 Live from Las Vegas, Nevada, it's theCUBE. Covering IBM World of Watson 2016. Brought to you by IBM. Now, here are your hosts, John Furrier and Dave Vellante. Okay, welcome back everyone. We are here live at the Mandalay Bay wrapping up two days of wall-to-wall coverage for IBM's World of Watson. World with Watson, as Ginny Romney said in her keynote today at one o'clock. She was on stage. It's theCUBE, our flagship program. We go out to the events and extract the signal from noise. I'm John Furrier. My co-host this week, Dave Vellante. Again, teaming up. Again, we've been at IBM. So many different events. But Dave, this event really culminates the coming out party of Watson. Really, this is about the brand. You see the new changes at IBM. Some new blood, some new people. And you're seeing a new vibe. You know, we just, you're seeing, you're seeing a different IBM. They're different. They're going to spring to their step. They're not holding back at all. They're all in and having Ginny Romney on stage at one o'clock today was really telling because she doesn't really do a lot of the customer events in the past. She does a lot of thought leadership events. But there she was. She did an amazing performance. Very inspirational. And she's clever. She's snarky in a clever way. But she has some nice digs on Google. I saw some digs on Facebook in an indirect way. But really, she's standing tall, loud and proud around Watson. What Watson's doing. And it's really got a new twist to it. You know, the smarter planet was their old messaging. The new messaging has a change the world mindset and they actually use the world. If you're going to change the world, we're going to share Watson. It's not world of Watson. World with Watson is what her quote was. And she made references to your data. You own the data. You own your intellectual product. You own your insights. Kind of implying, Dave, that that's unlike other platforms like Facebook and Google where they own your data and use your data to monetize it for their own services. She was really kind of telegraphing the strategy that IBM is clear. And it's all about the inside economy as Bob Pigeon talked about yesterday. So here you have it. You have the gauntlet being laid down. IBM is going big, big time with Watson using Watson and using that brand. And as I said, the journey of IBM's transformation is led by the young five year old Watson. And this is the putting all the hope on that, that brand and that capability of creating insights, creating value. I first met Ginny Rometti. The only time I met her actually was in 2007. And they gave us the first glimpse of Watson when we were in Yorktown Heights. I was at an analyst meeting. I don't know if you know, I'm a long time industry analyst. I know. So, but anyway. Well respected analyst too. At the time, thank you. And you really moved the market too. I will say that, you know. At the time, at the time we saw the challenge, the Jeopardy Challenge. And we thought, okay, well like remember Blue Gene or Deep Blue, whatever it was called. And it was kind of a super computer, a little niche thing. Little did we know at the time that it was going to become the company. But Ginny spoke at that event. It was a Rod Adkins event. And I got talking to where they're asking a bunch of questions. But she was running strategy at the time. And really, I mean her strategy around cognitive was certainly not baked at the time. But she went from running strategy to become CEO. She was elected the CEO. So she was deep into the strategy. So she architected this strategy and now owns it. So the reason for all this long-winded narrative is it was not just the coming out party of IBM Watson. My opinion, it was the coming out of Ginny Rometti as the leader of this company. I think part of the reason why she hasn't been at these customer events, like Interconnect and Edge, what's going to come to Interconnect and talk about how great cloud is, how Edge, how infrastructure matters. Beads and feeds. It's right compared to what she talked about today. So this was, to me, she stole the show. I thought she was phenomenal. I wrote down the things that I took away from her talk. She was crisp. She really had it together. She was cogent. She was inspiring. She was engaging, self-deprecating. She got up and she made a joke about her backside. She demonstrated her leadership. She had a command for the audience. Very engaging with her guests. Super, super impressed with what she did today. And the thing too, on that note, she was super impressive. More importantly, this is what the IBMers in the company need to hear. This is what customers need to hear. That they're not going to Watson wash everything and just call it the same old IBM. It's truly making change. And the thing that's different about this show is we go to a lot of these B2B tech conferences and it's business outcomes, technology, intersection, business