MSFT vs IBM

[Marve2013]

Hi All,

 

Can someone pls explain to me why the markets have been cheering on MSFT and all the while going ho-hum about IBM?

 

http://fortune.com/microsoft-fortune-500-cloud-computing/

 

I read the article and it's a good write-up about instilling a new culture, but other than that I didn't get the feeling there was any significant change.  My guess is the markets were really fed up with Steve Balmer back then, and the new CEO Satya offered a refreshing change that so much value was unlocked just based upon a "we've gone beyond Balmer" kind of era.

 

MSFT investing in cloud is great.  And I get that it can't stand on Office forever.  But even then, the level of margins and market share power in these two business are vastly different.  It's like taking the cash from what was once a REALLY great business and plowing it into a potentiall, GOOD business. 

 

IBM sounds more interesting to me.  Going for more selected hybrid plays, all the while building up an industry cluster practice.  Making the AI really workable for clients.  Is it fair to say IBM's AI (Watson) is further ahead than MSFT's AI?  Hard to say.  But IBM has certainly been making it more real and is signing up marquee names - Beijing (pollution) vs MSFT Chongqing, Tamil Nadu (Flood), Memorial Sloan, MIT AI Center, Big Banks, etc.

 

So to me, IBM has an intrinsic moat - that's if it can gain futher traction on this AI business.  But MSFT doesn't seem to have the same level of advantage.  Amazon, MSFT, and others can all sign up as much cloud business as they want.  But ultimately, they will still have to work with IBM inorder to all for clients to make use of that data on cloud ... is this a right asessment?  (yes, they could build their own AI too, or work with google .. but then that's another assessment to make)

 

Appreciate your comments.  Thank you all.

[RichardGibbons]

But ultimately, they will still have to work with IBM inorder to all for clients to make use of that data on cloud ... is this a right asessment?  (yes, they could build their own AI too, or work with google .. but then that's another assessment to make)

 

Their clients don't have to work with IBM.  I'm a proprietorship, and I've done stuff with AWS, and I'm sure I could figure out Azure as well.  There are a million people like me, and the only reason to choose IBM is because of the brand.  (In fact, I'd go a step further--the companies that choose IBM will mostly be the losers, because they are likely choosing the company because of the brand and therefore don't view IT as a competitive advantage, an attitude which I think puts them at a competitive disadvantage.)

 

Microsoft, on the other hand, has a huge chunk of Enterprise software, but a company would have to be really dumb to come to me to build an enterprise software suite from them.  They should just go to Microsoft.  Thus, IBM mostly has less of a moat that Microsoft. 

 

Watson might end up getting a moat, but it's also a sexy area that a bunch of other people are playing in, and they aren't the obvious "winner" yet.

[KCLarkin]

Nobody buys IBM because of the brand.

 

And those who buy IBM believe IT is a competitive advantage. If it was a commodity, they would just use open source software, running on chinese servers, installed by Indian IT shops.

[oddballstocks]

I have a lot of anecdotal stories of companies trying to do anything to escape the clutches of IBM, for cost, for performance, just to be away from IBM.

 

The problem is for large companies with enterprise installations they can choose from IBM, Oracle, or JBoss.  None are ideal solutions.

 

The danger is what KCLarkin mentioned, moving to open source.  In some ways these enterprise level companies have made their bed.  I know some companies that are so frustrated that they're moving to things like Spring self-hosting, Tomcat or any other non-heavyweight solutions.

 

The differences in the companies is clearly captured in their cultures.  IBM is known for hiring younger workers without much experience and putting them through the meat grinder.  It's just a stop on the resume tour.  Their "moat" is that some customers still haven't figured out how to leave yet.

 

Microsoft is out there creating new things and innovating.  There has been a HUGE shift in the IT industry with the Ballmer departure.  They're releasing what people want and have become much more open.  Their platform has some really compelling products.

