Big Blue, Big Muscle

Robert "Boomer" Brown rounds a corner in IBMs data center in research triangle Park, N.C., and stops in front of the big boxes that power Web operations for retailer Victorias Secret. "This is our sexiest site," says Brown, a program manager at IBM Global Services executive briefing center.

The joke, of course, is that a rack of servers for the lingerie business looks much like any other in the 50,000-square-foot facility, but theres a larger truth behind the humor: In the market for hosted and managed applications, IBM itself is looking pretty sexy these days.

It all starts with the infrastructure. IBM has 175 data centers worldwide, including 25 dedicated e-business centers, and plans to spend $4 billion to add 50 more e-business hosting centers over the next three years. Big Blue is a player in the basic colocation business, but its army of consultants and its close relationships with software vendors such as Ariba, SAP and Siebel Systems help give it a presence as well in more complex specialties like managed e-commerce and application services. "Fully managed areas are our sweet spot," says Rusine Mitchell-Sinclair, IBMs general manager of managed e-business services.

That sweet spot was on the mind of Chairman and Chief Executive Lou Gerstner at the mid-December e-Business Expo in New York, where he said in a speech that businesses like Web hosting, storage hosting, application services and computing-on-demand are early examples of a trend toward Internet-driven outsourcing that IBM calls e-sourcing. "As it takes off, almost all of the growth is going to be in the higher value-added segments," he said. "Its more than a fancy control room and raised floors that stretch to the horizon. It will require experience in managing highly complex systems, and it will have high-technology content."

Global Services was a driver of IBMs strong fourth quarter, with the division reporting revenue of $9.2 billion for the quarter and $35.6 billion for the year. IBM does not break out financial results for business lines but said e-hosting grew rapidly in the fourth quarter. Analyst firm International Data Corp. projects a total market for network-delivered services of $50 billion by 2003. Web hosting, e-markets and wireless hosting together are expected to account for $11 billion of that, with storage utilities coming in at $8 billion and hosting for application service providers (ASPs) at $4.5 billion.

Big Blues ASP Strategy

Mitchell-Sinclair calls the hosting business the foundation of the services strategy. While owning data centers is a somewhat discredited plan among start-up ASPs, and the push into managed services by hosting companies like Exodus Communications has been met with some resistance by their ASP customers, IBM has the heft to do it all.

"On that building block we can add towers or components" of higher-margin services, Mitchell-Sinclair says. IBMs approach to the application services market, for example, shows the company operating across a continuum of offerings, from colocation to enablement, to managing applications from vendors like Ariba, i2 Technologies and SAP for end users. "We can be an arms merchant or a competitor for an ASP, or both," she says.

Whats going on in the Research Triangle doesnt make IBM an ASP, says Mitchell-Sinclair, who uses the strict definition of a company that owns software and provides services to users on a rental or usage basis. But managing high-end e-commerce applications from Ariba and i2 for its enterprise customers puts IBM squarely in the same business as companies that everyone else thinks of as ASPs, such as Agilera and USinternetworking. At a time when few enterprise ASPs use the rental model, it can be tough to tell the difference between what IBM calls fully managed Web hosting services and what the market calls application services.

IBM also has an ASP unit, which is focused on hosting and enabling application service providers, and on helping software vendors to become ASPs themselves. Kathy Dodsworth-Rugani, who heads the ASP division that reports to Mitchell-Sinclair, says she has more than 50 end-user customers for applications from vendors including Ariba, i2, SAP and Siebel, along with smaller software makers like Great Plains, industry-specific vendors and new, Internet-native companies.

"Lots of software vendors want to be ASPs, and we want to enable them with whatever they need — our hosting or system integration support or application management services. Weve stayed away from preselecting three or four software providers and saying they have the right solution," she says. "We will enable any company, any software vendor or telco, with hardware, software and services." Overall, IBM is hosting almost a dozen software vendors, which use varying degrees of its service offerings.

"Weve competed four times on SAP implementations with IBM," says Tom Kelly, the newly named chief executive at eOnline, a leading enterprise-class ASP. "We won three of those, but Im sure they get deals we dont even see." Kelly says eOnline, which is tightly focused on a small handful of high-end vendors, including Ariba, SAP and Siebel, can compete successfully with IBM because of its particular expertise. "I think focus and best-of-breed capabilities will carry the day for a while. Of course, because theyre IBM, theyre clearly going to be a player."

ASP customers of IBMs core enablement offerings find that doing business with Big Blue is an advantage in a consolidating market. ASP-One, a Chicago application services company, uses IBM as a colocation partner in the U.S. but relies on Global Services to manage its applications in Europe. And ASP-One Marketing Director Cathy Houdek would like to further leverage IBMs resources to help gun-shy potential customers feel safer about dealing with the young company.

"We would like to have Global Services guarantee our service agreements in case something happens to us," she says. "IBM has the ability to do it."

Another IBM customer, Ikon Office Solutions, uses IBMs managed platform but does the actual application management of its legal database software itself. "We make known to our clients that were partnered with IBM," says John Haller, Ikons manager of support and education. "Its a major selling point for us."

In the long term, IBM seems well-positioned to capitalize on the convergence of the various e-sourcing disciplines into a single, integrated network of networks that ties together applications, commerce and other business interactions over the Internet — the any-device, anytime, any-operation future that is e-sourcings ultimate aim.

"Second-generation Internet computing needs, in part driven by the coming wireless explosion, will place a premium on companies with broad, deep and technologically superior offerings," wrote analysts John Jones Jr. and Craig Ellis of Salomon Smith Barney after a recent tour of IBMs enormous Boulder, Colo., data center.

"Were there already," says Mitchell-Sinclair of the ability to create a unified "ecosystem" that interweaves all aspects of a companys Internet operations. "The capability is on hand do it."

The market, however, is still moving slowly toward the integrated model. According to Dodsworth-Rugani, "We still focus on the application rather than a package of applications." Her ASP group has expertise in integrating applications for large providers, including SAP and Siebel, and works with other integrators for midmarket applications, she says.

Mitchell-Sinclair is confident that IBMs total package is where the market is headed. "The ASPs used to view themselves as a single-instance solution, but now theyre starting to want global service, the ability to move and balance traffic across sites, and the requirements from an infrastructure point of view are getting much more demanding," she says. "We can handle it."