Integration of AI into open architecture positions IBM hybrid cloud as ideal platform for mission-critical workloads

Since acquiring Red Hat, IBM has undergone a major strategic shift to accommodate for hybrid cloud, abiding by the philosophy that the hybrid model — whether it consists of core or edge infrastructure and/or multiple public clouds — captures more value than a traditional cloud. Drawing on more than a decade of experience in traditional and cloud-ready infrastructure, IBM provides a foundation on which to run Red Hat OpenShift and deliver a common software layer designed to abstract the underlying complexities.

However, Red Hat’s prowess in containers and Linux only completed half the story as IBM built on top of the platform with a suite of software, including IBM Cloud Paks and partner SaaS, and services supported by the “advise, build, move, manage” methodology that trickles down the technology stack. Based on Red Hat OpenShift, which has grown to nearly 3,000 clients, this architecture gives credence to this statement from IBM Cloud & Data Platforms SVP Rob Thomas: “There is no AI without IA (information architecture).” A key theme at Think Digital 2021, AI is becoming more relevant in IBM’s overall strategy as CEO Arvind Krishna looks to define IBM as a “hybrid cloud and AI company.”

Unifying AI with hybrid cloud speaks to IBM’s attempts to gain share in “Chapter 2 of the Cloud,” or take large amounts of data, which can largely be accessed through AI, and extend it to the cloud. Given that operational AI is most successful running on containers and Kubernetes by allowing users to apply AI algorithms across architectures with consistency, IBM again benefits from Red Hat’s underlying platform and gains positioning to deliver AI to the enterprise with a degree of flexibility and vendor-agnosticism. For example, IBM Watson Studio is available as an add-on to the new Red Hat OpenShift Data Science service, to create and manage AI. With the support for Red Hat, applying AI to areas such as security and compliance, application modernization, IT support, and business process transformation could be the differentiating factor IBM needs to capture new cloud customers outside the IBM ecosystem.  

IBM tackles automation as it looks to democratize AI and bring all software back to the platform

IBM asserted itself in the AIOps market at Think Digital 2020 with the announcement of Watson AIOps, which is designed to automate how clients run their IT systems. However, in the last year, IBM has accelerated investments outside AIOps, making big bets on automation underscored by acquisitions in robotic process automation, process mining and business process automation. These investments were likely prompted by market changes stemming from the COVID-19 pandemic, which Salesforce President Bret Taylor noted at the event brought a “decade’s worth of digital transformation into 13 months.”

Building on last year’s theme of solidifying a hybrid cloud architectural approach through Red Hat, at Think Digital 2021, IBM (Nasdaq: IBM) emphasized the importance of infusing AI into the platform to help enterprises make sense of data and achieve true insights in a digital economy. IBM again used the event to emphasize the power of adopting hybrid cloud architecture integrated with AI-driven cognitive services to help businesses adapt to change. Naturally, AI and automation were key themes of the one-day virtual event, and discussions with CVS Health (NYSE: CVS) and Delta Air Lines (NYSE: DAL), among other companies, highlighted how AI has supported IT and business transformation across industries during the COVID-19 pandemic.

TBR perspective

Based on a foundation in Linux, which enables containerized applications to move across physical and virtual environments, Red Hat maintains a unique market presence with its neutral PaaS solution, Red Hat OpenShift. Red Hat’s vision to extend the applicability of Red Hat OpenShift, which is leveraged by 90% of Fortune 500 companies, to new use cases, consumption models and environments was one of the key takeaways from Red Hat Summit 2021.

As discussed by Paul Cormier, one of the main benefits of an open hybrid cloud approach, which is based on open code, processes and cultures, is the flexibility to run applications across environments with consistency. This approach positions Red Hat and its customers to evolve alongside emerging market trends such as AI, 5G and even quantum computing. As seen in Red Hat’s expanding top line, the company has been successful leading with an architectural approach under core brands such as Red Hat Enterprise Linux (RHEL), OpenShift and Ansible. TBR believes Red Hat will be well positioned to expand its portfolio to new markets and customers and push its open-source expertise beyond the bounds of cloud computing due to continued support from IBM (NYSE: IBM) and an expanding ecosystem of systems integrators (SIs) and ISVs.

Red Hat expands Red Hat OpenShift usage with new managed cloud services

While Red Hat has offered Red Hat OpenShift as a managed service for some time, scaling up managed support is becoming a key initiative for the company, especially as more customers pursue managed offerings to offload operational tasks at both the applications and infrastructure layers. To broaden the applicability of Red Hat OpenShift, at the event, the company unveiled three new cloud managed services supporting customers’ need to build, deploy and integrate modern applications within their existing Red Hat OpenShift environment, either in the cloud or on premises.

