dressed many times for IBM’s funeral over the last 40 years and others I might add too. The Enterprise hates to turn off the crap it creates in IT so big Enterprise Tech providers get to live way beyond into Zombie-land until they finally get the bonfire.

  17. Just don’t confuse milking the legacy with winning the current platform battle…

  18. AT&T disagrees.

  19. Remember when AT&T and the other telcos made the case they would dominate cloud because it involved “networking”? Good times those were.

  20. Fantastic read!

    I happen to be an ex-employee of a startup that has courted both IBM and Red Hat (OpenShift) in hope of being acquired. So instead of trying to attract an eagle they were after two turkeys 😉

    Will be back for sure.

  21. Found this article posted on Hacker News, found it incredibly insightful.

  22. Great insight and funny too 😉

  23. Good take, probably right. Corollary… IBM will be hurting shortly; then what happens? Someone will buy /them/. Who? Best bet would be Microsoft…

  24. They’re hurting now. Red Hat is their Hail Mary. But they have to get a lot smaller before anyone buys them. The combo of both enterprise sales force and legacy installed base will turn off a lot of potential buyers. Suspect most want one or the other, but not both.

  25. Hi Charles, nice article. Am reading for 1st time.
    “The End of Red Hat
    Thanks for reading this far!” — I skip most articles but this one was engaging.

    Any update to this coming ?

  26. I think your reference to Google Cloud being immature needs updating (pointing to a 2016 article backs my claim). Google Cloud, IMO is actually one of the better clouds tech-wise TODAY. Lagging in adoption and perception, unfortunately.

  27. Yes they have good tech but need more than tech to play in this market. They still immature relative to its major competitors and want to rely on just having good tech. I continue to hear stories of Google Cloud employees doing/saying stupid things to customers and customers complaining about the human element. And most of all, it isn’t anywhere close to job one at Google.

  28. “shorting IBM’s top ten customers seems like a strong investment thesis” is a sick burn. I kept nodding my head. And yes, indeed, great flow in your text. I feel you are humble bragging.

  29. My personal opinion: Some people get really unnerved when they 1.) already have a biased, negative predisposition and 2.) because of that, they can’t see the forest through the trees; it is something they do not understand. So they jump up and down like a narcissist who finally discovers they are not as smart or great as they thought and can’t absorb the new reality.

    Being an IBMer, I don’t know where to start. I can’t expound as much as I’d like in this limited space and time, but…..

    You think enterprises want any public cloud providers’ proprietary IaaS virtualization and/or container orchestration stacks in their data centers? Talk about vendor lock in. “Public-cloud-technology-in” is not a viable enterprise IT strategy.

    You think enterprises are just chomping at the bit to throw away decades of previous CAPEX (big CAPEX guy) and skills investments, instead of leveraging those investments by simply “modernizing” what needs to change while allowing their existing IT estate to co-exist with any public cloud provider’s platform and services? Changing enterprise culture and existing processes and people doesn’t come easily.

    You think selling a private K8s platform (yes, based on open source) to an enterprise without a bundled software stack (or services arm) to help them understand and manage it is tenable? And yes everyone knows a private K8s platform in an enterprise data center is part of the standard definition for private cloud, contrary to your confusion on the topic. Run the same containers with no changes on IBM’s public cloud and poof! you have “hybrid cloud.” Now run them and move them around on multiple vendors’ public clouds and poof! you have “hybrid multicloud.” Why is that hard? And how are you going to manage all that from one pane of glass? Now, that’s hard. (Teaser alert: There’s an app for that.)

    And you think large enterprises will eventually just shift all their IT assets to any single (or even multiple) public cloud provider(s) — all their servers, data, dev processes, ops processes, runtimes, security policies, middleware, integrations, back office, etc? No, there is already too much invested in these things and they will move incrementally with foresight and purpose (i.e. they will move to a hybrid, multi-cloud world). The IT estates of large enterprises are very complex. But the concept of hybrid, multi-cloud is not. Why is it such a mystery to you?

    Oh, I get it. Being from Microsoft, I’m sure you wish every enterprise would adopt only .NET framework for all apps and run them in only in Windows containers on Azure public IaaS VMs (or Azure CaaS) using only Azure-based backing services (and apparently now also some type of Azure On-Prem IaaS/CaaS, whatever proprietary technology that is based on.) Nice try. Ain’t gonna happen.

    Sure we are an old company that is reinventing itself. And I agree we have not invested enough capital in public cloud. We don’t have the same level of cross-subsidizing profits from existing, growing assets to fund the till — like AWS (Amazon the online retailer), Azure (Windows, Office, other software), and GCP (Search, Adwords, Android, Google Play, etc.). We have a declining mainframe business, some (getting better) enterprise software, and a huge (but lower margin) professional services business. Yeah, we could use a suitor for public cloud CAPEX (Apple), or some type of strategic partnership (Telco?) but it would have to be a global partner.

    But as far as strategic direction in enterprise IT, there is a method to what you perceive as madness in the Red Hat acquisition. Can’t share anymore, but suffice to say, stay tuned. Elvis has not left the building.

  30. I am currently with IBM, came in through an acquisition. It took them around 4 years to completely destroy the business, which is now (my guess) waiting to be divested.

    As far as THE deal, the amount of internal publicity, mandatory training and generally money thrown to sell this deal to the employees has been phenomenal. However, people have grown very skeptical and take anything that Ginni says with rather large grain of salt. Working here definitely feels like being at a financial engineering firm, a Goldman Sachs of tech of sorts, that makes (some) money through creative ( or not so creative) destruction.

