 From Las Vegas, it's theCUBE. Covering InterConnect 2017, brought to you by IBM. Hello everyone, welcome to theCUBE, special broadcast here at the Mandalay Bay in Las Vegas for IBM InterConnect 2017. This is IBM's big cloud show. I'm John Furrier, my co-host Dave Vellante for the next three days. We'll be wall-to-wall coverage of IBM's cloud, Watson. All the goodness from IBM. Keynotes are finishing up now, but this morning was the kickoff of what seems to be IBM's cloud strategy here with Dave Vellante. Dave used it in the keynote. We were hearing the presentation. We had the general manager, vice president of data from Twitter on there, Chris Moody talking about everything from the Trump presidential election being the avid tweeter that he is and got a lot of laughs on that to the SVP of cloud talking about DevOps. And this is really IBM is investing $10 million plus into more developer stuff in the field. This is IBM just continuing to pound the ball down the field on cloud. Your take. Well, IBM's fundamental business premise is that cognitive, which includes analytics, John, plus cloud, plus specific industry solutions are the best way to solve business problems and IBM's trying to differentiate from the other cloud guys who, David Kenney was on stage today saying, you know, they started with a retail business or the other guy started with search. We started with business problems. We started with data. And that's fundamental to what IBM is doing. The other point I think is, the other premise that IBM is putting forth is that the AI debate is over. You know, the artificial intelligence, you know, wave of excitement in the 70s and 80s. And then, you know, nothing is now back in full swing. And AI on the cloud is a key differentiator from IBM. In typical IBM fashion for the last several big shows, IBM brought out not an IBMmer, but a customer or and or a partner. And today it brought out Chris Moody from Twitter, talking about their relationship with IBM. But more specifically, the fact that Twitter's 11 years old, some of the things you're doing with Twitter, obviously connected into March Madness. And then Arvin Krishna, who was taken over for Robert LeBlanc as the head of the cloud group, talked about IBM, AI, IBM's cloud, blockchain, trusted transactions, IoT, DevOps, all the buzzwords, merged into IBM's cloud strategy. And of course, we reported several years ago at this event about Bluemix as the underpinning of IBM's developer strategy. And as well, it showcased several partners. Indiegogo was a crowdfunding site. And others, some of those guys are going to be in the cube. So, you know, as I say, this AI debate is over. It's real and IBM's intent is to be the platform for business. Dave, the thing I want to get your thoughts on is IBM's on a 19 consecutive quarters of revenue problems with the business in general. But they've been on a steady course and they kind of haven't wavered. So it's as if they know they got a shrink to grow approach, but we just came off the heels of Google Next, which is their cloud show. Obviously Amazon reinvented its large public cloud. But the number one question on the table, that's going to power IoT, that's going to power AI, is the collision between cloud computing and IoT, cloud computing and big data, I should say, is colliding with IoT at the center, which is going to fuel AI. And so it brings up the question of enterprise readiness. Okay, so this is the number one conversation in the hallways here in Las Vegas. And every single cloud show in the enterprises, can I move to the cloud? Obviously it's a hybrid world, multi-cloud world. IBM's cloud play, they have a cloud, they're in the top four as we put them in there. Has to be enterprise ready, but yet it has to spawn the development side. So again, your take on enterprise readiness and then really fueling the IoT, because IoT is a real conversation at an architectural level that is shifting the, tipping the scales, if you will, for where the action will be. Well, John, you and I have talked on theCUBE for years now, going on probably five years that IBM had to shrink to grow. They've got the shrink part down. They've divested some of its businesses like the x86 business and the microelectronics business. They have not solved the grow problem, as you say, 19 straight quarters of declining revenue. But here's the question, is IBM stronger today than it was a year ago? And I would argue yes, and why is that? One is its focus. It's got a much clearer focus on its strategy around cognitive, around data, and marrying that to cloud. I think the other is as an $80 billion company, even though it's shrinking, its free cash flow is still 11.6 billion, so it's throwing off a lot of cash. Now, of course, IBM made those numbers, made its earnings numbers through expense control. It's got lower tax rate, some of the nuance of the financial engineering. It's got some good IP revenue. But nonetheless, I would still argue that IBM is stronger this year than it was a year ago. Having said that, IBM's services business is still 60% of the company. The software business is still only about 30% and then about 10% is hardware. So people say IBM has exited the hardware business. It hasn't exited completely the hardware business, but it's only focusing on those high value