If you’ve seen IBM’s advertisements or have read the proclamations that the company is making a big bet on Watson, its famed “cognitive computing” engine, you might be tempted to think the gamble is failing. After all, as IBM informed investors yesterday, even with the push to infuse all kinds of business services with Watson’s insights, net income fell 19 percent in the last quarter of 2015 and will likely drop again this year. But the problem doesn’t really seem to lie with a failure of Watson as a technology. IBM’s business challenge is so grand that it’s hard to imagine some smarter business services could have solved it.
To be sure, people have been right to question how valuable Watson really can be. Two years ago it was obvious that the natural-language-processing, data-scanning genius the program showed on Jeopardy! wasn’t easily transferring to products businesses could use. (I predicted as much in 2011.) As the Financial Times astutely observed two weeks ago, IBM has since grouped so many computing technologies under the Watson brand name that it’s hard to tell exactly what Watson even is now. That piece questioned whether “the brand is being used to create a halo effect for a set of technologies that are not as revolutionary as claimed.”
However, even if Watson had become a big business by now, IBM would still be in huge trouble because of trends that have been afoot for a very long time—notably the rise of cloud computing services that have diminished the need for large organizations to buy IBM servers and mainframes. This was in play long before Ginni Rometty was named CEO in 2011, but her predecessor, Sam Palmisano, was better able to mask the decline and keep Wall Street happy by selling off unprofitable lines of business, buying high-margin software companies, and returning billions of dollars to investors through dividends and share buybacks. Now there are fewer financial levers left to pull. Revenue has been falling for 15 quarters in a row.
All this matters even if you aren’t an IBM investor because the company still pursues some ambitious R&D projects. IBM consistently puts about 6 percent of revenue to R&D, but as revenue is shrinking, so is the total spending figure. At some point IBM will be cutting close to the bone—making it ever less likely it will come up with another technology that can be described with a straight face as a big bet.
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