Defeat by Amazon could prompt IBM acquisitions

A $600 million CIA cloud computing contract remains elusive for IBM.

By TheStreet.com Staff Oct 9, 2013 9:36AM

Amazon.com logo © Spencer Platt/Getty ImagesBy Andrea TseTheStreet.com Logo


IBM (IBM) suffered a gutting defeat after U.S. Court of Federal Claims Judge Thomas Wheeler ruled against the U.S. Government Accountability Office's recommendation that Big Blue be given another chance to bid for a four-year, $600 million CIA cloud computing contract that had been won by Amazon's (AMZN) Amazon Web Services in January, on grounds that the process had been unfair.

 

"It's certainly interesting times when IBM is the underdog to an online bookstore in procuring government IT," said Carl Brooks, an internet infrastructure services research analyst at IT enterprise specialist 451 Research.

 

IBM, a long-time contractor for the government, said that it plans to appeal the decision and reiterated the superiority of its offer.

 

Richard Stiennon, the chief research analyst at cyber defense industry intelligence firm IT-Harvest, said that the ruling in favor of relative newcomer AWS represents the fiercely competitive bidding process for lucrative government contracts, and that while the defeat was a huge disappointment for IBM, it doesn't reflect on IBM's future ability to secure market share expansion in the cloud. After all, IBM has shown that it is willing to make aggressive investments into the cloud, with its most recent cloud expansion milestone consisting of its acquisition of the privately held cloud computing infrastructure company SoftLayer Technologies in July for a reported $2 billion.

 

"This the Federal court decision does not deal IBM out of the cloud, although it may cause them to look at emulating Amazon's AWS service, perhaps through another acquisition, so they can gain market share in the Platform as a Service and Infrastructure as a Service business" where AWS currently leads, Stiennon explained.

 

Among the AWS facets that Stiennon praises are its convenience and low-cost reliability.

 

"While IBM has much more experience delivering large custom built systems, Amazon's technology should be easily and quickly duplicated in a private data center setting. I would expect less risk of massive cost overruns and late delivery with Amazon."

 

"I am pleased that the outsider now has the nod because it means the CIA and IC (Intelligence Community) in general will be able to tap into the extraordinary innovation and market leading scale and economy of Amazon's massive infrastructure," Stiennon added.

 

He said if IBM were looking for more acquisition targets in order to expand its market share in the cloud business, the first places the company would likely look at are Rackspace Hosting (RAX) and the Savvis cloud infrastructure assets of telecomm company CenturyLink (CTL). Both Rackspace and Savvis have been investing to provide services that compete directly against Amazon Web Services and would be able to help IBM broaden its offerings beyond large enterprise and government to gain experience in the fast paced, evolving cloud space.

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1Comment
Oct 9, 2013 4:37PM
avatar

Amazon's strategy is to compete on price. It could be that its bid for CIA contract

was priced low to clinch the deal. The company doesn't generate high profit. IBM

on the other hand is focused on improving the earnings. Its bid may be well over

Amazon's. One unknown is the data security. How good is the security provided by

Amazon? IBM has good security software. This is the beginning of rivalry

and there will be many more competitive biddings by these two and others in future.

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