IBM missed analyst expectations for the third quarter and weakness in traditional services is to blame. Customers appear to be scaling back, especially as the economy worsens in the United States and Europe.

But ironically, its cloud services business is up significantly.

It’s a paradox for IBM. And one for the tech sector to watch closely through the next quarter.

The services business is shifting. New service providers want the revenues that the traditional enterprise software companies have enjoyed for nearly two decades. The traditional software oriented services companies desire the excitement and growth that the new cloud service providers enjoy.

As I wrote last week, it’s a race to the middle. Customers want innovative new technologies but the reliability they believe they can get from more longstanding partners such as IBM.

The new service providers like VMware want to have a big piece of that middle ground and the old guard are using their considerable muscle to show they can be as nimble as the young ones.  IBM’s investments reflect that effort as illustrated with its strategic relationship with Nirvanix, the cloud-based storage provider. VMware, which has become the titan of the virtualization market, has reached that middle ground. It now seeks to be associated with the new and the innovative through such efforts as Cloud Foundry, the open-source platform-as-a-service it launched earlier this year.

The numbers best tell the story.

IBM beat its own expectation.  But according to Barron’s, traditional services revenue backlog was up just 2%. But its cloud services business has already doubled, compared to 2010.  And IBM still has another quarter to go before the year ends.

VMware’s revenues were $941.9 million, up 31.9% compared to last year. VMware still largely works according to a software licensing model but is working its way into cloud services. According to VMware, customers buy more than 24 months of support and maintenance. On top that, VMware said professional services were $71.5 million, up 25.7% compared to last year.

Services Angle

IBM and VMware represent the old and the new. IBM has built a business on traditional services but is now focused on developing a new cloud oriented services approach. VMware has built a software business with traditional support and is racing to become a fuller services company.

But in the end, services will continue to define both companies.