I have written a couple of pieces recently arguing that IBM needs to rethink its attitudes to “consumer” vs enterprise, because the distinctions are blurring. But rather than go negative all the time, I figure now is a good time to drop a post I have been considering for a while.

I am not a numbers guy but I understand Amazon is not over-valued at the moment. Buying the company could be a transformative acquisition that would bring IBM new opportunities in both business process outsourcing (BPO) and grassroots development. Most importantly buying Amazon would also put IBM back in touch with consumers again, a calling card it lost when it spun off Lenovo, as well as bringing thousands of small booksellers to IBM as customers, expanding its small to medium enterprise footprint. Did I happen to mention that Amazon is emerging as a major software-as-a-service player…What might some objections be?

IBM can’t compete with its customers, and Amazon is an online retailer, which might damage relationships with other retailers.

This objection can be answered by pointing out that Amazon provided fulfillment services to Borders.com for seven years, before the ties were recently broken. Amazon long ago became more than an ecommerce site, and its distribution network is a powerful one. Its a tremendous asset.

What about smaller retailers? There was a time when people argued Amazon would put smaller booksellers out of business. The opposite may be true. I remember my surprise when I talked to a small bookshop once a few years ago, and the owner talked passionately about how easy it was to sell books through Amazon, to get on its platform (a classic onramp for sales and continuing trust) and to sell against major retailers.

Is it really off limits for IBM to buy into retail anyway? If IBM can buy a share in a Chinese bank, as it recently did, its clearly time to rethink what IBM is, and what risks it is prepared to take.

Talking of risk, I would argue IBM is too risk averse at the moment. IBM is doing a great job of deepening its ties with the Fortune 500 – increasing its sales there at the expense of competitors. Collaborative innovation is great, and will earn IBM billions of dollars of revenues over the next few years. But would IBM ever foster the next YouTube or Twitter? I can’t see it.

Grassroots developers don’t see IBM as a potential supplier. Sun is explicitly targeting startups at the moment, and next gen Web 2.0 datacenters.

IBM R&D is now almost entirely large-enterprise customer driven, a massive change from the old days of invent it, sit back and watch someone else make the money on the idea. But this conservatism goes to far. After all – the big companies IBM will engage in collaborative innovation projects with are just too big to be truly innovative. Even Google is finding it hard to compete these days in some areas as it morphs into a BigCo – Twitter handed Dodgeball a beating. Twitter runs Ruby on Rails on Joyent which runs on Sun hardware. Wait a minute – anyone would think Sun had a plan… they should come up with a cool name for it, participation age or something, because its about helping people to participate in the network…

IBM talked about On Demand then seemingly dropped it like a hot brick just as the concepts started to become reality. Amazon may not be making money on its On Demand offerings yet, but developers and startups are heading to Amazon Web Services in droves. People blog their monthly payments to Amazon EC2 as a badge of honour. People argue that Amazon has removed the need for capacity planning.

How many IBM customers are like Gumiyo?

Within three weeks, Gumiyo, an online mobile commerce provider, had a complete production environment running on the Amazon Web Services platform, including web servers, database servers, and load balancers.

So IBM could gain new SMB customers, a new and truly On Demand infrastructure for developers, and a new Business Process outsourcing capability. What’s not to like?

Of course such an acquisition would entail significant risk. It would mean IBM changing its views on some things – but it would also be a swing to the reality of individual2enterprise network convergence. Sramana Mitra calls out the Extended Enterprise thusly:

The modern enterprise is no longer one, monolithic organization. Customers, Partners, Suppliers, Outsourcers, Distributors, Resellers, … all kinds of entities extend and expand the boundaries of the enterprise, and make “collaboration” and “sharing” important. Let’s take some examples. The Salesforce needs to share leads with distributors and resellers. The Product Design team needs to share CAD files with parts suppliers. Customers and Vendors need to share workspace often. Consultants, Contractors, Outsourcers often need to seamlessly participate in the workflow of a project, share files, upload information. All this, across a secure, seamlessly authenticated system.

Right now IBM is very well set up for selling to Enterprise 1.0. But selling to Enterprise 2.0 is going to mean selling to the active end-points, or at least having a conversation with them. IBM needs a ubiquity play. It needs an storage cloud play. With Amazon on board it would have these things. IBM would be part of the internet backbone, and that’s where it has to be.