A Closer Look At IBM's Future (Part 1)

| About: International Business (IBM)
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IBM is reinventing itself.

In a series of articles, I will discuss how IBM is changing and how it will compete in the technologies of the future.

This article is part of an interview with IBM.

In my previous article, I explained why I believe in the future of IBM. Over the last month, the stock price moved from $152 to the current level of $160: a gain of 5.2% against +2.8% for the S&P 500. This strong performance is driven by IBM's strategic turnaround in which the company is selling underperforming assets to focus on its "strategic imperatives."

(source Google Finance)

After I published my previous article, I was contacted by the "Corporate Communications and External Relations" team at IBM, offering me the chance to learn more about the company and its activities. I asked the readers of Seeking Alpha what they would be interested to know and IBM started responding. First of all, I tried to understand the long-term vision of IBM.

Second, I tried to understand how IBM intends to position itself vis-à-vis technologies that are likely to shape our futures. In particular, I focused on two technologies that I believe will considerably impact our future: quantum computing and self-driving cars (read this article if you are interested in the technologies that can significantly affect your retirement plans). This is the first part of the information that I have received from the company.

Q: What will IBM become in 5/10 years?

A: IBM is emerging as a cognitive solutions and cloud platform company. You can look at the investments IBM is making, both organically (such as R&D) and acquisitions (11 already this year) and you'll see that much of our investment activity is focused on cognitive and cloud capabilities. The company believes big data, cognitive systems and cloud computing will influence and transform the way companies do business.

Speaking at the THINK Forum event in Sydney a few weeks ago, IBM CEO Ginni Rometty shared her thoughts on the next disruptive wave of technology and observed that this disruption will be driven by cognitive platforms that can take massive amounts of data within an organization via the cloud and turn it into competitive advantage (see here for Ginni Rometty's keynote of Think 2016 India).

Eighty percent of data is invisible to computers, and current IT systems can't see or make sense of it. A cognitive business uses systems that can understand, reason and learn to tap into all of that data. In turn, objects, products and processes are able to "think" - they will be able to sense what matters, reason across all the data, and constantly learn and improve. Cognitive (think Watson, but scaled everywhere) can be applied to everything from retail to sports to healthcare, and IBM is helping clients transform by becoming cognitive businesses - all enabled by the IBM Cloud. That's a big advantage for IBM - and it's where we can differentiate and deliver value to our clients.

With that in mind, our focus is always to meet the changing needs of our clients and capture the highest-value opportunities that generate a positive return to our investors.

It is always difficult to envisage the world in 10 years, especially now that technologies are moving so fast. Yet, my academic career helps me to understand and appreciate the power of computing and data analysis. My experience has convinced me that cognitive computing can be an extremely powerful tool. With the amount of data and computing power available today, we can learn and understand phenomena that until a few years ago were out of reach.

For example, today, we can code and analyze our DNA in a few hours at a reasonable cost, while at the beginning of this century, it would cost (at least) 10000x more in terms of time and money. This possibility can profoundly shape our understanding of the human body and can help prevent and cure genetic diseases. In his recent books, Ray Kurzweil explains how Singularity and computers able to emulate a brain will change everything that we know today.

IBM is successfully investing in technologies such as AI, big data and cloud that are the pillars of this revolution. For example, IBM researchers recently managed to build an artificial neuron. As The Economist explains, this IBM

invention consists of a tiny blob of germanium antimony telluride sandwiched between two electrodes. Germanium antimony telluride is what is known as a phase-change material. This means that its physical structure alters as electricity is passed through it. It starts off as a disordered blob that lacks any regular atomic structure, and which conducts electricity poorly. If a low-voltage electrical jolt is applied, though, a small portion of the stuff will heat up and rearrange itself into an ordered crystal with much higher conductivity. Apply enough such jolts and most of the blob will become conductive, at which point current can pass through it and the neuron fires, just like the real thing. A high-voltage current can then be applied to melt the crystals back down and reset the neuron. This arrangement mimics real neurons in another way, too. Neurons are unpredictable. Software neurons must have their randomness injected artificially. But since the precise atomic details of the crystallization process in IBM's differ from cycle to cycle, their behavior is necessarily slightly unpredictable."

This is a first step since the brain is composed of numerous interconnected neurons. In the future, the research team will work to link them together and resemble a functioning brain-machine that could be powerful at pattern-recognition tasks such as face recognition or speech.

Of course, IBM is not alone on this frontier. For example, Google Deep Mind (NASDAQ:GOOG) (NASDAQ:GOOGL) is working on a powerful AI interface, Amazon (NASDAQ:AMZN) is the market leader in the cloud and Microsoft (NASDAQ:MSFT) is also a strong player in many of these businesses. It is probably too early to decide who will win this race to the future, but I definitely believe that IBM is going in the right direction and stands a good chance.

