Competition in the cloud industry is heating up. On China’s Monday, Alibaba announced a $28.2 billion USD (200 billion RMB) investment in Alibaba Cloud over the next three years. On America’s Monday, IBM did its first earnings call with new CEO, Arvind Krishna, who emphasized revenue growth and hybrid cloud customers as the two major metrics to measure the company on in the next few years, a notable shift in priorities from the emphasis on earnings per share under his predecessor, Ginni Rometty.
Both companies are fighting for the third place in the massive and growing global cloud market, which is currently (and tenuously) held by Google’s GCP. And both companies have a chance to do so but in markedly different ways.
Buy vs Build
Alibaba has chosen the road of build. It has always been that way, similar to Amazon’s approach to AWS. This latest investment is an expansion of the initial 10 billion RMB (~$146 million USD) over 10 years investment that jump-started Alibaba Cloud back in 2009, a very risky bet at the time. To put this new investment in context, IBM’s headline-grabbing acquisition of Red Hat was $34 billion USD, a 63% premium of what Red Hat was worth back then (close to $21 billion USD). Note: this $21 billion was public market valuation, not cold-hard cash. And if the IBM-Red Hat acquisition was to happen today, Red Hat would likely be valued less simply due to the COVID-19-induced economic conditions and IBM would probably pay less. This hypothetical underscores just how significant is Alibaba’s new investment; the same money could have probably bought Red Hat today with change to spare.
Clearly, IBM has chosen the road of buy -- a more common approach used by its competitors. Microsoft bought GitHub. Google bought Looker. VMWare bought Pivotal and Carbon Black. And these are just the deals worth more than $1 billion USD. Plenty of small deals and acqui-hires occurred over the last few years as well. All these acquisitions are intended, in one way or another, to boost cloud platform usage in its most basic form: compute and storage. For the most part, all the major cloud platforms are still in “land grab” mode.
Buying companies is typically a quick fix to boosting earnings, but the long-term impact on growth is anybody’s guess. IBM acquired Red Hat for its long-term growth potential and technical competitiveness, especially in container orchestration which has been standardizing on Kubernetes, an open-source container orchestration technology first developed by Google. In fact, the terms “containers”, “Kubernetes”, and “OpenShift”, which is Red Hat’s managed Kubernetes platform, are emphasized in many places in IBM’s most recent Q1 2020 earnings call.
The race between Alibaba and IBM comes down to how fast Red Hat integrates with IBM (or IBM with Red Hat) versus how strategically and efficiently Alibaba can spend its new investment.
And that speed and efficiency is determined by culture.
Macro-Culture vs. Micro-Culture
By “macro-culture,” I mean the macro business environment external to the company. By “micro-culture,” I mean the specific company internal cultures. Alibaba and IBM have strengths and weaknesses along both dimensions.
For Alibaba, “micro-culture” is its advantage. It’s famous for having a tightly-knit, somewhat quirky company culture. Some would call it a big happy family, others would call it a cult. (For example, when Jack Ma was still CEO, he would officiate a special Alibaba-style wedding ceremony for selected employees and their new spouses who got married that year. Happy family or cult? You be the judge.)
This strong internal culture is likely a key driver behind why Alibaba has been opting to build versus buy when it comes to cloud. Building a cloud business is technologically difficult, immensely expensive up-front, and requires more patience than consumer-driven businesses. Having an idiosyncratic company culture also means if you acquire other sizable companies, integrating personnel would be difficult. Adding up all that, doubling down on its strong “micro-culture” with a sizable investment to boot is Alibaba playing to its strength.
The “macro-culture” environment is the opposite story. Alibaba is in a tough global business environment and has been for quite some time. When Trump was first elected president in early 2017, Alibaba made a high-profile overture to create one million American jobs. That promise has since been withdrawn when the bilateral trade war was heating up in 2018. Alibaba Cloud’s expansion plan into the U.S. was also halted in 2018, after spending more than three years and millions of dollars in building two data centers and a full-service American team.
This almost civilizational-level cultural clash between China and the U.S.-led West is only intensifying during this coronavirus pandemic, with both Trump and Biden airing political ads labeling the other person as more cozy with the Chinese government. Election Day is still more than six months away, and the anti-China rhetoric will only grow by then. Stuck and shut out of America, the most lucrative cloud market, are Chinese companies like Alibaba, which need both creativity and patience to achieve growth elsewhere (more on that below).
For IBM, “micro-culture” is its weakness. There is nothing noteworthy to my knowledge that distinguishes IBM’s culture in any way; the lackluster financial performance over the last decade plus probably didn’t help. Contrasting IBM’s blandness with Red Hat, which does have a strong, cohesive culture centered around its purist commitment to open source, and you have a mini-cultural clash waiting to burst. Red Hat’s culture is well-known in the tech community and, some argue, singularly unique and not replicable.
If you are a business management geek, like me, watching the impending integration between Red Hat and IBM is as good as the next hot TV series on Netflix. Since it’s only been less than three quarters from when this acquisition officially closed, it’s too early to tell whether things are going well or not. But with Alibaba’s investment, and the other bigger cloud vendors all growing aggressively, this integration will have to show meaningful progress soon.
IBM would argue it already has, by playing into its “macro-culture” advantage as a trust-worthy brand in enterprise technology products and services, with a long track record of having big companies and governments as customers. In its Q1 2020 earnings call, IBM SVP & CFO Jim Kavanaugh said:
Red Hat signed the two largest deals in its history, leveraging IBM’s deep client relationships. This is a great proof point of the value of IBM and Red Hat together.