areas like mainframe and trying to sort of retool power. It's got a new leader with Bob Picciano. But it's still 60% of the company's business is still services and it's shifting to a ratable model, an annuity model. And that is sometimes painful financially. But again, John, I would argue that it is stronger. It is better positioned. And now it's got some growth potential in place with AI and with, as you say, IoT. We're going to have Harriet Green on. We're going to have Dionne Newman on. Focusing on the IoT opportunity. The weather company acquisition is a foundation for IoT. So the key for IBM is that its strategic imperatives are now over 40% of its business. IBM promised that it would be a $40 billion business by 2018 and it's on track to do that. I think the question, John, is that business as profitable as its old business and can it begin growing to offset the decline in things like storage, which has been seeing double-digit declines in its traditional hardware business? So Dave, this is to my take on IBM. IBM has been retooling for multiple years. It's at least a five-year journey that they have to do because let's just go down the enterprise cloud readiness matrix that I'm putting together. And let's just go through the components and then think about what was old IBM and what's new. Global infrastructure, compute, networking, storage and content delivery, databases, developer tools, security and identity, management tools, analytics, artificial intelligence, Internet of Things, mobile services, enterprise applications, support, hybrid integration, migration, governance and security. Not necessarily in that order. That has, that is IBM, right? So this is a company that has to essentially cobble together core competencies across the company. And to me, this is the story that no one's talking about at IBM is that it's really hard to take those components and decouple them in a fashion that's cloud enabled. This is where I think you're going to start to see the bloom on the roast come out of IBM. And this is what I'm looking at because IBM had a little bit here, they had a little bit there, they had a little stovepipe over here. Now bringing that together and make it scalable with elastic infrastructure is going to be really the key to success. Well, I think if again, if you break down those businesses and the growth businesses, the analytics business is almost 20 billion. The cloud business is about 14 billion. Now what IBM does is they talk about as a service run rate of, you know, 7 to 8 billion. So they give you little dimensions on, you know, their financials, but that cloud business is growing at 35% a year. The as a service component, let's call it true cloud, is growing over 60% a year. Mobile growing 35%, security 14%. Social surprisingly is down actually year on year. You would thought that would be a growth area for them. Nonetheless, this strategic initiatives, this goal of being 40 billion by 2018 is fundamental to IBM's future. Yeah, and the thing too about the enterprise readiness and then the numbers speaks to the way the action is. So right now the hottest conversations in IT are SLAs. I need SLAs, I have a database strategy that has to be multi database. So even though they have DB2, database as a service is going to be very, very important. They're going to have to come in and support multiple databases and identity and role-based stuff has to happen because now apps, if you go DevOps and you go Watson data analytics, you're going to have native data within the stack. So to me I think one of the things that IBM can bring to the table is around the enterprise knowledge. The SLAs are actually more important than price. And we heard that at Google Next where Google trotted out all their technology and said, oh look at all the technology by us because we're Google. Not really, it's not so much the price. It's the SLAs and where Google is lacking as an example is their SLAs. Amazon has really been shoring up the SLAs on the enterprise side, but IBM's been here, this is their business. So to me I think that's going to be something I'm going to look for as well as the customer testimonials looking at who's got the hybrid and where the developer actions. Because I think IOT is the tell sign in the cloud game. And I think a lot of people are talking about infrastructure as a service, but the action will be platform as a service and the developer action. And to me that's where I'm looking. Well comparing and contrasting those two companies, Google and Amazon with IBM, I think completely different animals. As you say, Google kind of geeky doesn't really have the enterprise readiness yet, although they're trying to talk that game, Diane Greene hiring a lot of new people. AWS arguably has a bigger lead on the enterprise readiness, not necessarily relative to IBM, but relative to where they were five years ago. But AWS doesn't have the software business that IBM has yet. We'll see, you know. Okay, so that's IBM's ace in the hole is the software business. Now having said that, David Kenny got on stage today. So he came out and is doing his best Jeremy Burton impression. Came out and sort of a James Bond motif and guys with sunglasses. And he announced the IBM cloud object storage flex. And he said, yes, we have a marketing department