value. Here they're taking a different approach. They're adding a third dimension to that technology intersection with business value, with a changing the world, social impact, social justice, social change, because all the things that they're talking about affect individuals, not just the industry. So the old IBM would have been, oh, we have a vertical for the financial applications and our go-to-market strategy to create business value. None of that. None of that certainly can help there, but it really adds, your job as a data scientist in the financial service. They're talking about the professions. They're talking about the individuals. They're going down to the individual level and it's not just tech. They're talking about education, healthcare. And I noticed that with Ginny as I get to follow her, her personal experiences as a child and her personal life, her story is affecting her view on this and she's bringing that passion. You learned this last week. I learned this last week about how her father left her when she was a young child. Her family of four, mom was out of work. They were broke. She'd go back to school, get a job. She went into computers and the rest is history. That affected her and she is taking a clear change the world that Watson and IBM Technologies have traditionally done that and they're going to continue to do that. And that's a mission that people can buy into, Dave. That's the inspirational part of it. And I thought it was very powerful and symbolic and probably not coincidental that last week she spoke at the Grace Hopper Celebration of Women conference. She was the main keynote. And here she is on stage this morning commanding a big presence. She had her best, it wasn't Madonna, Adele on, where she's in the center stage. She got the 360, she sort of joked about that. But then she had Mary Bar come on. So it was Ginny and Mary Bar up. Two power player women in the business. Everybody's a technology business today. So that was to me really symbolic. She talked about three things that she wanted to convince the audience of. That IBM is all about AI for business. And the second was that it was all about embedding cognitive into your business. And it was about transforming and changing industries. I thought that was very powerful differentiation. John, we go to a lot of conferences. You know, the classic is Larry Ellison, when he talks about, we're 10 times faster than this and 20 times better than that and three times cheaper than this. Whereas IBM standing up and saying, we're changing the world, right? There really isn't any competition directly in the enterprise. Although she did say, we don't have a search legacy. It'll slap on Google. And she said, it's your data. You own the data. We made that big decision. And you're talking about the walled garden monetization of data. Facebook. Facebook is one. Google, certainly Google Analytics, Google Gmail, I mean, I'll check my Gmail right now and it'll tell me my flight information. They're using my data. And I have no idea what else they're using it for. Again, but that's my data. So, then she talked about, we made three fundamental decisions. One was it's about man and machine. Which is, again, interesting. It's really powerful. As we enter the second machine age, people talk about machines replacing humans. Not only for physical function, but now cognitive functions. People concerned about the hollowing out of the middle class and jobs. Legitimate concerns. Go back to the chess example with deep blue. Gary Kasparov, when he lost to the IBM Supercomputer, said, screw this. I'm going to go start a competition. I'm going to beat the Supercomputer. So he took a computer and a human and beat the Supercomputer. Which is, again, symbolic. Showing that the man plus the machine combination is greater than just the machine. So it made that point. The second was it's your data. No search legacy. And the third is the ecosystem. Which sounds like bromide, but I mean, it's sort of a no-brainer. You got to have the ecosystem. She has to say that. But she didn't go deep on developers, but she was kind of talking about the outcomes in context to enabling people to do the right thing in the social change. I thought that was phenomenal. Just in general, Dave, I think that, you know, Bob Pitchiano was on yesterday. And again, we've interviewed him and all these other executives at IBM. The course has stayed the same. They might have zigged a little bit and zag, but no major left turn, right turns. They're not groping for a position. And it's clear. Now the big wild card in all this analytics is the cloud, the future of Blue Mix. Blue Mix is now the brand. Softlayer has been put under Blue Mix and kind of depositioned or eliminated. And we'll see how that plays out. But the weather company we've interviewed here, we learned that they have a very awesome cloud. So the interesting thing is that you start to see