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The full potential of International Business Machines (IBM) in the $148 billion cloud computing market can be achieved if it targets Microsofts (MSFT) leadership in Enterprise SaaS (Software-as-a-Service). The Enterprise Collaboration market is predicted to grow from $26 billion last year to $49 billion by 2021.

Productivity and collaboration apps like Microsoft Office 365 and Googles (GOOG) (NASDAQ:GOOGL) G Suite dominated last years list of most used cloud apps and SaaS offerings. IBMs tepid collaboration effort is still limited to providing social networks. The IBM Verse email client is not going to help IBM become relevant in enterprise collaboration anytime soon. Corporate employees need groupware productivity programs that will let them create documents, not just exchange email messages.

In the enterprise SaaS industry, IBM only leads in the System Infrastructure niche. On the other hand, the more diversified portfolio (Skype, Dynamics, and Office 365) of Microsoft made it a leader in CRM, Collaboration, and Other Enterprise Applications.

Enterprise SaaS leaders Google, Microsoft, and Adobe (ADBE) greatly outperformed IBMs stock due to their millions of Office and Creative Cloud subscribers. Office 365 has 26.2 million subscribers and Adobe has more than 9 million Creative Cloud subscribers. Googles G Suite has 3 million business subscribers.

The three-year chart below illustrates how Big Blue is fading away, eating dust behind its more nimble rivals in cloud computing.

(Source: Google Finance)

Tardiness in joining the SaaS race can worsen IBMs 20 consecutive quarters of revenue declines. As per Gartners forecast, SaaS and Business Process Services are going to generate more revenue than IaaS (Infrastructure-as-a-Service). Big Blue needs the revenue from software products like Office 365 and Adobe Creative Cloud to augment its IBM Cloud infrastructure service.

Cloud advertising is the biggest segment but I believe IBM doesnt know anything about selling ads. On the other hand, IBM has decades of experience selling software to companies. SaaS therefore is IBM's best expansion move.

Buy The Tools To Fight Microsoft Office and Adobe Creative Cloud

IBM became a leader in private cloud hosting partly thanks to its $2 billion buyout of SoftLayer in 2013. SoftLayer was an early-bird provider of private cloud services in 2010. Management should also consider making an acquisition to push IBMs debut in Collaboration SaaS. It will take some time to build competent rival products to Office 365 and Adobe Creative Cloud software suite. Acquiring other firms with proven products that compete with Microsoft Office and Adobe Photoshop, Illustrator, Premiere, and After Effects is the faster route.

Adobes 2016 revenue from Creative Cloud subscriptions was $4.58 billion. Selling design software is obviously more lucrative than IBMs Watson AI initiative. Using an average $9.99/month per user fee, the 26.2 million subscribers of Office 365 likely contribute more than $3 billion annually to Microsofts coffers.

The huge economic opportunity in collaboration software services is why Salesforce (CRM) paid $750 million to acquire Quip last year. Quips only product was a mobile-focused word processor with chat and spreadsheet creation. IBM has $10 billion in cash and equivalents. Why not use some of that idle money to acquire other firms which will help it compete with Microsoft, Google, and Adobe in SaaS.

Who To Buy?

Ideal acquisition targets are Serif, Corel Corporation, and China-based KingSoft. KingSoft is the firm behind the mega-hit WPS Office software product that touts 1.25 billion installations. WPS Office looks and feels like Microsoft Office 2017. It's quickly becoming a favorite among small businesses. Serifs Affinity Photo and Affinity Designer are considered by many as the best alternatives to Adobe Photoshop and Illustrator CC.

Corel touts the complete package though. It has a long list of products that will let IBM simultaneously compete with Microsoft Office, Adobe Creative Cloud, and Autodesks (ADSK) AutoCAD line of products.

I am long IBM.

(Source: Corel/Wikipedia)

Conclusion

IBMs revenue has declined for the 20th consecutive quarter. Desperate times call for desperate measures. The current cloud and AI initiatives of IBM has failed to offset the declining sales of its legacy products. IBM urgently needs to retool itself as a legitimate SaaS provider like Microsoft, Google, and Adobe.

Selling more affordable alternatives to Office 365, G Suite, and Adobe Creative Cloud could help IBM offset declining sales of its legacy hardware and software products.

Disclosure: I am/we are long MSFT, ADBE, GOOG.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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How And Why IBM Can Challenge Microsoft Office And Adobe Creative Cloud - Seeking Alpha