and they came up with that name. You know, this to me is their clever safe object store to compete with S3. You know, several years later, after Amazon has announced S3. So they're still shoring up some of that core infrastructure, but IBM's, the linchpin of IBM strategy is the ability to layer cognitive and their SaaS portfolio on top of cloud and super glue those things together, along of course with its analytics packages. That's where IBM gets the margin, not in volume infrastructure as a service. I want to give you a take on squinting through the marketing messages from IBM and get down to the meat and the bone, which is where is the hybrid cloud? Because if you look at what's going on in the cloud, we hear the new terms lift and shift, which to me is rip and replace. That's a strategy that Google has to take because if you run G Suite in Google, you're kind of cloud native. But IBM is dealing with a lot of preexisting enterprise legacy stuff, data center and whatnot. So the lift and shift is an interesting strategy. So the question is for you is, what does it take for them to be successful? With the data platform, with Watson, with IoT, as enterprise extend from the data center with hybrid? Well, I think that, you know, again, IBM's linchpin is the data and the cognitive platform. And what IBM is messaging to your question is that you own your data. We are not going to basically take your data and form our models and then resell your IP. That's what IBM is telling people. Now, I want to dig into that a little bit because I don't understand sort of how you separate the data from the models. But David Kenney on stage today was explicit that the other guys, he didn't mention Google and Amazon, but that's who he was talking about are essentially going to be taking your data into their cloud and then informing their models and then essentially training those models and seeping your IP out to your competitors. Now, he didn't say that as explicitly as I just did, but that's something as a customer that you have to be really careful of. Yes, it's your data. But if data trains the models, who owns the model? You own the data, but who owns the model? And how do you protect your IP and keep it out of the hands of the competitors? And IBM is messaging that they are going to help you with the compliance and the governance and the edicts of your organization to protect your IP. That's a big differentiator, if in fact there's meat in the bone there. Well, you mentioned data, that's the key thing. I think what they're doing really quickly is getting the hybrid equation nailed. So I think that's kind of like, just pedal as fast as you can, get that going. But data-first enterprises really speaks to the IoT opportunity and also the new application developers. So to me, I think for IBM to be successful, they have to continue to nail this data as value concept. And if they can do that, they're going to drive more intelligence. And I think that's their differentiation. If you look at Oracle, Azure, Microsoft, Azure and IBM, they're all playing their cards to highlight their differentiation. So table stakes, infrastructures of service, get some platforms of service, cloud-native, open source, all the goodness involved in all the microservices, the containers, Kubernetes, you're seeing that market just develop as it's developing. But for IBM to get out front, they have to have a data layer. They have to have a data-first strategy. And if they do that well, that's going to be consistent with what I think was the winning formula. And so, to me, I'm going to be poking at that. I'm going to be asking all the guests, what do you think of the data strategy? That's going to be power in the AI. You're seeing artificial intelligence and things like autonomous vehicles. You're seeing sensors, wearables. Edge of the network is being redefined. So I'm going to ask the guests really kind of how that plays out in hybrid. What's your analysis going to be for the guests this week? Well, I think the other thing too is the degree to, to me, a key for IBM's success and their ability to grow and dominate in this new world is the degree to which they can take their deep industry expertise in healthcare and financial services and certain government sectors and utilities, et cetera, which comes from their business process, their BPO organization and their consulting and all the PWC acquisition years ago. The extent to which they can take that, codify it, put it into software, marry it with their data analytics and cognitive platforms and then grow that at scale. That will be a huge differentiator from IBM and give them a really massive advantage from a business model standpoint. But as I said, 60% of the IBM's business remains services. So we got a ways to go. All right, we're going to be drilling into it again. There's a collision between cloud and big data markets coming together. That's forming the IoT. You're going to see machine learning. You're going to see artificial intelligence and really a forcing function in cloud acceleration with data analytics being the key thing. This is theCUBE. We'll be getting the data for you for the next three days. I'm John Furrier with Dave Vellante. We'll be back with more coverage kicking off day one of IBM Interconnect 2017 after the short break.