    Some days you simply wonder how it all hobbles together.

  31. Hacker News discussion thread on this post: https://news.ycombinator.com/item?id=20474494

  32. So four years is a good target for IBM selling the remains of Red Hat to HCL? 😉

    IBM is definitely financial engineering > engineering engineering.

  33. First, kudos for being the only IBM employee to go to bat for your employer (note some other comments from current and former employees who seem to agree with the post).

    Saying I’m biased is not the strongest response to the post which includes very specific arguments (and be glad I cut some…). I made a call in 2013 that IBM was at risk in the transition to cloud and it is a looking like a pretty good call (missed IBM’s all-time stock high by 16 days). So yes I have a predisposition based on that call panning out with IBM’s revenue/profit/FCF/market cap trend lines all in full agreement. But feel free to provide specific arguments for how I’m missing the forest, don’t understand what I’m talking about, or can’t absorb the new reality.

    I get and agree with the general customer value proposition for hybrid/multi-cloud (and have been making it since 2011). But the post doesn’t argue that the hybrid/multi-cloud opportunity doesn’t exist. The post argues that the Red Hat assets don’t help, that IBM massively overpaid (with debt), and that IBM can’t execute generally (see SmartCloud, IBM Cloud, BlueMix, Watson, blockchain and other examples of overpromise and underdeliver) much less keep up with AWS/Azure/Google who are both competent at software and also focused on hybrid/multi-cloud. Why does IBM need Red Hat if K8S is the future given IBM had at least two certified implementations? Why will IBM not screw this acquisition up as they do with most of their acquisitions? And then there is all the hyperbole about how this deal “changes everything” about the cloud market: how so? IBM could have talked about hybrid as its play to service legacy on-premises customers without pretending it somehow made the company relevant in the public cloud. But instead they painted a huge target on themselves.

    You’re saying wait and see. Happy to do that and happy to make a wager on it while we do so. I’ll bet IBM’s stock price is lower in a year. I’ll bet the Red Hat deal doesn’t “change everything”. I’ll bet that AWS and Azure continue to grow much faster than IBM’s “cloud” business and destroy the rest of IBM faster than IBM can grow its “hybrid cloud” business (which is really just cloudwashing of the legacy portfolio – e.g. how is a third of the systems business “cloud”?”).

    IBM has been talking a good game for nearly two decades now, but somehow the talk never pans out. Why is this time different?

  34. I think there’s also an 0ver-assumption that the cloud will devour all. It won’t there are as many or more cases where cloud doesn’t make sense as where it does.

  35. I don’t think I claim cloud devours everything, but I think it will devour a lot more. You can make the case that cloud will devour another $1 trillion of IT spend (with 2-3x revenue compression).

    And you can segment workloads a bunch of different ways to explore which more/less likely to go to cloud. I actually had a bunch on this in the post but cut it in the interest of getting it out. I don’t think the workloads that stay off the cloud are the foundation of a great business because they are things people don’t care about/won’t invest in. This article explores some of the data on this as well — https://venturebeat.com/2019/07/20/ibm-red-hat-should-developers-worry-were-headed-back-to-the-1990s/

  36. Great read, excellent comments..As a former Red Hatter (11 years) I must admit I was more bullish on the deal a year ago than I am now.(Note, I have no financial skin in the game either way) I can’t get into “internal IP” pre-acquisition strategy or #’s, but, I did predict in the first months of my career there, that IBM would eventually acquire Red Hat. Red Hat hired IBM’ers by the truckload, put them in key positions ahead of others from other more nimble backgrounds, by far and away more so than other, potentially more innovative thought leaders and technical minds. As far back as 2008, I even asked the CEO, Jim Whitehurst, 2010 timeframe, if IBM was a potential buyer, and I was more or less laughed at. (not by Whitehurst, a great CEO) I was told even then, IBM could not afford Red Hat on its P/E multiple and cash flow.

    Once a rebel, RHT continued its journey into conventionalism and top-heavy bureaucracy run by IBM and HP gray-hairs. A cash cow for some time, Red Hat was leery of competing directly with IBM ( Jboss-Websphere, RHEL-AIX, mainframe and Suse Linux (mainframe/SAP) to some obvious degrees. I once dallied with contributing market data etc to the internal “Competition Team” (internal) and IBM was rarely targeted. Ex IBM-employees still had friends of course with quotas to meet and dividends to cash, and thus lucrative Websphere shops were left alone,MQ/Risc accounts were often untouched. At times, sales teams were told ” IBM shops are not considered a competitor” Many reasons for this of course, but it did have the appearance at times, that RHT was IBM’s much younger step-brother. At times, it seemed the step-brother was nearly afraid of its bigger, older, “brother from another mother.”
    My overall opinion now, is Red Hat has unintentionally slowed down its innovative edge, and squarely stuck in the aging infrastructure world. Could help in some areas with margin erosion, a defense against the mainframe business, gain some more spend in non-Blue-dominated accounts, but still a generation or two late in the already way overhyped and already mature “hybrid-heterogeneous public/private
    containerized off-prem/on prem. SaaS, PaaS, Iaas” buzz-word salad machine.
    My guess is Whitehurst will move on from overseeing Red Hat, to some other role at IBM (V.P of Software or Operations ( his expertise) possibly CEO ( he did wrestle Delta Airlines back from dead) Remaining “culture” will devolve into a line item on a balance sheet, perhaps printed off on a dot matrix printer in Armonk.

    Colin Fleming

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