While I have no inside knowledge of what these two large deals are and how they materialized, this sounds more or less like a business partnership referral to me; something that happens routinely when two companies in partnership bring each other in on deals to satisfy the customer. We will need more than just evidence of referrals to evaluate whether the most expensive acquisition in IBM’s 100-plus-year history was worth it. I do think both IBM’s and Red Hat’s solid reputation with enterprise customers is a “macro-culture” strength. But they need to forge a new “micro-culture” together to take advantage of it, soon.
Where To Grow?
The question of growth is markedly different for Alibaba and IBM, just like the culture question. For Alibaba, it’s a geographical question. For IBM, it’s a product question.
Alibaba Cloud’s presence will likely expand into Latin America and Southeast and South Asia, while doubling down on its lead in China and avoiding the U.S. market in the foreseeable future.
Latin America is intriguing, because it’s a relatively blank slate; all the other major cloud platforms have only one region currently online in Latin America, while Alibaba has none. According to industry research firm IDC, Latin America’s overall cloud market is also projected to grow 38.3% CAGR between 2018-2023, albeit from a small base. Alibaba and other Chinese tech companies, like ridesharing platform Didi Chuxing, have also made inroads in that continent’s various markets with other consumer businesses, so the local political and cultural resistance may not be as strong as in the U.S. Southeast and South Asia are natural extensions of Alibaba, because the region has a booming Internet economy and Alibaba already owns several important companies there like Lazada and Paytm. Of course, China is where Alibaba Cloud is leading, and considering how China's cloud spending is now the 2nd largest in the world with lots of growth potential ahead, doubling down not only makes sense but may even yield tangible results soon. Announcements of new data center and region locations are signals worth monitoring.
As for IBM plus Red Hat, it’s betting heavily on hybrid cloud to resurrect its growth. There are a lot of confusing marketing terms in the cloud industry, hybrid cloud being one of them. In the plainest of terms, hybrid cloud means running your IT in a mix of traditional non-cloud infrastructure and a cloud platform, thus hybrid. In the IBM case, the hybrid likely means long-time IBM customers mixing its existing mainframes with OpenShift to become one hybrid platform. In other words, IBM has an existing customer base to “cloudify.”
How big will hybrid cloud be in the entirety of cloud computing is an open question, but it should be significant. AWS used to see the term itself as a threat enough that the company banned it from all partnership branding and user conferences only to somewhat relent recently, accepting the reality that hybrid cloud (along with multi-cloud) cannot be wished away.
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阿里巴巴 vs IBM：争夺云市场第三
云计算市场的竞争正在极度升温。中国时间的本周一，阿里巴巴宣布在未来三年内给阿里云投资2000亿人民币。美国时间的本周一，IBM的新CEO Arvind Krishna首次参与季报电话会议，强调了收入增长和混合云（hybrid cloud）客户是衡量公司未来几年进度的两大指标，与前任CEO Ginni Rometty 强调的每股收益指标明显不同。
阿里巴巴选择了“自己造”这个路线。阿里团队一直如此，与亚马逊打造AWS的方式很像。这次新投资是对阿里最初十年100亿元人民币投资的肯定和延伸。阿里云从2009年起家，当时这项对云的押注风险很大。我们先好好思考一下这次2000亿人民币的新投资（大约282亿美元）的厉害程度。IBM收购Red Hat的价格是340亿美元，比当时Red Hat的估值（接近210亿美元）高出63%。要记住，这210亿美元是华尔街给的估值，不是现金。如果IBM对Red Hat的收购发生在今天，Red Hat的估值应该会因为新冠疫情所影响的经济状况而低一些，IBM要买的的话也会便宜些。这一假设突显出阿里的新投资有多重磅；同样的钱今天很有可能买得起Red Hat，还能剩点零钱。
收购公司通常是提升盈利的捷径，但对业务增长的长期影响业界里并没有公认结论。IBM收购Red Hat是为了长期增长的潜力和技术能力，特别是在容器编排方面。绝大部分云平台已经围绕着Kubernetes开始标准化，这是一个开源的容器编排科技，最初缘由与谷歌。IBM最近的Q1 2020季报电话会议中，已经在很多地方强调“容器”、“Kubernetes”和“Open Shift”这几个关键词。Open Shift既是Red Hat托管的Kubernetes平台。
阿里和IBM之间的竞争归根结底是在Red Hat与IBM（或IBM与Red Hat）的整合速度，和阿里能否有战略性和效率地花掉新的投资之间。
对IBM来说，“微观文化”是它的弱点。据我所知，IBM的企业文化没有什么有特点的地方；过去十多年来低迷的业绩也对打造文化有影响。Red Hat的文化则是个鲜明的对比，非常强大、有凝聚力，这与Red Hat多年拥抱开源软件文化有很大关系。Red Hat的文化在科技界是众所周知的，有些人认为甚至是独一无二，不可复制的。不难看出，这两种“微文化”很有可能演变成一个即将爆发的文化冲突。
IBM也许觉得合并已经有了效果，而且体现出了自己在“宏观文化”作为一个企业技术老品牌的优势。毕竟IBM是老字号，已经拥有许多大公司和政府作为客户。在其Q1 2020季报电话会议中，IBM SVP兼 CFO Jim Kavanaugh 说：
Red Hat签署了其历史上最大的两个单子，利用了IBM深厚的客户关系。这是IBM和Red Hat共同价值的有力证明。