IBM says bye-bye to hardware and hello to the cloud

First PCs, then servers, now chips are being thrown overboard. IBM is going through its biggest shakeup in years, as it pivots from hardware to the cloud

Here are two things you didn't know about IBM: More than 200,000 of its employees are located in the Netherlands, and it is the third-largest seller of software applications in the world.

OK, the first item isn't exactly correct; those 200,000 employees are only in Holland on paper -- it's a perfectly legal tax dodge. But the second item is exactly right, says Forrester Research analyst Andrew Bartels. By next year, he says, IBM's application business will be worth about $8 billion, behind SAP and Oracle and ahead of Microsoft, excluding sales of Office. "IBM simply doesn't like to talk about the application business because it makes its partners uncomfortable," Bartels tells me.

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The software business as a whole is the company's second-largest income source, raking in $25.9 billion last year, more than a quarter of IBM's total revenue, so it's no surprise that IBM is moving to become a software and services company. But the speed at which the transformation is happening is startling, and the company is going to look very different in a few years -- because it has to.

In its most recent quarter, revenue from IBM's systems and technology business, which sells mainframes, servers, and other hardware, fell 26 percent to $4.3 billion in the fourth quarter, while cloud-related revenue rose 69 percent to $4.4 billion. That's right: The cloud business is soaring, while hardware is tanking.

IBM is headed for the cloud

Indeed, on Monday IBM kicked off a campaign to rebrand itself as a cloud company, committing $1 billion to new cloud capabilities. That effort includes putting its portfolio of business software into the cloud, not just selling it in separate packages to individual businesses. Don't forget: IBM spent $2 billion last year to acquire SoftLayer, a public cloud IaaS (infrastructure as a service) provider that complemented IBM's private cloud business.

IBM sold its PC business years to Lenovo years ago, in its first big move away from computer hardware. More recently, it's pulled away from its x86 server business, finally selling the remains of that business to Lenovo earlier this year. Now it appears that IBM will stop manufacturing semiconductor chips, according to multiple news reports. (IBM declined to comment.)

Getting rid of old products is not a new strategy for IBM. Over the years, the company has spun off typewriters, copiers, printers, satellite communications, networking services, and hard disk drives, as well as PCs, servers, and perhaps now chips. As "Lex," the influential but anonymous columnist for the Financial Times, puts it: "When IBM sees profit draining away, it sells, and its timing is usually good."

But there's plenty of profit in the cloud, so IBM is moving there at full speed.

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