Cloud Wars: Now Even the CIA Slams IBM’s Technology

By Wolf Richter: I assume without having even a scintilla of evidence that IBM, revenue-challenged as it may be, offers some decent hardware, software, and services, and that it has a thriving and close relationship with the Intelligence Community. All our American tech heroes yearn to get those big-fat contracts with “the Customer.” But when it came to cloud computing, the most hyped area in tech and IBM’s feeble hope for growth, the CIA – and this sort of stuff rarely seeps to the surface – slammed IBM’s technology.
So maybe IBM’s hardware and software engineering isn’t all that hot. But IBM excels in financial engineering. That’s what matters. Last year, it spent nearly $14 billion on buying back its own shares to prop them up and to hide the dilution caused by the shares it handed to its executives and to the owners of the acquired companies.
IBM lists 12 acquisitions last year and so far this year, bringing the total since 2000 to over 150. It dished out $2 billion last year for one of the hottest cloud-computing startups, SoftLayer, then wound down its own cloud-computing products. Buying over-hyped industry phenomena rather than creating its own technology has led to predictable results: withering revenues for eight quarters in a row.
A “terrific reverence for the shareholder” is what Warren Buffett called IBM’s financial engineering in 2011 during one of his hype appearances on CNBC where he touted IBM after he’d acquired a 5.5% stake. Perhaps IBM was too busy over the last few years manipulating up its stock while hollowing out stockholder equity and didn’t want to waste its resources on actual engineering.
And that’s how it got blasted by the CIA.

In mid-2012, five of America’s tech mastodons, including IBM and Amazon – whose cloud division AWS counts Netflix among its customers – bid on a $600-million contract to build the CIA’s private cloud computing system, according to Bloomberg Businessweek. It would be based on the latest and greatest technologies with the most advanced analytics. It was supposed to allow the Agency to get a handle on the mountains of disjointed data it collects from all over the world.
At the time, the cloud was still the most hyped concept on earth, though it just boils down to renting off-site computers and software, and every company was suddenly into it, offering hardware, software, and/or services to corporations and governments, and even to individuals. Google, which lives in the cloud, would later define the cloud this way: “virtualize hardware, pay only for what you use, with no upfront capital expenditures and lower prices than on-premise solutions.” Companies were raving about it during their earnings calls. IBM’s $100 billion in total revenues are declining, but hey, no big deal; its $2.3 billion in cloud revenues are booming. That sort of thing. Bureaucrats at the CIA ate it up and suddenly had to have their own cloud.
“It is nearly within our grasp to compute on all human-generated information,” gushed CIA chief technology officer Ira “Gus” Hunt to a group of tech industry leaders at the time. It was, he said, “high noon in the Information Age.”
The winner of the contract would be able to claim that the security of the system lived up to the CIA’s most stringent requirements so that even the NSA wouldn’t be able to hack into it. A big selling point at the time, now obviated by the Snowden revelations.
IBM and Amazon were finalists. In the past, IBM had been a shoo-in for bulbous government contracts with eternal, juicy service agreements. But February last year, the Agency awarded the contract to Amazon. The outside world would have kept sipping insipid lattes without ever knowing about it, had IBM not protested the decision.
The Government Accountability Office checked into IBM’s claim. According to BBW, the resulting documents showed that the CIA “had ‘grave’ concerns about the ability of IBM technology to scale up and down in response to usage spikes, and it rated the company’s technical demo as ‘marginal.’ Overall, the CIA concluded, IBM was a high-risk choice.”
It was IBM’s technology that got it panned, not its price.
In fact, its proposal was a third cheaper than Amazon’s. As this spilled into the courts, Amazon described IBM as a “late entrant to the cloud computing market” with an “uncompetitive, materially deficient proposal.” In the October 2013 ruling, a federal judge drove a wooden stake into IBM’s cloud technology: With the “overall inferiority of its proposal,” the ruling said, IBM “lacked any chance of winning.”
IBM pulled in its tail, gave up, and went back to work on its financial engineering. But now, it has an even bigger problem: The cloud – which it promised would be a source of fat margins and booming growth – is becoming commoditized. And a price war has broken out.
On March 25, Google fired a massive broadside when it announced mega-cuts in its cloud pricing. It claimed that hardware costs, over the past five years, had dropped 20-30% per year but cloud prices only 8% per year. “We think cloud pricing should track Moore’s Law, so we’re simplifying and reducing prices for our various on-demand, pay-as-you-go services by 30-85%.”
Google, which makes most of its money from selling ads, can afford to cut prices. Amazon, which doesn’t need to make money at all, based on how Wall Street looks at its stock, can also slash prices 35-85% because it doesn’t matter. Microsoft makes much of its money on other products, so OK. Everyone in the sector will have to fight mano-a-mano. And the juicy margins IBM promised its investors will dissipate into corporate speak, more slashing of products and people, and more financial engineering to somehow, by hook or crook, deliver on that non-GAAP earnings per share target.
It happened in 2000 and 2007. The consequences were spectacular. Now, it happened a third time in fifteen years. And it’s forming an increasingly terrifying chart. 

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X art by WB7