 

Personally I always had the "unix is great closed source sucks" mentality.  But then a project forced us to use C#.  Turns out that C# was an awesome language, and now it's completely open source.  Long story short, the stuff coming out of Microsoft is so compelling that we're moving entirely onto their platform.  A C# hosted app on Azure with a SQL Server backend.  Five or ten years ago I wouldn't have believed this was possible, but the business case for it supports the move.  Development time is reduced, support time reduced, there is support available, and Azure's servers tick every certification box available.

 

It's interesting to see what's happened on the other side as well.  Java, which was known as open source has been closed up by Oracle.  Sun was a much better stewart of Java compared to Oracle.  You have Microsoft who was previously very closed becoming very open and Java which was very open becoming very closed.

 

IBM used to have their own Hotspot JVM, I don't know if they're still maintaining it.

 

 

[RichardGibbons]

And those who buy IBM believe IT is a competitive advantage. If it was a commodity, they would just use open source software, running on chinese servers, installed by Indian IT shops.

 

Good point, maybe I should rephrase that.  People who buy IBM believe IT is a competitive advantage, but don't know enough about IT to build something that would provide a competitive advantage or even realize that businesses don't get competitive advantages in IT by outsourcing their IT to someone else. So they go with IBM because of the brand and end up grossly overpaying for mediocre talent.  But at least they help incompetent management feel good about themselves.

[oddballstocks]

And those who buy IBM believe IT is a competitive advantage. If it was a commodity, they would just use open source software, running on chinese servers, installed by Indian IT shops.

 

Good point, maybe I should rephrase that.  People who buy IBM believe IT is a competitive advantage, but don't know enough about IT to build something that would provide a competitive advantage or even realize that businesses don't get competitive advantages in IT by outsourcing their IT to someone else. So they go with IBM because of the brand and end up grossly overpaying for mediocre talent.  But at least they help incompetent management feel good about themselves.

 

Very well said.

[Ballinvarosig Investors]

I have a lot of anecdotal stories of companies trying to do anything to escape the clutches of IBM, for cost, for performance, just to be away from IBM.

You are not the only one. My brother works for a large multinational that is trying to disentangle itself from IBM. He said the reason why the IBM mainframe business is so profitable (and hated by customers) is the fact that customers are charged on a MIPS (millions of instructions per second) basis. Historically, they have been willing to pay this cost due to the stability (and some inertia) that a mainframe platform provides. Technology has moved on though and the upstarts at Facebook, Google, and other companies have developed technology (that's open source and can be run on commodity hardware) that allows customers to scale applications horizontally. This has left IBM selling a solution that's obsolete and too expensive, little wonder customers are leaving. The process isn't all or nothing though, and it is being staggered. If a company has just bought a lot of IBM mainframe hardware, they will want to get the full life from it before upgrading. This is why IBM are able to manage the decline. Make no mistake though, this part of the IBM business is dying.

 

Of course, people will say look at the free cash flow yield. It looks great, and if you believe the story that products and services outside of the mainframe (the other cash cow) can take up the slack, then IBM is a screaming buy. I asked my brother about this one too, and he actually said that not only is his company trying to get off the mainframe, they are trying to stop using other IBM products and services too (people are less willing to spend $200k on a fully loaded IBM web server when you can configure environments on Amazon for much cheaper). Again, like the mainframe, a lot of the benefits that IBM were able to provide for a price is now free and much of this technology is still in varying ways of early adoption. That leaves me wondering, what products do IBM actually have a genuinely competitive advantage in?

 

What I will say about IBM is that they are doing right by shareholders and are managing the decline reasonably well, so there is the possibility to buy it if it's cheap and sell when it's dear.

[KCLarkin]

So they go with IBM because of the brand and end up grossly overpaying for mediocre talent.  But at least they help incompetent management feel good about themselves.

 

A brand isn't magical fairy dust that causes people to pay more money for bad products.

 

Your lazy thinking obscures IBM's real strengths and challenges.

