Can IBM expect the same ROI from next round of investment in Linux?

Can IBM expect the same ROI from next round of investment in Linux?

Posted 17 Oct 2013 by 

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At the most recent LinxuCon, IBM announced it will invest $1B in Linux and related open source technologies over the next five years.

This is not the first time IBM has made such a significant commitment to Linux. Back in 2000, IBM invested $1B and dedicated about 1,500 engineers to work on Linux. That investment paid off handsomely: by 2003 IBM was already getting returns of about $2B per year by revitalizing its mainframe business. Deploying Linux on IBM servers had made the offering a lot more attractive for organizations interested in keeping control of their data centers. By 2003, IBM's revenue from Linux related services grew to be twice as much the revenue of patents licensing: a hint for the business models that make the most sense in a knowledge economy.

In this most recent, renewed commitment, IBM will focus on its Power System servers, particularly on facilities and personnel to help Power users move to Linux. The investement will also be applied to a "development cloud", a sandbox installation of Power-based servers that IBM customers will be able to use remotely to build and test Linux applications. 

IBM gets revenue from Power Systems through direct sales of hardware and through the use of those systems in cloud installations whose computing and storage are offered as services. Embracing Linux in the Power System platform enables IBM to bring a larger customer base to its cloud offering.

The Power System hardware has traditionally been running either AIX, AS/400 or Linux. The popularity of the Unix offering has been decreasing while the Linux one has been increasing, with the Linux share being as large as the Unix one today. This shift in popularity fuels the motivation for further investing in better support for Linux.

The standardization on Linux enables the flourishing of data centers at a time when big data applications require hundreds of thousands of computers and are changing the paradigm to 'the data center is the computer.' To better appreciate the significance of the cloud market for IBM, it helps to look at the increase of 80% of revenue that their cloud initiative had in 2012 and the 70% growth in the first and second quarters of 2013.

The current cloud revenue of IBM is $2B and the plan is to reach $7B in cloud revenue by 2015, with $3B from new business and $4B from shifting current contracts to the cloud category. In order to help customers migrate to a Power-based cloud environment, IBM is putting in place facilities for customers to build and test their applications as they prepare for deployments. This is the reason why a good part of this $1B investment will go to the creation of these type of build and testing facilities.

In a nutshell: IBM is investing $1B one time with the strategic goal of raising cloud revenues from $2B to $7B annually by 2015. It may sound overly optimistic, until one looks at IDC's estimate that the overall cloud market will almost double to $105B between now and the year 2016. In that environment, it looks like IBM is poised to pull this trick again, and at a much larger scale, than they did back in 2001. IBM continues to directly contribute engineering goodness to the Linux kernel, as supported in the 2013 report on "Who Writes Linux", published this month by the Linux Foundation.

Luis Ibáñez works as Senior Software Engineer at Google Inc in New York city. Opinions expressed in this site are his own.

You can find him in github at:
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He previously worked as a Technical Leader at Kitware Inc., and Director of Open Source Community