IBM Buys SoftLayer To Build Out Hosting, Cloud Businesses

June 10, 2013 Timothy Prickett Morgan

Big Blue is adamant about building up its cloud business, and has promised Wall Street that it can boost cloud-related services revenues to $7 billion by 2015. IBM was late to the public cloud game, which Amazon Web Services fired up in 2006 after several years of development. Call it something like a decade of a lead. And that is why it has shelled out an undisclosed sum to buy cloud and hosting rival SoftLayer.

While IBM has made great strides with its SmartCloud public cloud, it has many orders of magnitude fewer customers than AWS and a less sophisticated set of infrastructure and platform services, too. And if customers are shifting at least a portion of their workloads to the cloud, IBM needs to basically buy a customer base, as it has for so many of its software products over the past two decades. With IBM’s global reach and sales push, it can grow the SoftLayer business much faster than SoftLayer could have done on its own. And, IBM can therefore get closer to that $7 billion promise than it could have done all by its lonesome with its fledgling SmartCloud.

In its statement announcing the deal, IBM didn’t really say much specific about why it was buying the Dallas, Texas, company or how much it is paying for it. The rumors going around in March were that IBM and EMC were both interested in buying SoftLayer, and other scuttlebutt said that AT&T was sniffing around even earlier to see if it should eat it.

There was a lot of talk about clouds, of course, in the announcement for the deal and how IBM would be adding some of its own SaaS applications for marketing, data analytics, and other workloads to the existing SoftLayer infrastructure and customer base. But SoftLayer, which I know a thing or two about thanks to my other job at The Register, is a very different animal from IBM’s Global Services units that do hosting and cloud. If anything, IBM had better hope that the SoftLayer people stick around and change IBM’s cloud business as much as IBM offers services on top of the SoftLayer cloud, which spans 13 data centers and has over 100,000 servers to host the 21,000 customers it has.

SoftLayer is privately held, but being up against AWS, Microsoft Windows Azure, and Google App Engine and Compute Engine, it has been reasonably open about its operations. The company has created its own cloud controller, which can provision bare metal machines as well as virtual machine hypervisors and their virtual machines, and this is a very useful set of software. While OpenStack and CloudStack in the open source world, vCloud in the VMware world, and even IBM’s own homegrown SmartCloud Entry cloud controller can provision hypervisors and virtual machines, they cannot do bare metal. IBM has said it will be shifting its SmartCloud public cloud to the OpenStack controller over time, and said in the SoftLayer acquisition that it would be offering OpenStack as an alternative to the SoftLayer controller inside the SoftLayer data centers. As far as I know, SoftLayer was not all that interested in using OpenStack, but there is a new sheriff in town. Or there will be, at least, when the deal closes in the third quarter if all goes as IBM expects.

The other interesting twist in this is that since it was founded in 2007, the company has sourced its servers from whitebox server maker Super Micro, and it buys on the order of 20,000 boxes a year, which is about 8 percent of Super Micro’s server business. If the rumors are true, IBM has been trying to unload its System x business, possibly selling it to Lenovo Group, but that hasn’t happened and now there is a possibility that IBM will have a home for 20,000 of its servers a year in SoftLayer data centers. And maybe more if it can grow the SoftLayer business, which was on track to make maybe $350 million to $400 million in revenues for 2013 based on some limited financial data that SoftLayer had previously announced for its third quarter last year. IBM could push this business up to maybe $1 billion or so in short order, and possibly boost that server base to 250,000, which is about as many servers as Big Blue sells in a quarter these days.

Add up the hosting and cloud infrastructure on top of such a cloud, and then layer on SaaS applications, supercomputing on demand (which both IBM and SoftLayer sell), and various platform services such as Hadoop data munching and NoSQL data stores, and you could go a long way towards hitting that $7 billion figure that CEO Ginni Rometty has been promising.

Whatever IBM’s plans, they are in the hands of Erich Clementi, a senior IBM executive who has run Big Blue’s cross-divisional midrange system business as well as its System z mainframe division in recent years. Clementi, who is senior vice president of Global Technology Services, is also being named IBM’s Cloud Czar. Well, more accurately, he is being named as the general manager of IBM’s new Cloud Services Division.