Q: How do you see the Strategic Imperatives grow and establish a solid competitive advantage for IBM?

A: As you may have seen when we recently reported our Q2 earnings results, Strategic Imperatives experienced continued strong growth with revenues of $30.7 billion over the last 12 months, representing 38 percent of IBM revenue. That growth was led by cloud, with revenue up 30 percent to $3.4 billion in the quarter and $11.6 billion over last year. It's also important to note that we're not just moving into new spaces, we're creating new markets.

As clients look to become digital businesses, IBM is helping them make that transition through cognitive solutions that enable them to become more digitally intelligent. IBM's Strategic Imperatives are growing faster than the market, and we continue to invest aggressively in them - both organically and through acquisition - so that IBM can continue to lead in these markets. IBM is already the #1-ranked analytics provider, #1-ranked security services provider, and very much at the forefront of the cloud market (and #1-ranked in the important hybrid cloud market).

IBM is definitely growing in this environment and is achieving recognition for its efforts, though its answer does not elaborate on the "competitive advantage" aspect. Of course, being a first mover might be useful, but history has shown that being first is not enough to win in a certain industry (think Facebook (NASDAQ:FB) and MySpace). And, for example, Amazon entered the cloud space much earlier than IBM and now enjoys strong market leadership. However, I believe that although IBM and Amazon operate in a similar cloud environment, they are competing for different clients and on different strategies. I will try to extrapolate more information on this.

In the next two questions, I inquired about IBM's strategy in relation to two technological trends: quantum computing and self-driving cars.

Q: What is IBM's take on quantum computing? Do you think it will affect your business model or competitiveness?

A: We believe quantum computing has the potential to solve certain problems that are impossible to solve with today's supercomputers.

Launched earlier this year, the IBM Quantum Experience is a great example of how cloud is making emerging technologies available that would not have been accessible in the past. This kind of open innovation will allow for the next stage of development in quantum information technology and help push a universal quantum computer to reality even faster.

As far as IBM's business strategy related to next generation technologies such as quantum computing, our global team of researchers will continue to invent the future of technology by making scientific and technological breakthroughs that will transform businesses and society for many more years to come.

Speaking of breakthroughs - did you hear about our lab-on-a-chip announcement related to detecting cancer or our announcement about the IBM Research team imitating the way neurons in the human brain function?

Further research clarified the "lab-on-a-chip." I discovered that the company, in collaboration with the Icahn School of Medicine at Mount Sinai, has developed a "device that can separate biological particles at the nanoscale and could help enable physicians to detect diseases like cancer" - in particular prostate cancer. According to the journal Nature Nanotechnology, IBM's results "show size-based separation of bioparticles down to 20 nanometers in diameter. At this scale, researchers can observe and separate particles such as exosomes, viruses and DNA. Once separated, the particles can be analyzed by physicians to potentially reveal signs of disease, even before patients experience any physical symptoms and when the outcome from treatment is most positive."

Q: What is IBM's strategy in the self-driving car business?

A: IBM Watson IoT APIs are available to a wide network of ecosystem partners. One area where we see a lot of initial exploration is transportation systems. This includes everything from traffic systems, public transportation systems, and vehicle systems. Even within the self-driving car environment, we see a lot of potential applications of IBM Watson technologies for everything from optimal routing, optimizing for real-time weather, and serving up personalized content within the vehicle. As with many Watson innovations, the potential application of Watson technologies is amplified by a vast network of ecosystem partners, such as Olli.

Our strategy is to bring Watson capabilities to a range of markets where complex data captured through IoT is growing. The self-driving car market represents one of the 'big challenges' in the industry, where we think we can find solutions.

Self-driving cars will revolutionize our transportation systems. For example, this technology can minimize traffic jams and significantly reduce pollution. In practice, if all cars were self-driving we would not need traffic lights and cars would be able to "talk to each other," self-administer traffic and optimize routes (and therefore reduce fuel consumption).

Of course all this "talking" would require a huge amount of computing power in real time. We do not want cars to fight over who will go first at a junction until they crash. Again, this technology is in its early phases and it is difficult to foresee how it will unravel, but IBM seems to have good car(d)s in their hand to play the game.

As always, thank you for reading. If you wish to follow my future articles about IBM, just click the "Follow" button next to my name at the top. I would also be interested to know what you think about the company's prospects and its investment in the technologies of the future. Thank you for reading!

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Disclosure: I am/we are long IBM.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article is the first part of a longer interview with IBM. I am not compensated for this article and I don't have any other relationship with the company beside owning shares.