4 Reasons Why You Should Care That IBM Just Made the Biggest Software Acquisition Ever Entrepreneurs building applications that solve problems in the cloud computing sphere should take very careful note.
By Thomas Smale Edited by Dan Bova
Opinions expressed by Entrepreneur contributors are their own.
On October 28, IBM announced a deal to acquire Red Hat, the largest distributor of the popular open-source operating system Linux, as the New York Times reported. The deal, estimated by BusinessWeek as costing $33 billion, positions IBM -- one of America's most venerable technology companies -- to take a bigger slice of the cloud computing market.
Related: IBM Says Cloud Business Enjoying 'Breakthrough Year'
That seems like a good move for IBM: Gartner has forecast that annual revenue from cloud computing will reach $186.4 billion by the end of 2018, and $302.5 billion by 2032.
So, for those new to these topics: What exactly is cloud computing, and why is it forecast to grow by 62 percent in the next three years? As defined by Amazon Web Services -- itself the largest cloud computing provider, with a 33 percent market share -- cloud computing is "the on-demand delivery of computer power, database storage, applications and other IT resources through a cloud services platform via the internet with pay-as-you-go pricing."
The main driver behind the enormous growth of the cloud computing market has been the increasing adoption of the three models: software as a service (SaaS), infrastructure as a service (IaaS) and platform as a service (PaaS). Adopters have been diverse, ranging from individuals and small businesses to the world's biggest corporations.
Things are changing fast for these players. "As of 2016," Sid Nag, research director at Gartner, told ZDNet, "approximately 17 percent of the total market revenue for infrastructure, middleware, application and business process services had shifted to [the] cloud.
"Through 2021," Nag continued, "this will increase to approximately 28 percent."
Such explosive growth in cloud computing provides enormous opportunities for everyone from solo SaaS entrepreneurs to giant companies like IBM. Below is a look at four reasons driving IBM's purchase of Red Hat, in what the latter company called the largest software company acquisition to date.
Those reasons reflect what the purchase says about the continued growth of -- and opportunities in --the cloud computing market.
1. IBM's need to keep up with the big boys
In its influential Magic Quadrant survey of the top cloud computing providers, Gartner relegated IBM to No. 6 in its rankings, lagging far behind the big three of: Amazon's AWS, Microsoft Azure and Google Cloud Platform.
2. IBM's bet on the hybrid cloud
By acquiring Red Hat, IBM is making a substantial bet that rather than migrating fully to public cloud solutions like AWS, many large businesses will instead adopt hybrid cloud solutions. Typically, a hybrid cloud approach relies on a blend of private cloud computing --with technology deployed in-house, often using Red Hat Linux -- in tandem with a public cloud provider like AWS, Azure or Google Cloud. IBM significantly trails those big three in market share, but is looking to make up ground with the Red Hat acquisition.
Such a hybrid cloud approach is appealing to companies which:
Are hesitant to trust their most sensitive data to a third-party, but recognize the cost and operational benefits of hosting some vital services,such as email and customer relationship management in the public cloud.
Are concerned about entrusting uptime for their most crucial processes completely to a third-party provider, particularly in times of disaster recovery.
Rely on legacy services that cannot be easily transitioned to the public cloud, but can run on in-house technology and work in concert with data processed on the public cloud.
Are concerned about scalability and want to harness the public cloud's compute power to improve it.
Related: It's Google vs. Alibaba in the Cloud Computing Gameplay in the Asia Pacific
IBM is betting heavily that these concerns, among others, will make hybrid cloud solutions appealing to a substantial number of customers; and the Red Hat acquisition better positions the information technology company to capitalize on that bet. IBM CEO Ginni Rometty put it this way, according to Business Insider: "IBM will become the world's No. 1 hybrid cloud provider," she predicted, "offering companies the only open cloud solution that will unlock the full value of the cloud for their businesses."
In addition, according to ZDNet, Rometty "dissed the public cloud and noted that most companies are 20 percent along the cloud journey and renting compute power to cut costs.
"The next 80 percent is about hybrid cloud," ZDNET predicted. Now, with its Red Hat acquisition, Rometty apparently believes that IBM will become that leading provider of hybrid cloud solutions.
3. IBM's bet on open source
Wired noted that many might think it unusual that IBM paid $33 billion to acquire a company that "gives away its primary product for free." The source code for Red Hat's most popular product -- its Red Hat Enterprise Linux operating system -- can be downloaded and used without charge.
However, Red Hat generates approximately $3 billion in revenue a year from companies using its products and paying for support. IBM has long been a believer in and contributor to open source software projects, particularly Linux. Wired also noted that, "Open source was once a fringe, idealistic movement in software, but it's now a core part of how big companies operate, from internet giants like Google and Facebook to Walmart and ExxonMobil."
Even former Microsoft CEO Steve Ballmer embraced open software. That's notable because Ballmer famously described open source software as "a cancer," according to TechCrunch. Yet Microsoft today is one of IBM's biggest cloud computing competitors with its Azure platform and has embraced open source software, even acquiring open source code repository and developer community GitHub for $7.5 billion earlier in 2018.
4. IBM's declining revenues
Since its founding in 1911, IBM has enjoyed many successes, and was considered "the most admired American corporation" for many years during the 1970s and 80s, as Fortune reported. The internet era has not always been kind to IBM, however: In 1993, the company posted what at the time was the second biggest ever quarterly loss in US history, in 1993.
More recently, IBM reported disappointing third quarter 2018 results. In recent years, IBM increasingly wagered on Watson, its artificial intelligence division, to drive growth, but Watson, "has not performed as well as IBM had hoped and investors were losing their patience," reported TechCrunch.
In acquiring Red Hat, IBM hopes to position itself as a much bigger player in the burgeoning cloud computing industry. The same TechCrunch article noted that the move may be seen as a return to focusing on "the enterprise software and services business that has always been [IBM's] core competency."
Final thoughts
The acquisition of Red Hat by IBM marks the biggest software acquisition ever, according to TechCrunch. Whether this wager on the hybrid cloud pays off over the long term remains to be seen, but it is a clear indication that the future of cloud computing remains bright, at least according to one of history's most successful companies.
Related: Apple Confirms it Uses Google Cloud for iCloud
The message here? Red Hat's acquisition should serve as a clear indication and inspiration to entrepreneurs that building applications that solve problems in the cloud computing sphere may prove to be very lucrative indeed.
