It’s earnings season again and Amazon, for the first time ever, has broken out the financial results of its cloud services division, Amazon Web Services (AWS). The results are impressive. In less than a decade, Amazon has grown AWS into a $5 billion business that is still growing at 50%.
Yet even more impressive—and strangely unnoticed—is that at IBM cloud services is now a $7.7 billion business growing at 75%, according to IBM CFO Martin Schroeter’s prepared remarks during the company’s recent earnings call. Even for Big Blue, that’s a big business.
Amazon and IBM run vastly different operations, so making a direct comparison between the two announcements isn’t exactly apples to apples. Still, I think two things are clear. First, the cloud is becoming an absolutely massive business. Second, that much like the PC business back in the 90’s, most of the value will be in software and services, not hardware.
How Amazon Created The Massive Market For Cloud Services
Amazon Web Services was officially launched in 2006, but the seed of the idea came three years before. As Benjamin Black describes in his blog, at the time he was working on infrastructure with his manager, Chris Pinkham, when the the two developed a vision for how the could completely standardize and automate Amazon’s server infrastructure.
They took the concept to Amazon CEO Jeff Bezos who liked the idea a lot. As a matter of fact, he liked it so much that he thought that he could make a business out of it. Surely, if Amazon found the technology useful, other companies would also. He was right and when the service launched it became a runaway success.
Today, AWS has more than 1 million business customers ranging from Netflix and Expedia to startups most people have never heard of. When Healthcare.gov ran into highly publicized problems during its launch, it moved parts of the website to Amazon. Even the CIA recently signed a contract for Amazon to design and build a $600 million custom cloud for the agency.
Yet as I noted a while back, Amazon’s low cost, low margin approach has its limits. While the company is incredibly innovative, it often attracts competition that not only squeezes its margins, but eventually outperforms it. That’s seems to be what’s happening now as AWS’s “infrastructure as a service” is being outpaced by higher value services.
And the early leader appears to be, believe it or not, IBM.
An Old Approach Becomes New Again
In 1981, IBM launched the PC, which became an almost immediate success. It’s open approach allowed the company to shoot past Apple and create an entirely new industry. Yet as it turned out, the real value of the computer age turned out to lie not hardware, but software. Before long, Microsoft emerged as the world’s most powerful technology company.
By the end of the decade, IBM was faltering. Many industry observers thought the company should be broken up and when Louis Gerstner was named CEO in 1993, that’s what most people expected him to do. Yet he didn’t. Instead, he leveraged IBM’s enormous footprint to create a fabulous business in services.
In a sense, Amazon Web Services today is very much like IBM’s PC business back in the eighties. Two years ago, IBM bought a similar business, Softlayer, which at the time was a rising player in the cloud market that competed directly with Amazon. In a sense, this is similar to some of the moves Hewlett Packard made a generation ago.
Yet this time, IBM would not make the mistake of focusing on hardware to the exclusion of software. Last year, it launched Bluemix as a “platform as a service,” designed to allow developers to access all aspects of the cloud, including infrastructure, software and services. It also quickly moved to offer many of its existing products as “software as a service.”
Incidentally, Microsoft has a very similar strategy with its Azure offering. Its recently reported $6.3 billion in cloud revenues are second only to IBM. Unlike in the PC era, however, Redmond won’t have the market all to itself.
An App Store At Enterprise Scale
When people buy mobile phones, they are looking not only at the handset itself, but what applications it can access. IBM sees its cloud business in a similar way and is looking to leverage its unique offering of hardware, software and business services. In a sense, IBM is creating an app store for the cloud at enterprise scale.
Angel Diaz, Vice President of Cloud Architecture and Technology at IBM told me, “We’re moving to a world where applications are being integrated to create new products and services. We see our cloud business as empowering our customers to innovate, adapt and go to market with integrated services that change and adapt quickly.”
So for IBM, the cloud is vastly more than infrastructure, which is likely to be increasingly commoditized over time. An IBM client can access and integrate third party applications such SAP enterprise software, but also data and analytics packages honed through its Smarter Planet initiative, cognitive computing through Watson and a host of other software services.
Or, alternatively, a client can choose another partner for low cost infrastructure, but still use IBM exclusively for the high value services. Either way, it’s a great business.
The Cloud Disruption
As I argued in an previous article, the cloud might be the most disruptive technology ever. Earlier technologies had a centralized architecture, which meant that they were expensive to install, maintain and update. Cloud based services, on the other hand, are highly distributed, making it easy for even startup companies get similar access as large scale enterprises do.
And the potential is enormous. Not only is the market estimated to rise to $286 billion by 2018, but it represents an entirely new era of computing. As IBM’s Diaz puts it “it’s a whole new level of technological capability, which means an entirely new era of business innovation that will most likely dwarf what we saw with the arrival of the commercial web.”
So in a very real sense, we are in a situation much like the PC era in the eighties. IBM leads now, but that could change. Amazon, Microsoft and others are also building exciting businesses with high margins that are growing at an astounding rate. What’s more, that pace is likely to continue for over the medium term.
So perhaps we should pay less attention to the horse race and take a moment to appreciate the phenomenon itself. Much like a generation ago, we are entering a new era of computing and, just like back then, it will change everything.
This article was written by Greg Satell from Forbes and was legally licensed through the NewsCred publisher network.