IBM Watson Has a Tough Question to Answer
November 6, 2014
In a sense, the erosion of a well-known company is interesting to watch. Some might use the word “bittersweet.” IBM has been struggling. Its “profits” come from stock buybacks, reductions in force, cost cutting, and divestitures. Coincident with the company’s quarterly financial reports, I heard two messages.
- We are not going to hit the 2015 targets we said we were going to hit
- IBM paid another company money to “acquire” one of IBM’s semiconductor units.
I may have these facts wrong, but what’s important is that the messaging about IBM’s strategic health sends signals which I find troubling. IBM is a big company, and it will take time for its ultimate trajectory to be discernable. But from my vantage point in rural Kentucky, IBM has its work cut out for its thousands of professionals.
I read “Does Watson Know the Answer to IBM’s Woes?” Compared to other Technology Review write ups about IBM’s projected $10 billion revenue juggernaut, the article finally suggests that IBM’s Watson may not be the unit that produces billions in new revenue.
Here’s a passage I highlighted with my trusty yellow marker:
Watson is still a work in progress. Some companies and researchers testing Watson systems have reported difficulties in adapting the technology to work with their data sets. IBM’s CEO, Virginia Rometty, said in October last year that she expects Watson to bring in $10 billion in annual revenue in 10 years, even though that figure then stood at around $100 million.
Let’s consider this $100 million number. If it is accurate, IBM is now one eighth the size of Autonomy when HP paid $11 billion for the company. It took Autonomy more than 14 years to hit this figure. In order to produce $800 million in revenue, Autonomy had to invest, license, and acquire technology and businesses. In total, Autonomy was more like an information processing holding company, not a company built on a one trick pony like Google’s search and advertising technology. Autonomy’s revenue was diversified for one good reason: It has been very difficult to built multi billion dollar businesses on basic search and retrieval. Google hit $60 billion because it hooked search to advertising. Autonomy generated seven times more revenue than Endeca because it was diversified. Endeca never broke out of three main product lines: ecommerce, search, and business intelligence. And Endeca never generated more than an estimated $160 million in revenue per year at the time of its sale to Oracle. Even Google’s search appliance fell short of Autonomy’s revenues. Now IBM wants to generate more money from search than Autonomy and in one third the time. Perhaps IBM could emulate Mike Lynch’s business approach, but event then this seems like a bridge too far. (This is a more gentle way of saying, “Not possible in 60 months.”)
It is very difficult to generate billions of dollars from search without some amazing luck and an angle.
If IBM has $100 million in revenue, how will the company generate $1 billion and then an additional $9 billion. The PR razzle dazzle that has involved TV game shows, recipes with tamarind, and an all out assault on main stream media about Watson has been impressive. In search, $100 million is a pretty good achievement. But $100 million does not beget $1 billion without some significant breakthroughs in marketing, technology, must have applications, and outstanding management.
From my point of view, Technology Review and other high profile “real” news outfits have parroted the IBM story about Watson, artificial intelligence, and curing cancer. To IBM’s credit, it has refrained from trying to cure death. Google has this task in hand.
The story includes a modest but refreshing statement about the improbability of Watson’s financial goal:
“It’s not taking off as quickly as they would like,” says Robert Austin, a professor of management at Copenhagen Business School who has studied IBM’s strategy over the years. “This is one of those areas where turning demos into real business value depends on the devils in the details. I think there’s a bold new world coming, but not as fast as some people think.”
As the story points out, “Watson is still a work in progress.”
Hey, no kidding?
Stephen E Arnold, November 6, 2014
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