At the Red Hat Summit 2021 conference, Red Hat continued to convey to a group of customers, partners and industry analysts the message of open hybrid cloud the company has been leading with for over a decade. Over the course of the three-day event, executives including Red Hat CEO Paul Cormier and Products and Technologies EVP Matt Hicks outlined Red Hat’s evolution from an operating system company to one offering a full suite of self-service software and services for hybrid cloud.

5G represented a small portion of the overall PCN market in 2020, but is poised to rapidly scale in coming years

According to TBR’s estimates, 5G represented 8%, on average, of benchmarked companies’ private cellular network (PCN) revenue in 2020, with the rest being LTE. LTE remains the de facto technology for PCN, thanks to its maturity and vibrant ecosystem, which has been developed over the past decade. 5G for private networks, on the other hand, remains in its infancy, with key 3GPP Release 16 standards recently ratified, 5G spectrum gradually coming to market, compatible infrastructure commercialized and endpoint devices becoming available in the past year.

The endpoint device aspect of the nascent 5G ecosystem will begin to proliferate over the next couple of years, at which point 5G PCN implementations can be scaled commercially. In the meantime, most of the 5G engagements that occurred in 2020, with the notable exception of those in China, were focused on experiments and pilots, pending the commercial availability of compatible endpoint devices.

China has a significant head start with private 5G, with Huawei and ZTE equipping leading entities in the country, particularly the government, with the technology as part of national digitalization-related initiatives. Other developed APAC countries, namely South Korea, Japan, Taiwan and Singapore, are following closely behind China in 5G readiness.

Vendors’ PCN sales funnels are burgeoning

Vendors are experiencing significant and broad interest from enterprises and governments for how to leverage PCN for digital transformation-related initiatives. 5G is of particular interest, portending a strong growth profile through this decade.

Though 5G remains primarily in the exploratory phase, many of these engagements are likely to convert into commercial contracts over the next couple of years. In the interim, the bulk of PCN deal wins will be for private LTE networks.

TBR’s Private Cellular Networks Vendor Benchmark tracks the revenue key vendors obtain from the sale of LTE- and 5G-related infrastructure (includes RAN, core, transport and services provided for that infrastructure) to governments and enterprises, including large, medium and small non-CSP (telco, cableco, webscale) businesses. The benchmark ranks key private cellular networks vendors by overall revenue and by segment. Global market share and regional data and analysis are also provided.

After over a year of discussions about the future of the Dell-VMware relationship, on April 14, 2021, it was confirmed that Dell (NYSE: DELL) will spin off its 81% majority stake in VMware (NYSE: VMW) to create two independent companies, effective CY4Q21. Evidenced by the market’s immediate reaction, the spinoff will be an overall positive move for both companies, giving Dell the chance to reorganize as a leaner, more targeted organization while offering VMware more go-to-market flexibility. Of course, as independent companies, Dell and VMware will face challenges, but increasingly differing portfolios, revenue models and market views will position both companies for longer-term success as separate entities. 

While mostly beneficial to VMware, the spinoff will offer stand-alone Dell some pockets of opportunity

While it is true that VMware has been Dell’s secret sauce for years, the announced spinoff will not necessarily cost Dell a long-term competitive advantage. Given the investments VMware has made in the last five years to accelerate its cloud strategy and position itself as more than a virtualization software company, it makes sense for VMware to operate separately. This is true even from a branding perspective, given Dell EMC’s play in many legacy markets.

However, there is also a potential upside for Dell, as the separation could enable the company to be less reliant on VMware and move beyond the big bets it placed on software-defined hardware solutions, which have generally performed below market expectations over the past few years. TBR suspects this strategy will allow Dell to become more focused on capturing the roughly 80% of enterprises that continue to operate on premises by providing them with access to cloud services and flexible pricing within their own data centers. There are already signs of this strategy developing.

While this release could be viewed as Dell giving the market a sense of what its post-spinoff portfolio could look like, at issue for the company is that it will now be more directly aligned with competitors such as Hewlett Packard Enterprise (HPE) (NYSE: HPE), Cisco (Nasdaq: CSCO) and Lenovo. Given HPE’s head start in the market through its GreenLake brand, Dell will be forced to explore new avenues for differentiation with Project APEX, and this could largely come down to Dell’s still unique five-year go-to-market agreement with VMware and any potential influence from Dell Technologies CEO and Chairman Michael Dell, who will remain VMware’s chairman of the board post-spinoff.

Apart from the near-term impacts and challenges in the competitive landscape, the spinoff is best viewed in opportunities. Following the sale of RSA and current speculation regarding Secureworks (Nasdaq: SCWX), Dell has recently focused on shedding underperforming brands to become a leaner organization. TBR suspects the spinoff of VMware, along with potential sale of integration PaaS (iPaaS) subsidiary Dell Boomi, will present an opportunity for Dell to streamline its operating structure and support the large investment it made in legacy EMC.

