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IBM is boring again. That’s good news

July 20, 2021, 6:07 PM UTC

IBM surprised investors on Monday with good news: Its revenue grew for the second consecutive quarter.

For those not following IBM, this is rare. The company has posted declining sales for 30 of the last 34 quarters, and over the last decade its slice of the enterprise computing business has been gobbled up by the likes of Amazon, Google, and Microsoft.

Forget what you’ve seen in IBM’s TV ads and marketing materials. This uptick in revenue wasn’t due to the awakening of a sentient Watson artificial intelligence, but instead the company doubling down on what it’s always done: enterprise computing.

If this is a turning point for IBM, it can be traced to the $34 billion acquisition of Red Hat in 2019. Red Hat makes a free, open source operating system, and then charges businesses to install, maintain, and build custom applications on top of it.

With the acquisition, IBM now effectively owns the operating systems of companies worldwide, giving it an opportunity to pitch them the idea of a “hybrid cloud.” Here’s a simplified example: A company has Red Hat’s operating system running on its retail registers, and those devices on the “edge” also run the same core software as in IBM’s cloud. It’s hybrid because immediate local sales insights are available on cash registers, while heavy analysis and database work is done on the cloud. The benefit is a distribution of workload between systems the company already owns and the cloud it pays continuously to use, and that IT administrators can manage it as one single system.

There’s more: Since Red Hat software can also run on competitors’ clouds like Amazon Web Services or Microsoft Azure. So even if a Red Hat customer defected to an IBM cloud rival, IBM still collects some money.

Red Hat was a bright spot in this quarter’s earnings. Its revenue grew 17% year over year, and helped IBM’s cloud and data platforms unit grow 29%.

Analyst Kurt Marko noted during Red Hat’s developer conference in May that the latest version of Red Hat’s operating system specifically focuses on adding features for retail, hospitality, and industrial customers. This lets big companies use the same enterprise tools, like for security and automation of tasks, in both data centers and cash registers. It’s boring, but critical.

This kind of strategy is a growth opportunity that IBM has been missing for years. The company’s problem isn’t a lack of customers, as it is embedded in most of the world’s large enterprises. For instance, it claims to handle 87% of the world’s credit card transactions on its mainframes. Mainframes make IBM dependable money, but those sales don’t grow at the pace of AWS or Azure.

Now with Red Hat and the hybrid cloud, the company can show investors it has some real growth. And if that doesn’t work out, well, the company can always hope that its Watson AI gets better⁠—fast.

Dave Gershgorn 
@DaveGershgorn

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BEFORE YOU GO

Another secret surveillance test. In 2016, Toronto's Pearson International Airport furtively scanned the faces of 2.9 million people in an attempt to match them against a database of 5,000 suspected identity fraudsters, according to an investigation from The Global and Mail. The test generated 47 "real hits," but its unclear whether anyone was removed or deported due to the scan. The airport didn't put up any signs or public-facing information about the scans.

“I’m very concerned that the government chose to do this,” said Tamir Israel, a lawyer at the University of Ottawa’s Samuelson-Glushko Canadian Internet Policy and Public Interest Clinic who has studied border agencies’ use of facial recognition.

“This was deployed in a context where there was no public discussion in advance, with a technology that’s known to have flaws in terms of both accuracy and, in particular, racial biases,” he said. “In such a high-stakes environment, that’s really concerning.”

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