It’s been a hot couple of weeks in the cloud infrastructure as a service space. Microsoft’s Azure IaaS (persistent VMs) came out of beta, Google Compute Engine went into public beta, VMware formally launched its public cloud (vCloud Hybrid Service), and Dell withdrew from the mark. Now, IBM is acquiring SoftLayer, with a deal size in the $2B range, around a 4x-5x multiple — roughly the multiple that Rackspace trades at, with RAX no doubt used as a comp despite the vast differences in the two companies’ business models.
SoftLayer is the largest provider of dedicated hosting on the planet, although they do also have cloud IaaS offerings; they sell direct, but also have a huge reseller channel, and they’re often the underlying provider to many mass-market shared hosting providers. Like other dedicated hosters, they are very SMB-centric — tons of dedicated hosting customers are folks with just a server or two. But they also have a sizable number of customers with scale-out businesses to whom “bare metal” (non-virtualized dedicated servers), provisioned flexibly on demand (figure it typically takes 1 to 4 hours to provision bare metal), is very attractive.
Why bare metal? Because virtualization is great for server consolidation (“I used to have 10 workloads on 10 servers that were barely utilized, and now I have one heavily utilized server running all 10 workloads!”), but it’s often viewed as unnecessary overhead when you’re dealing with an environment where all the servers are running nearly fully utilized, as is common in scale-out, Web-scale environments.
SoftLayer’s secret sauce is its automation platform, which handles virtualized and non-virtualized servers with largely equal ease. One of their value propositions has been to bring the kinds of things you expect from cloud VMs, to bare metal — paid by the hour, fully-automated provisioning, API as well as GUI, provisioning from image, and so forth. So the value proposition is often “get the performance of bare metal, in exactly the configuration you want, with the advantages and security of single-tenancy, without giving up the advantages of the cloud”. And, of course, if you want virtualization, you can do that — or SoftLayer will be happy to sell you VMs in their cloud.
SoftLayer also has a nice array of other value-adds that you can self-provision, including being able to click to provision cloud management platforms (CMPs) like CloudStack / Citrix CloudPlatform, and hosting automation platforms like Parallels. Notably, though, they are focused on self-service. Although SoftLayer acquired a small managed hosting business when it merged with ThePlanet, its customer base is nearly exclusively self-managed. (That makes them very different than Rackspace.)
In terms of the competition, SoftLayer’s closest philosophical alignment is Amazon Web Services — don’t offer managed services, but instead build successive layers of automation going up the stack, that eliminate the need for traditional managed services as much as possible. They have a considerably narrower portfolio than AWS, of course, but AWS does not offer bare metal, which is the key attractor for SoftLayer’s customers.
So why does IBM want these guys? Well, they do fill a gap in the IBM portfolio — IBM has historically not served an SMB market directly in gneral, and its developer-centric SmartCloud Enterprise (SCE) has gotten relatively weak traction (seeming to do best where the IBM brand is important, notably Europe), although that can be blamed on SCE’s weak feature set and significant downtime associated with maintenance windows, more so than the go-to-market (although that’s also been problematic). I’ll be interested to see what happens to the SCE roadmap in light of the acquisition. (Also, IBM’s SCE+ offering — essentially a lightweight data center outsourcing / managed hosting offering, delivered on cloud-enabled infrastructure — uses a totally different platform, which they’ll need to converge at some point in time.)
Beyond the “public cloud”, though, SoftLayer’s technology and service philosophy are useful to IBM as a platform strategy, and potentially as bits of software and best practices to embed in other IBM products and services. SoftLayer’s anti-managed-services philosophy isn’t dissonant with IBM’s broader outsourcing strategy as it relates to the cloud. Every IT outsourcer at any kind of reasonable scale actually wants to eliminate managed services where they can, because at this point, it’s hard to get any cheaper labor — the Indian outsourcers have already wrung that dry, and every IT outsourcer today offshores as much of their labor as possible. So your only way to continue to get costs down is to eliminate the people. If you can, through superior technology, eliminate people, then you are in a better competitive position — not just for cost, but also for consistency and quality of service delivery.
I don’t think this was a “must buy” for IBM, but it should be a reasonable acceleration of their cloud plans, assuming that they manage to retain the brains at SoftLayer, and can manage what has been an agility-focused, technology-driven business with a very different customer base and go-to-market approach than the traditional IBM base — and culture. SoftLayer can certainly use more money to for engineering resources (although IBM’s level of engineering commitment to cloud IaaS has been relatively lackluster given its strategic importance), marketing, and sales, and larger customers that might have been otherwise hesitant to use them may be swayed by the IBM brand.
(And it’s a nice exit for GI Partners, at the end of a long road in which they wrapped up EV1 Servers, ThePlanet, and SoftLayer… then pursued an IPO route during a terrible time for IPOs… and finally get to sell the resulting entity for a decent valuation.)