IBM pushes SoftLayer cloud incentives program

CloudsIBM Corp. is making its SoftLayer cloud computing division more attractive to partners by providing profitability enhancements, marketing resources and training support. This initiative comes as Big Blue struggles to staunch declining revenue from legacy products while accelerating the adoption of its cloud services.

SoftLayer, a cloud infrastructure and hosting company IBM acquired in 2013 for $2.1 billion, is the cornerstone of a concerted effort to accelerate IBM’s presence in the cloud computing market and transform the company’s revenue mix. IBM is investing $1.2 billion to expand SoftLayer’s capacity beyond its existing 15 data centers around the world.

IBM wants partners to deliver more sales and revenue of its SoftLayer products. To simulate adoption and cultivate success, IBM is offering partners greater margin opportunities, marketing support and co-marketing initiatives to generate sales, and expanded technical support to partners on creating cloud services. IBM says partners who take advantage of these initiatives are generating twice the revenue growth of non-engaged partners.

The SoftLayer incentive and support program could be the foundation for a larger, concerted effort by IBM to convert many of its existing Systems X server resellers to cloud services sales. IBM is selling its X86 server business to Lenovo for $2.3 billion. When the sale closes, IBM plans to turn partners not transitioned to Lenovo on to SoftLayer. The rationale: Why sell hardware when you can sell hosted, virtual servers that generate recurring revenue?

Already IBM is generating more than $2.3 billion in cloud computing services and support. While this figure places IBM among the biggest cloud computing vendors in the market, the sales revenue is still a tiny fraction of IBM’s overall $100 million annual revenue.

IBM needs success from SoftLayer and other cloud services as sales and value of its legacy products are under pressure. In its quarterly earnings report released earlier this week, IBM posted its eighth consecutive quarter of declines, mostly in legacy hardware sales and on-premises software licenses. IBM is facing the same problem other hardware and software vendors are, in that the market’s transition to cloud isn’t generating enough replacement revenue for lost legacy products. At the same time, cloud services are pressuring the price and margins of legacy products.

Solution providers and resellers are facing similar revenue and margin pressure. Many solution providers see the necessity of transition from product sales to cloud services. However, cloud services aren’t generating the same sales and revenue streams, leaving gaps in cash flow resulting in high risk exposure to disruption.

The 2112 Group’s 2014 Channel Profitability report found that hardware and software profits were down slightly in the last year, but relatively stable. However, profits from services such as cloud, managed and professional services fell by nearly one-half as more supply entered the market and customer pressure on pricing forced margins concessions.

The IBM push for channel adoption of SoftLayer comes as the cloud computing market is embroiled in a pricing war. IBM positioned itself against Microsoft Azure and Amazon Web Services, saying the three companies make up the major, most significant players. There are more than three, though, and Amazon, Google and Microsoft are slashing prices to attract customers, which is also hurting profitability of downstream resellers.

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