IBM’s Big Bet on Standardized Shipping (of bits)

The Red Hat acquisition took many by surprise — especially the price tag.

Since the announcement, many experts, strategists, and employees both current and former have chimed in on various angles some suggesting this mirrors IBM’s old playbook, when Lou Gerstner was in charge, how keeping Red Hat’s employees happy is IBM’s new strategy, or that this is really all about Kubernetes.

At Intricately, we have a front-row seat to what’s happening in the digital cloud, but the Red Hat acquisition was unique for many reasons.

I wanted to offer another perspective by looking at the acquisition as a parallel to the rise of industrialized shipping for context on why Red Hat will be a critical part of IBM’s future.

In particular, we’ll focus on the growing number of companies’ moving to multi-vendor cloud strategies and its potential for this strategy to commoditize the big cloud vendors core (compute and storage) businesses.

We’ll then unpack IBM’s bet on cloud commoditization and the acquisition of Red Hat (particularly its service business) as an opportunity to own a high-margin business and maintain relevance in the face of cloud domination from AWS, Google Cloud, and Azure.

I’ll also make a bunch of logistics and shipping references. I hope you like them.

Shipping bits vs shipping atoms

In a former career, I worked in logistics and read Mark Levinson’s The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger (would highly recommend). A somewhat lengthy title that crisply sums up the roughly 400 pages. We’ll shorten the title to The Box from here on out.

Do you remember what life was like before shipping containers? Probably not. Long story short, Amazon.com wouldn’t have been possible, international commerce was really hard, and it involved lots of stevedores.

Prior to 1956, products were shipped as break bulk cargo, this was companies putting their goods in boxes, bags, barrels, drums, crates, and whatever else they felt like which were occasionally secured to pallets. The stevedores unpacked and packed ships all day long full of various shapes and sizes of products.

Sound familiar?

Today, the internet as we know it is being is powered by cloud providers that act as both the transportation vehicles (the ships, trucks, and airplanes that deliver your goods via virtual machines) and the makers of the break bulk cargo containers of all shapes and sizes (the niche AI, ML, and other solutions).

This is partially due to the cloud providers waging a war to capture IT dollars as businesses first moved to hybrid cloud, then the native cloud, and increasingly, a multi-cloud strategy.

But as Amazon, Microsoft, and Google turned their resources towards building the vehicles and cargo cases for the cloud over the last ten years, IBM chose to sit things out, costing them billions of dollars in potential cloud revenue.

IBM tried to rectify this in 2013 with the acquisition of Softlayer, but between being late to market and not in a position to commit the CAPEX necessary to compete with the established Big Cloud Co’s, they needed a new plan.

Containers to the rescue?

While the cloud companies have been at war for companies’ infrastructure spend, technologies like Docker and Kubernetes have made substantial progress on cloud standardization through containerization.

Similar to how Intermodal containers revolutionized global trade, cloud containerization allows companies to ship (digital) products faster and cheaper by defining and enforcing a standard set of rules, streamlining the process for all parties involved.

Moving to the standard shipping container and away from break bulk cargo required concerted effort between entrepreneurs, private investors, governments, and ports. We’re now seeing this happen in the cloud as IT buyers move to a multi-vendor strategy, changing the way digital products are built and deployed.

Just like the massive expansion of standardized shipping that changed the world, the cloud is having to reconcile itself to the benefits of standardization in the best interest of their customers by providing the fastest and cheapest solutions to deliver their product. It’s clear that the transition to standardized shipping containers radically changed international logistics and grew the total addressable market exponentially.

Okay, okay, but wasn’t this an article about IBM and Red Hat?

Well, over the last few years, Red Hat has been focused on in implementing open source container solutions for enterprises (i.e Kubernetes). As IBM was once the layer between open source technologies and the enterprise, containerization products provide standardization between all of a company’s applications regardless of the underlying cloud provider or technology.

This means that with containerization, digital products can be manufactured and shipped to consumers faster and cheaper across the internet superhighway be defaulting to the easiest route — whether that be Amazon, Azure, or Google Cloud servers that handle the “logistics”.

Rather than ships with irregular cargo of all shapes and sizes, containerization empowers digital “manufactures” by no longer locking them onto certain infrastructures, but allows them to deliver products and applications across the cloud based on the optimal route for each customer.

Similarly to how Walmart has dozens of shipping partners that go from production facilities on the other side of the globe to the last mile, standardization and containerization allows companies to pick the best providers for each leg of the journey with ease.

Building the right kind of port

If the revolution of containerization in shipping taught us anything, it’s that a necessary solution is sometimes building a whole new port. The transition to standardized containers is the reason for the death of first-generation port cities like New York, London, and San Francisco (think of these as v1.0) and the rise of secondary cities like Oakland and Newark (the new and improved 2.0 versions).

And rather than betting the farm on being able to catch up in infrastructure and niche cloud computing, IBM saw an opportunity to lean into its service-based business because service-based businesses tend to have lower, but more stable and higher margins versus capex-intensive computing businesses.

With their purchase of Red Hat, one of the largest implementers of Kubernetes, IBM is effectively betting on the commoditization of the cloud vendors while maintaining their long-standing business relationships to sell more (high-margin) cloud consulting services.

IBM is essentially building the port to the new cloud where everything is optimized for delivery of digital products and Red Hat is the key piece of the puzzle to service the ships coming in and out of these “digital ports”.

A commoditized cloud

As the consumerization of everything spreads to Enterprise IT, expectations for business challenges to be solved faster and cheaper are not just nice-to-haves but requirements. Just like standard shipping containers created the foundation for massive international commerce, the standardization of the cloud has the potential to drive a similar explosion of online commerce.

This will allow businesses to build, deliver, buy, and sell technology products like never before, and while the big guys will likely try and resist it, in the long-haul, standards usually to led a market where everyone wins.

IBM’s Big Bet on Standardized Shipping (of bits) was originally published in Hacker Noon on Medium, where people are continuing the conversation by highlighting and responding to this story.