[undervalued]

There are a lot of Indians working for MSFT and IBM. They might decided that it's better to start up a new company in India or maybe move back to India and work there as Indian companies get bigger. I've heard stories from Indian IT people that they have better working environment and perks in India than here in the US.

[oddballstocks]

So they go with IBM because of the brand and end up grossly overpaying for mediocre talent.  But at least they help incompetent management feel good about themselves.

 

A brand isn't magical fairy dust that causes people to pay more money for bad products.

 

Your lazy thinking obscures IBM's real strengths and challenges.

 

You work for or worked for IBM correct? What are their strengths?  Why would someone buy IBM's offerings?

[KCLarkin]

You work for or worked for IBM correct? What are their strengths?  Why would someone buy IBM's offerings?

 

Ha ha. No, I don't work for IBM. But I understand how brands work.

 

[arcube]

Nobody buys IBM because of the brand.

 

And those who buy IBM believe IT is a competitive advantage. If it was a commodity, they would just use open source software, running on chinese servers, installed by Indian IT shops.

 

I think we traded posts on IBM thread before. I am not sure what you are trying to say! What's wrong with "Chinese servers and Indian IT shops". IBM GS has a huge amount of talent working from India and often uses equipment from Lenovo.

[KCLarkin]

I am not sure what you are trying to say!

 

Just saying that cost isn't the only variable. And the people who buy IBM tend to care more about the other variables.

[arcube]

I am not sure what you are trying to say!

 

Just saying that cost isn't the only variable. And the people who buy IBM tend to care more about the other variables.

 

Agreed but there are similar shops both from the US and Asia that compete on those variables as well and are comparatively economical and flexible compared to IBM. We can get into a big discussion here but let's do it some other day, my opinion is it takes a giant aircraft carrier like IBM time to turn compared to a lot of industry players. My hope is that Watson for Healthcare really gives IBM the shot in the arm it needs but I am not betting on it.

[intothebreach]

One aspect of the brand that I believe is non-negligeable is there is a lot of truth to the statement "nobody ever got fired for hiring IBM", especially in large corporations where it is less risky for an individual to fail in conventional ways than to try to succeed non-conventionally (to borrow a familiar expression). Although this would probably also apply to Microsoft.

[KCLarkin]

One aspect of the brand that I believe is non-negligeable is there is a lot of truth to the statement "nobody ever got fired for hiring IBM", especially in large corporations where it is less risky for an individual to fail in conventional ways than to try to succeed non-conventionally (to borrow a familiar expression). Although this would probably also apply to Microsoft.

 

This is a good example of my point:

Lazy Thinking: Stupid people pay extra for IBM, because of "brand"

2nd Level thinking: IT managers pay extra for IBM to reduce career risk

3rd Level: Why does hiring IBM reduce career risk? Is this advantage eroding?

 

You could argue that IBM's ROTE is so high because it exploits a principal-agent problem. That is a much more insightful argument than saying that people only buy IBM because of the "brand".

 

--

I will refrain from further comment on this thread.

[oddballstocks]

One aspect of the brand that I believe is non-negligeable is there is a lot of truth to the statement "nobody ever got fired for hiring IBM", especially in large corporations where it is less risky for an individual to fail in conventional ways than to try to succeed non-conventionally (to borrow a familiar expression). Although this would probably also apply to Microsoft.

 

This is a good example of my point:

Lazy Thinking: Stupid people pay extra for IBM, because of "brand"

2nd Level thinking: IT managers pay extra for IBM to reduce career risk

3rd Level: Why does hiring IBM reduce career risk? Is this advantage eroding?

 

You could argue that IBM's ROTE is so high because it exploits a principal-agent problem. That is a much more insightful argument than saying that people only buy IBM because of the "brand".

 

--

I will refrain from further comment on this thread.

 

I'll propose a different theory.  The companies that end up buying from IBM come from RFP heavy sales processes and IBM along with a few other heavyweights are the only players who are willing to play this game.