Additionally, TBR believes Dell has in many ways backed the innovative concepts and ideas that have emerged from VMware, namely intrinsic security, but have not been fully executed. As such, this spinoff could help Dell become more selective in which markets it wants to innovate and truly scale in, which may include enabling enterprise hybrid cloud, edge computing and data management. TBR expects Dell will turn to its partner network as an immediate avenue for growth, yet as the company more aggressively pursues new growth areas, tuck-in acquisitions that complement the EMC software cannot be ruled out and, down the road, could be essential to competing on par with peers.

Corporate structure does impact performance

In theory, the ownership structure and model of firms do not impact their business model, but in practice they sure do. The evolving case of Dell and VMware is one of the most — if not the most — complicated in the history of the IT market. VMware has grown accustomed to operating under a complex and dependent ownership structure; the firm has not been fully independent since EMC acquired it in 2004 for $635 million.

Since that time, VMware has been an embedded gem within both EMC and Dell, driving growth and profitability well above the traditional hardware segments that made up the majority of both firms. VMware’s consistent performance over the past 15 years is driving this latest change in ownership structure, with VMware set to be spun out of Dell and have its most independent ownership structure since 2004. For VMware, the change is all positive, giving the firm a single-minded clarity to operate in its own best interest, without the weight of supporting the corporate performance of either EMC or, more recently, Dell

Dramatic need to shift to contactless payments

Prior to the pandemic, demand for digitization services and deals in the European financial, public and retail verticals grew at a generous rate. Europe-focused vendors covered by TBR, including Accenture (NYSE: ACN), Atos (Nasdaq: ATOS), Capgemini, Deloitte and T-Systems, consistently expanded services and contracts surrounding related capabilities, such as cloud, blockchain and automation, feeding these healthy verticals. However, vendors and clients faced numerous challenges as the pandemic hit, such as the need to shift to remote work environments and the need for digital, e-commerce and contactless solutions. In 1H20 most vendors focused on client retention and headcount management, rather than entertaining expansionary strategies. Europe, which felt the impacts of the pandemic in its early months, was among the first to experience a need for digital alternatives, evidenced by accelerated demand for digital infrastructure, banking and payment solutions, benefiting IT service vendors and the struggling European economy.

As consumers faced pressures to go cashless, demand for contactless payment alternatives increased dramatically. While the financial and public sectors had been prioritized in 2020, as they typically make up a large percentage of IT service vendors’ revenues, the retail vertical contracted drastically as lockdowns and supply chain challenges impacted inventory levels. So, while tailoring contracts and generating solutions to attract clients in the financial and public sectors was imperative in the thick of the lockdowns, addressing challenges in retail will complement vendors’ efforts in other verticals as well. From an influx of credit card and debit card usage to increased demand for Apple Pay and other tap-to-pay capabilities, retail clients of IT service vendors were transitioning their client-facing solutions to meet the demand to go digital.

For example, in 4Q20 Atos announced it will use the Atos Codex Internet of Things solution to develop and run nutrition company Goli’s cashless and contactless vending machines, which will be deployed in numerous environments such as shopping malls and airports. The solution also leverages cloud technology to connect cashless payment alternatives and digital wallets to the network. Additionally, Atos holds shares in Worldline, a payment and transaction services company that offers a strong digital payments and contactless solutions portfolio, along with a collaborative partner network. In December Worldline partnered with P3 Financial Group to bolster the real-time digital commerce and e-payments ecosystem in much of Europe.

Other vendors have taken similar action; T-Systems Hungary drove real-time payments on a single platform for ACI Worldwide (Nasdaq: SCIW) in September, strengthening regional initiatives to meet expectations for safer and more secure vertical operations, and Capgemini partnered with SharpEnd and The Drum to develop CornerShop, a retail innovation store that is helping brands, retailers and shoppers utilize technologies to transform their shopping and customer engagements in preparation for the post-pandemic world. Further detail and analysis on the store are available in TBR’s 4Q20 Capgemini report.

Previous investments in emerging tech like blockchain paved the way

Going back about 10 years, digitization drew consumer attention in the mid-2000s, when in-house cloud computing caught fire and distributed ledger technologies emerged. Leveraging blockchain, cryptocurrency entered the market as a private payment alternative that offered greater security and cut out banks altogether. Bitcoin, arguably the poster child of cryptocurrency, quickly became an investment tool for many users, though its position as a go-to currency in the black market and, more importantly, its price volatility made its use an unpopular choice for the average consumer.

Changing regulations related to IT technologies, such as blockchain and digital assets, have challenged Europe-centric vendors despite the opportunity to capitalize as consumer preference shifts to digital. IT services vendors covered by TBR will likely face new contract and deployment challenges in the region, alongside pre-existing obstacles related to the COVID-19 pandemic. TBR believes a greater focus on digital and contactless payments, e-commerce, and digital banking and currencies from vendors will be an important aspect of economic regrowth in Europe and lead to adjustments in financial, public and retail verticals to better complement one another.