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Is Cloud Computing Cannibalizing Legacy IT Revenue Streams?

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Thursday, November 11, 2010

Is Cloud Computing Cannibalizing Legacy IT Revenue Streams?

Preferred / State-of-art Information Technology (IT) infrastructure and delivery mechanisms have gone through a myriad of changes in the last 30 years. We started with centralized process on mainframes, introduced the laptop computer, move to client/server, introduced Web 2.0 and mobile computing and are now contemplating a major move to the cloud.

Each of these “paradigm shifts” required that users migrate from the old to the new and in the process disrupted the business models and the revenue streams of the hardware and software manufacturers, Independent Software Vendors (ISVs), Resellers, Value Added Reseller (VARs) and IT consultants.

In an article on the CRN.com site by Joseph F. Kovar, titled, “IBM: Cloud Computing Will Cannibalize Other Parts Of The IT Business,” Mr. Kovar sites IBM sources as saying that they are in fact forecasting that they will cannibalize their legacy business units as a consequence of their cloud initiatives.

According to Mr. Kovar, Richard Michos, vice president of channel strategy for IBM, told a group of solution providers attending the Xchange Tech Innovators conference on Wednesday that, “IBM expects to add about $3 billion of net growth to its business by 2015 but…IBM will actually grow its cloud business by $12 billion, as the growth in cloud computing is expected to erase $9 billion worth of sales of its current hardware, software, and services.”

As indicated, this is not a new trend and is a natural result of any major paradigm shift in the industry. What is interesting from my perspective is how the vendors and the consultants in the litigation services and Governance, Risk and Compliance (GRC) markets will react to this inevitable model. And, that the industry will look like after the paradigm shift is complete.

Anaysts are predicting an accelerating shift in demand for eDiscovery infrastructure and technology in the cloud in the next five (5) years within the litigation services market. And, as a result, I predict major changes in the leading vendor and service provider landscape. If IBM is forecasting change, I would advise anyone in any industry that is moving to the cloud to take note of how it will affect your current revenue stream and mix. In some cases current product lines and resulting services will fade away and be replace by completely new opportunities. In some csaes this will present the opportunity to provide migration services and maybe even technology.

Recent history has proven that many in the litigaton services and technology market are slow to change and slow to even admit that there is a change. And, many have suffered as a result. This time around, it will be interesting to watch the dynamics of how the old and the new react.

One thing for sure,it is definitely going to be an entertaining and potentially profitable time to be in eDiscovery.

The full text of the portion of the Kovar article that talks about IBM cannibalizing its legacy IT revenue stream is as follows:

IBM (NYSE:IBM) expects the adoption of cloud computing to add significant growth to its business over the next five years even as it cannibalizes much of its existing business.
Richard Michos, vice president of channel strategy for IBM, told a group of solution providers attending the Xchange Tech Innovators conference on Wednesday that cloud computing is one of four "megatrends" IBM expects to impact its goal to increase business over the next five years, and that they had better prepared for those impacts.

IBM is planning on earning $20 per share by 2015, compared to about $11.45 per share now, Michos said. "Obviously, we have a lot to do in a short time," he told the solution providers. "And we can only do it with you."

One of those megatrends is cloud computing, which IBM expects to add about $3 billion of net growth to its business by 2015. IBM is investing about $6 billion in R&D for cloud computing, he said.

However, lest solution providers think $3 billion is not a big deal to a company like IBM, Michos said that to reach that goal will require IBM actually grow its cloud business by $12 billion, as the growth in cloud computing is expected to erase $9 billion worth of sales of its current hardware, software, and services.
That cannibalism of existing business by the growth in cloud computing caused Juan Rosario, owner of Daroc Computing, an Texas, El Paso-based solution provider, to stop and think about the impact of cloud computing on his business.

"For a small businessman like me, with small shops and repair shops, the cloud will be a threat," Rosario said. "Seventy percent of my business comes from fixing things. One of the promises of the cloud is that there is no virus, no software upgrades."

Rosario said he is afraid the cloud could one day put small companies like his out of business. "I need to look at how to use the cloud," he said.

Phillip Durant, president of American Computer Enterprises, a Daphne, Alabama-based solution provider, said that Michos certainly showed the importance of being part of the move to adopt cloud computing.
"If IBM is focused on the cloud and putting $6 billion in R&D into the cloud, it shows us we need to be there," he said.

Michos told solution providers to not worry about whether IBM will swoop in and grab cloud customers from them. "Won't happen," he said. "We don't have the manpower to do that."

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