 

Anecdotal story.  Was on a car rental bus recently and a guy next to me was in enterprise software sales and decided that he wanted to share the results of his trip with the entire bus.  His company (that will remain nameless, but I know) was competing against IBM for a contract at a very large oil company that everyone on here would recognize.  He kept talking about how this company had no idea what they were doing and were relying on their vendor for advice.  He said the other competing vendor pushed IBM products, but this guy said they were pointless and was going to push his software stack.  In the end this client will purchase from IBM or this other company based on whose sales story they like more.  The client was not in the drivers seat, they were being taken for a ride. 

[rishig]

One aspect of the brand that I believe is non-negligeable is there is a lot of truth to the statement "nobody ever got fired for hiring IBM", especially in large corporations where it is less risky for an individual to fail in conventional ways than to try to succeed non-conventionally (to borrow a familiar expression). Although this would probably also apply to Microsoft.

 

This is a good example of my point:

Lazy Thinking: Stupid people pay extra for IBM, because of "brand"

2nd Level thinking: IT managers pay extra for IBM to reduce career risk

3rd Level: Why does hiring IBM reduce career risk? Is this advantage eroding?

 

You could argue that IBM's ROTE is so high because it exploits a principal-agent problem. That is a much more insightful argument than saying that people only buy IBM because of the "brand".

 

--

I will refrain from further comment on this thread.

 

I'll propose a different theory.  The companies that end up buying from IBM come from RFP heavy sales processes and IBM along with a few other heavyweights are the only players who are willing to play this game.

 

Anecdotal story.  Was on a car rental bus recently and a guy next to me was in enterprise software sales and decided that he wanted to share the results of his trip with the entire bus.  His company (that will remain nameless, but I know) was competing against IBM for a contract at a very large oil company that everyone on here would recognize.  He kept talking about how this company had no idea what they were doing and were relying on their vendor for advice.  He said the other competing vendor pushed IBM products, but this guy said they were pointless and was going to push his software stack.  In the end this client will purchase from IBM or this other company based on whose sales story they like more.  The client was not in the drivers seat, they were being taken for a ride.

 

This is spot on. The ultimate sucker client who hires the likes of IBM is the US government. Here is an example of how US government outsourced the building of healthcare.gov and the execution was a mess. This is my old boss talking about how they ultimately rescued the healthcare.gov website (my boss and a few others took unpaid leave from our current employer to help rescue the healthcare.gov):

[RichardGibbons]

This is a good example of my point:

Lazy Thinking: Stupid people pay extra for IBM, because of "brand"

2nd Level thinking: IT managers pay extra for IBM to reduce career risk

3rd Level: Why does hiring IBM reduce career risk? Is this advantage eroding?

 

Hey, wait a minute... I said this and you said it was lazy thinking: "they make incompetent management feel good about themselves".  This is essentially your 2nd level thinking.

 

Also, your third level thinking is basically paraphrasing "hey people buy it because of its brand and we should think about whether that brand is eroding".  Essentially what I said!  Go figure, I'm third level thinking, but you're having a really hard time identifying it.

 

I think maybe you're saying the same thing as me, except you're being nice about it, and I'm being blunt about it.  You're probably a nicer person.  :)

 

I think the real problem IBM has is that IT is a competitive advantage in many cases.  So, the companies that don't understand IT and therefore hire IBM will frequently lose to companies that do IT in-house.  It's hard to win long-term when your business model self-selects the customers who are more likely to lose long term.

[KCLarkin]

No, we're not saying the same thing.

 

You are saying that people buy IBM because of the perception that it reduces IT career risk.

I am saying that people buy IBM because it actually reduces IT career risk.

 

By stopping at Level I, you are ignoring all the strategic and tactical ways IBM reduces IT career risk.

 

--

For example, Silicon Valley lives with an experimental "fail fast" mantra. That allows them to innovate quickly. But if you build your bank on top of the enterprise equivalent of "Google Glass", that is extremely risky. Enterprises that buy cloud computing from Google have extreme career risk. A private cloud from IBM might be pricier, but you know that IBM will be around in 50 years to support it.

