You’ve got to give UBS analyst Steven Milunovich major props. During IBM’s earnings call on Monday, he asked whether IBM Watson, the company’s golden child, will run on rival Amazon Web Services—and he was promptly shot down.
“No. Watson runs on our cloud, and our technology will run on IBM’s cloud,” IBM chief financial officer Martin Schroeter responded tersely.
Milunovich’s question wasn’t stupid. Just last week, VMware (VMW), another big Amazon (AMZN) rival, said that its bread-and-butter VMware software will run on AWS, starting next year.
Indeed, it seems that most of the world’s most important business software including SAP’s (SAP) HANA databases as well as databases from Oracle (ORCL) and Microsoft (MSFT), run on AWS. This is even though AWS offers its own, competitive, databases. To back up, almost every legacy IT company, including IBM, Microsoft, Oracle, view AWS as an existential threat so allowing their software to run on Amazon infrastructure seems sort of like sleeping with the enemy.
The thinking seems to be, “we might as well make our stuff available on Amazon’s cloud since everyone seems to be running on Amazon cloud.” Basically this means that corporate customers can opt to run this third-party software on AWS instead of in their own corporate data centers. But not IBM, apparently, at least not when it comes to Watson.
IBM is pouring huge resources into Watson, the Jeopardy-winning artificial intelligence technology that is now being marketed to businesses. It’s pitched as being able to make smart decisions and provide reliable predictions in industries like healthcare and financial services. IBM says that business is growing, but details are scant. In February, chief executive Ginni Rometty said the lack of information is because Watson is new and growing, and must be protected and nurtured.
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On its third quarter earnings call Monday, IBM said total revenue for what it calls its cognitive solutions business, was up 5% for the quarter year-over-year. Within that category, sales of software that includes Watson rose 8%. Overall, for the quarter, profits fell to $2.85 billion, or $2.98 per share, from $2.95 billion, or $3.01 per share. But, excluding some items, earnings per share was $3.29, slightly beating analyst estimates of $3.23. So there.
IBM’s earnings calls have become something like the movie Groundhog Day, Quarter after quarter, the company touts growth in its “strategic imperative” areas that include cloud computing, analytics, mobility, and security, while overall revenue falls. Although, to be fair, the revenue slide this quarter was just 1%. And, IBM noted, the strategic technologies, now represent 40% of IBM’s business.
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For the aforementioned strategic imperative areas, IBM said revenue grew 16% compared to last year. And cloud revenue reportedly was up 44% for the same period. But again, many eye that with a bit of skepticism because it includes a lot of legacy software and other products that have been moved into that category.
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Watson is supposed to be the game-changer—and it may well be—but we just don’t know that based on the information provided. Critics say Watson requires a lot of assembly and tweaking by the customers themselves or consultants hired to help. Thus there is a perception that Watson is more a systems integration project than a product. And that may be a problem at a time when competitors including Microsoft, Google (GOOG) and yes, Amazon, are rushing to provide cloud-based artificial intelligence.
One thing we do know is that IBM is holding onto Watson with both hands. Schroeter acknowledged again that the Watson business will take time to build.
He said: “Yes we’ve made good progress, yes it’s a long-term investment, and no it won’t run on anything but IBM cloud.”