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IBM Watson: Two Views of the Same Pile of Tinker Toys

I find IBM an interesting outfit to watch. But more entertaining is watching how the Watson product and service is perceived by smart people. On the side of the doubters is a Wharton grad, James Kisner, who analyzes for a living at Jeffries & Co. His report “Creating Shareholder Value with AI? Not So Elementary, My Dear Watson?” suggests that IBM is struggling to makes its big bet pay off. If not a Google moon shot, Mr. Kisner thinks the low orbit satellite launch is in an orbit which will result in Watson burring up upon re-entry to reality.

The Big Dog of artificial intelligence and smart software may be a Chihuahua dressed up like a turkey, not a very big dog, not much of a bark, and certainly not equipped to take a big bite out a Wharton trained analyst’s foot.

On the rah rah side is Vijay, a blogger who does not put his name on his blog or on his About page. (One of my intrepid researchers thinks this Vijay’s last name is “Vijayasankar?.” Maybe?) I assume he is famous, just not here in Harrod’s Creek. His most recent write up about Watson is “IBM Watson Is Just Fine, Thank You!” His motivation for the write up is that the attention given to the Jeffries’ report caught his attention. He is a straight shooter; for example:

I am a big fan of criticism of technology – and as folks who have known me over time can vouch, I seldom hold back what is in my mind on any topic. I strongly believe that criticism is healthy for all of us – including businesses, and without it we cannot grow. If you go through my previous blogs, you can see first hand how I throw cold water on hype.

I like the cold water on hype from a person who is an IBM executive, and one who has been involved in the IBM Watson health initiatives. (I think this includes the star crossed Anderson project in Houston. I hear, “Houston, we have a problem,” but you may not.) I highlighted these points in this blog post:

1. Hey, world, IBM is an enterprise product, not a consumer product. This seems obvious, but apparently IBM’s ability to communicate what it is selling and to whom is not working at peak efficiency or maybe not working because everyone is confused about Watson?
2. IBM does not do the data federation things with its customer data. That’s good. I know that IBM sells a mainframe that encrypts everything. Interesting but I am not sure how this addresses flat revenue growth, massive layoffs, and the baffling Watson marketing which recently had a white cube floating in a tax preparer’s office. A white cube?
3. IBM Watson has lots of successes. That’s a great assertion. The problem is that Watson started out as the next big thing. There was a promise of billions in revenue. There was a big office commitment in Manhattan. Then there was the implosion at the Houston health center. “Watson, do you read me?” I once tracked some of the Watson craziness in a series called the “Weakly Watson.” I gave up. The actual examples struck me as a painful type of fake news. What’s interesting is that the “weakly” stories were “real.” Scary to me and to stakeholders.
4. Watson is not a product. Watson is an API to the IBM ecosystem. Vendor lock in beckons. And, of course, lots of APIs. These digital tinker toys can be snapped together. The problems range from the cost and time required for system training, the consulting and engineering services price tag, and the massaging required to explain that Watson is something that requires a lot of work. For the Instagram crowd that’s a problem. “Houston. Houston. Do you copy? Tinker toys. Lego blocks. Do you copy?”
5. Watson “some times needs consulting.” Talk about an understatement. Watson needs lots and lots of consulting, engineering services, training, configuring, tuning. and training. Because Watson is a confection of open source, acquired technologies, and home brew code—a lot of work is needed. That’s because Watson was designed to generate high margin services, not the trivial revenue from online ads or from people ordering laundry detergent by pressing a button on their washing machine.
6. Watson has two things in its bag of tricks: “Great marketing” and “AI talent.” Okay, marketing and smart people. The basic problem IBM has to solve before investors get frisky is generating significant, sustainable revenues and healthy margins. Spending money buys marketing and people. Effective management orchestrates what can be bought into stuff that can be sold at a profit.

The Vijay write up ends with a question. Here you go: “So why is IBM not publishing Watson revenue specifically?” This Vijay fellow who assumes that I know his last name does not answer the question. In the deafening silence, we need an answer.

That brings me to the Jeffries & Co. report by James Kisner, who is certified to do financial analysis. The answer to Vijay’s question consumes 53 pages of verbiage, charts, and tables of numbers. The entire document was available on July 18, 2017, at this link, but it may disappear. Many analyst documents disappear for the average guy. (If the link is dead, head over to Investext or give Jeffries & Co. a quick call to see if that will get you the meaty document.

A Jeffries & Co. analyst with teeth bites into the IBM financial data and seems to be unsatisfied.

In a nutshell, the Jeffries’ report says that IBM Watson is a limp noodle. Among the Watson characteristics are unhappy customers, wild and crazy marketing, misfires on deep learning, and the incredibly difficult, time consuming, and expensive data preparation required to make the system say, “Woof, woof” or maybe “Wolf, wolf” when there is something important for a human to notice.

Net net: IBM’s explanations of Watson have not produced the revenues and profits stakeholders expect. Jeffries & Co. goes MBA crazy providing a wide range of data to support the argument that Watson is struggling.

That “woof, woof” is the sound of a Chihuahua barking with the help of IBM spokespeople and lots of PR and marketing minions. The Wharton guy is a larger dog, barks ferociously, and has a bite backed up by data. IBM has to prove that it can solve problems for clients, generate sustainable revenue, and keep the competition from chowing down on a Watson weighted down with digital tinker toys.

Stephen E Arnold, July 19, 2017

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