 

--

And because you are looking at this superficially, you are missing some key investment insights. If IBM's brand promise is to reduce IT career risk, what happens when business units or developers can buy IT resources directly from AWS or the cloud? Suddenly, AWS is able to breach IBM's moat.

 

IT professionals want to reduce risk. Business units want speed and flexibility. The relative power between these groups will determine how aggressively the companies move towards the public cloud. Banks, insurers, airlines, railroads, and hospitals are understandably risk adverse. Startups are understandably focused on speed and flexibility.

 

And because of this dynamic, IBM is racing to make their products and services more flexible. And AWS is racing to make their services less risky.

 

And finally, getting back to the OP, Microsoft Azure is sitting happily in the middle. It is both relatively risk-free and relatively flexible. A very prudent choice for the many businesses that are "Microsoft shops".

 

That probably explains the wide valuation gap between MSFT and IBM. There is uncertainty about whether IBM will be able to repair the breach in its moat. Microsoft's enterprise moat is relatively unscathed (although iOS/Android have breached the Windows moat and Google Apps has wounded the Office moat).

 

[RichardGibbons]

Interesting argument, but I'm afraid that you're at first level thinking on this one, focused on this one premise, "IBM is a job security for IT people (but don't refer to 'people associating job security with IBM' as a brand, because it isn't. Just because.)"  Grounded in this first-level thinking, blindered view of IBM's competitive advantages, you'll have problems understanding their long-term risks.

 

The Silicon Valley "fast fail" strategy is risky, but there are a large number of people who are doing this, and 5% who are successful will typically be much more successful than the people using things like IBM.  The non-IBM customers will be the long-term winners, which will be very problematic for IBM.

 

Thus, while IT job security is a factor, it is only a minor one, long term.  The important thing is whether IBM can play this new game successfully (and it's shown no sign that it can.)  It doesn't really matter if you're great at creating buggies that will reliably take you from Philadelphia to New York, and everyone who orders buggies will think of you first. Thirty years after the car is invented you still won't be selling many.

 

You should consider doing some second and third level thinking about what happens to IBM in a world where a bunch of people start doing "fast fail".

[KCLarkin]

Interesting argument, but I'm afraid that you're at first level thinking on this one, focused on this one premise, "IBM is a job security for IT people (but don't refer to 'people associating job security with IBM' as a brand, because it isn't. Just because.)"  Grounded in this first-level thinking, blindered view of IBM's competitive advantages, you'll have problems understanding their long-term risks.

 

The Silicon Valley "fast fail" strategy is risky, but there are a large number of people who are doing this, and 5% who are successful will typically be much more successful than the people using things like IBM.  The non-IBM customers will be the long-term winners, which will be very problematic for IBM.

 

Thus, while IT job security is a factor, it is only a minor one, long term.  The important thing is whether IBM can play this new game successfully (and it's shown no sign that it can.)  It doesn't really matter if you're great at creating buggies that will reliably take you from Philadelphia to New York, and everyone who orders buggies will think of you first. Thirty years after the car is invented you still won't be selling many.

 

You should consider doing some second and third level thinking about what happens to IBM in a world where a bunch of people start doing "fast fail".

 

To be clear, the "Nobody gets fired for buying IBM" thesis isn't mine. Someone else stated this earlier in the thread. I was just using it as an example about how to think about "brands". I will refrain from further discussion.

[vinod1]

I have sold IBM earlier this year - a wash with no gains. That said, I agree with KCLarkin.

 

I disagree with the whole premise:

 

"So, the companies that don't understand IT and therefore hire IBM will frequently lose to companies that do IT in-house.  It's hard to win long-term when your business model self-selects the customers who are more likely to lose long term."

 

Visa for example is heavily into IBM products and it is not because it does not understand IT. It is not an isolated example, you look at many examples in the financial sector.

 

Vinod