Arne Alsin
Nov 28, 2016 · 6 min read

We believe the erstwhile tech leader has been padding its cloud numbers, even as it falls further behind Amazon, Google and Microsoft in cloud-computing.

Mere minutes into his keynote speech at the Amazon Web Services re:Invent conference in October of 2015, AWS C.E.O. Andy Jassy took a swing at IBM while touting his company’s dominance in the cloud. As he stood in front of a massive projection screen ranking IBM dead last among its cloud enterprise peers in year-over-year revenue growth rate, the Amazon executive asserted that IBM’s business was “shrinking by double digits” before an audience of thousands and proudly declared the Seattle-based e-commerce giant’s subsidiary as the leader in the cloud space.

IBM, on the other hand, has been telling quite a different story — a story that flatly contradicts the claims of Andy Jassy and AWS. Far from being dead last in the cloud race, IBM claims top billing, featuring its cloud prowess in its latest annual report to shareholders. IBM proudly told shareholders it increased total cloud revenue by 50% to $10 billion in 2015, which it claimed qualified it “as the largest cloud business in the world.”

Both companies can’t be right. So who, then, is to be believed? The executives at AWS? Or those at IBM?

In the case of AWS, cloud revenue of over $10 billion is easy to verify. It’s fully disclosed in the financials and backed up by a wealth of confirming evidence, such as the long line of enterprise customers moving to the AWS cloud.

In the case of IBM, the only cloud revenue we can find comes from SoftLayer, a small-time operation that reportedly has $700 million in annual revenue, according to Deutsche Bank, which says IBM has “no chance” of catching up to AWS.

Source: IBM, Rometty Letter to Shareholders

Armonk, New York: How the claim got started

When IBM executives first imagined and began concocting their cloud story at Armonk headquarters several years ago, my guess is that they almost certainly viewed it as nothing much, a harmless fabrication that would never come back to haunt the company. Lots of companies make up stories when a new-fangled product hits the market, and that’s just the way you play the game. The strategy, simply stated, is to pretend you’re a player by saying you’re a player, all the while seeking to develop a mature product internally, or through acquisition.

To IBM executives in 2011 and 2012, cloud infrastructure services probably looked like a market they could eventually dominate. With IBM’s marketing heft behind the effort, they probably assumed they could figure out cloud in due course. As a $200 billion company (at the time), hiding the story would be easy because cloud was small and it was immaterial in the bigger scheme of things. Besides, they could find things to include in their cloud numbers — for example, the company has confessed to counting mainframe in its cloud reporting.

To put conversations in Armonk back then in perspective, remember, cloud was not the priority at IBM at the time, not by a long shot. The board of directors made their wishes clear — with $360 million in annual incentives granted to executives. IBM directors established a path for executives to follow: They were to focus on an earnings-centric “roadmap,” and per share performance, above all else.

We have reviewed several years of proxies: Executives were lucratively and consistently incentivized around per share targets, especially earnings per share. Executives were not incentivized to curate, develop and build an all-new platform in cloud computing.

It should come as no surprise, then, that in an effort to secure those rich incentives, IBM executives steered huge convoys of shareholder cash to the stock market, to be used for buybacks. And it should come as no surprise that IBM’s nascent cloud effort suffered from underinvestment as a result.

Compare cash outlays: $46Bil for Buybacks v. $3Bil for SoftLayer

Lavish spending on stock buybacks is one reason why, as of today, IBM’s net equity (book value) is just $17 billion. Since Rometty took over in 2012, IBM has spent $46 billion buying back IBM stock at an average cost of $183 per share. In one frantic twelve-month surge, from Q4 2013 to Q3 2014, IBM executives plowed a stunning 23% of total company sales into IBM stock, or nearly $20 billion in cash.

Contrast that to the paltry $3 billion invested in SoftLayer ($2 billion for the company in 2013, and an additional $1 billion for expansion). CEO Ginni Rometty proclaimed on CNBC and elsewhere that SoftLayer was built from the “ground up” for the enterprise. It appears that wasn’t the case. SoftLayer purchased off the shelf servers out of a Super Micro catalog, connected them together, and rented them out, a fact that founder Lance Crosby and others on the inside at SoftLayer freely admit.

Even though IBM assured investors that SoftLayer’s cloud was “enterprise capable” back in 2013, it doesn’t look like it was ready for the heavy-duty production workloads that are the norm at the enterprise level.

Guess who was ready?

This is from an October 2013 presentation by AWS engineer James Hamilton. You don’t have to listen to the presentation, you can see from the slide that by 2013 the AWS cloud was already well advanced, having moved way past the white-box standardized servers that IBM’s SoftLayer was using.

IBM is in quite a pickle: What to do now?

Pretending to be the #1 cloud player for the last several years has cost IBM important time, and the IT industry appears to have moved on. Pretty much every name player in the industry is in the process of moving to hyperscale clouds, and it’s primarily the AWS cloud they’re interested in. From Salesforce to Accenture to VMWare, key technology players are moving big parts of their businesses to the AWS cloud.

This leaves IBM alone on an island, without a substantial cloud infrastructure business, without a relationship with AWS, and with nowhere to turn.

What story will IBM executives spin now?

Got a question? Contact us:


The opinions expressed herein are those of Worm Capital, LLC and are subject to change without notice. The company (or companies) identified or referenced herein is an example of a current or potential holding or investment target and is subject to change without notice. This information should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the investments or strategies referenced were or will be profitable, or that investment recommendations or decisions we make in the future will be profitable. Past performance is no guarantee of future results. Worm Capital reserves the right to modify its current investment views, strategies, techniques, and market views based on changing market dynamics. This article contains links to 3rd part websites and is used for informational purposes only. This does not constitute as an endorsement of any kind.

Arne Alsin and Worm Capital clients are currently long Amazon and also own options positions in IBM and stand to benefit if the trading price of Amazon increases and/or the trading price of IBM decreases.

Worm Capital, LLC does not accept any responsibility or liability arising from the use of this document. No document or warranty, express or implied, is being given or made that the information presented herein is accurate, current or complete, and such information is always subject to change without notice. Shareholders and other potential investors should conduct their own independent investigations of the relevant issues and companies involved in this article. This document may not be copied, reproduced or distributed without prior written consent of Worm Capital.

Worm Capital, LLC is an independent investment adviser registered in the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Worm Capital including our investment strategies, fees, and objectives can be found in our ADV Part 2, which is available upon request. WRC-16- 03

  • CFO Shroeter in the Q3 earnings call last year, admitted that in their reported cloud numbers “there is some element of zSeries.” (IBM’s mainframe product).
  • A few weeks after this breathtaking spree, on Oct. 20, 2014, IBM executives finally admitted the roadmap was a failure.
  • AWS has grown ten-fold since this presentation, but as you can see, Amazon was already optimizing servers for specific workloads back in 2013.

Worm Capital

Worm Capital, LLC is a SEC registered investment advisor. The firm is led by our founder and Portfolio Manager, Arne Alsin. For more information, visit us at:

Thanks to Zachary Lash

Arne Alsin

Written by

Arne Alsin is the founder and principal of Worm Capital, a California-based investment adviser.

Worm Capital

Worm Capital, LLC is a SEC registered investment advisor. The firm is led by our founder and Portfolio Manager, Arne Alsin. For more information, visit us at:

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