IBM is buying RedHat because IBM has fewer potential customers today than it had in the early 1970s. You can buy companies, but you can’t buy time and time is IBM’s enemy because every passing second acts against IBM’s business model by killing off IBM's best customers.
According to the US National Bureau of Economic Research, in 1976 there were nearly 5000 publicly listed companies, approximately 23 public firms per million US inhabitants. These companies have long been the bedrock on which IBM’s technology and professional services businesses were built.
When these companies first needed a computer, they bought a mainframe. When the PC and client server computing waves swept through firms IBM was there with the hardware, software and services required to put a PC on every desk and a server in every small data centre. When the internet hit, IBM had an e-business strategy on paper for CIOs to read and an army of IBM Global Services consultants to implement that strategy if the CIO cut them a purchase order.
IBM helped publicly traded firms make sense of technological change. Then, slowly at first, the worst thing happened. Globalisation and the Internet began murdering IBM’s customers.
That company making plumbing fixtures in their own factories in the US went out of business because its customers could order the same fixtures slightly cheaper and in higher volume from Asia with just a few clicks. As time ticked on hundreds of that company's publicly traded peers joined them on the funeral pyre of companies that are delisted and go out of business.
In 2016 the number of publicly listed companies had declined from 5000 in 1976 to approximately 3,600. As the US population continued to grow and consumer demand surged, a vast swath of existing and potential IBM customers withered and died. Where there once were 23 companies per million US inhabitants now there are 11 and falling.
In 1975, 109 firms accounted for half of all the profits booked by publicly traded firms, this year just 30 firms booked half of the profits. More customers giving more money to a smaller and smaller number of companies. Every one of the massive tech platform companies is in the top ten. Those platform companies not looking to buy anything from IBM today or tomorrow.
Near term, in the Enterprise IT market you can either become one of the trillion Dollar platform holders or be a company that uses those platforms to provide something of value to customers. RedHat has been moving towards trying to provide something of value. IBM has realised they will never be a platform holder of the size IBM requires to sustain itself, so the RedHat deal is their attempt to get onto those hyper-scale platforms and provide something of value to customers of any size.
The coming threat, for many IT providers not just IBM, is the next death wave to rip through the existing publicly traded companies. Amongst the financially living there are shambling zombie firms which have been lurching from one cash flow problem to the next under the darkness of creative accounting.
Mortally wounded due to the financial crisis and global competition, they shuffle onwards because of the cheap debt sloshing around the global financial system. Now that quantitative easing has tapered off across the globe, the low interest money drying up, rising debt interest rates will send these companies to their final death. Bankruptcy follows unsustainable debt payments and IBM’s potential customer pool will shrink even further as these zombie firms are shown to be flat broke.
RedHat is not a perfect deal, it has its own challenges, but it’s a deal that can be done with the financial resources IBM has today. There is no time for IBM to attempt another organic growth spurt, cognitive computing (Watson) was IBM’s in-house attempt to build a bridge to a prosperous future, IBM has failed in this effort. The idea was good but in business perfect execution of a mediocre idea results in profits. IBM had poor execution and that’s why cognitive computing has been a bust for them.
You can buy companies, but you can’t buy time. Buying RedHat is an attempt to buy the results of the time RedHat has spent on solutions to get customers up and running on the hyper-scale platforms. IBM’s customers are the names rolling across the stock market tickers, but that list shortens every year. With the RedHat deal it is IBM’s hope that a potential IBM customer is anyone of any size trying to get work done on the hyper-scale platforms.
It could work.
It could also be the death rattle of an industry pioneer.
But what a way to go out...