pockets of IBM at scale at the weather company have a powerful cloud presence and looking for the analytics to be plugged into that. Can Blue Mix and Weather Channel come together under one and really explode? Because I think they have a lot of leverage with that weather data, the weather company, and weather data certainly is going to be relevant for, you know, integrating into the real lives of people, changing the lives of obviously e-commerce, which Jeannie kind of talked about, but then went into things like education and other things. The weather data is a big deal. I'm looking for interesting moves to see how the weather companies roll within IBM's cloud group, either which should be more prominently featured. I think that is a story that's not being told. I think that's a story that's compelling. And I think it's an example of IBM winning with their own stuff. Well, this is classic IBM, I mean this transformation. And to your point about strategy, it's been spot on since really Jeannie took over. Now, there's been pain. We talked about it the other day. When IBM lost that deal to Amazon and the CIA, that was a wake-up call. They had to go out and spend $2 billion on SoftLayer, which as you pointed out was parametal hosting. Remember, I was critical of that deal at the beginning. Well, but IBM said, okay, we're going to have $2 billion for essentially parametal hosting, but that's going to get us started. We're going to pour money into that. We're going to bring a Blue Mix layer, take the WebSphere playbook, repeat that for the IoT and the literature. Well, they needed IaaS and the infrastructure as a service. The SoftLayer was a pragmatic deal. It wasn't like a game changer. It was table stakes. Blue Mix can change the game, and Watson's driving a lot of Blue Mix action right now. So you got to look at that now as a fundamental building block. So what they said was, okay, we need a platform that we can invest in, and they have, and they purchase companies to compete with Amazon's different component. They got something to compete with DynamoDB, you know, they get clever, safe to compete with S3, so they brought in a bunch of components, and you know, that's always a challenge, but they're spending R&D money there. They've got the money to spend, they're doing. That's the one thing about IBM and Oracle, they invest unlike HP underheard, which really didn't invest. So, okay, got that. And they said, okay, we're going to focus on strategic initiatives, right? And that's been painful. We're going to get rid of the microelectron, we're just going to pay somebody to take the microelectronics business. We're going to jettison our x86 business. We're going to transform this outsourcing business, which was your mess for less, into this, you know, analytics and- It's a great analysis. And, right? It's a great analysis. And you're an industry analyst? Yeah, thank you. And cognitive error. So they've done that, now they've hit this 40% milestone, right? They're 40% of their businesses through strategic initiatives, and they're just barely flat in revenue year to year. So now, I think again, it's symbolic, Ginny comes out. We're at World of Watson. I would expect, next quarter, to see some growth. They got a blow through that 50% mark, you know, and keep driving- They need a flywheel. Right now, the thing, you pointed out in the opening segment, you said, the way they're hiding the revenue or not reporting the revenue, it's early, they're incubating this business. Today's, I looked at it as the launch of Watson and the way they pulled it together. But they got to incubate this. We heard a lot of experimentation, a lot of curiosity, a lot of creative, a lot of services. So I'm sure they haven't found their groove swing yet, but I think once the flywheel kicks in, they'll start reporting the Watson numbers. So I don't think- Yeah, I agree. They're going to be wanting to show that card right now. The other thing that was interesting was Michelle Paluso, the new CMO, she talked about, well, look, we could go out and do these big, smarter planet campaigns on TV, and IBM will surely still do that. They're just good at it. But she said, we have to transform our marketing for the digital world. Yeah, and then I have some notes here. And she said, I asked the brand question, we need a crisper, harder-hitting messaging. That's one of her mandates. Marketing attribution around ROI, return for the client experiences, multi-touch omnichannel activities, recognizing that the old way is shifting to a new digital platform. I love the message there. I think she's right on the money. Consumer front and center to IBM, a consumer-oriented messaging, not the B2B, your grandfather's IBM, they're going to really take a consumerization approach. You can already see it. And finally, they're going to hire new talent, they're bringing in new talent, and I think that's the strategy. Let's, you know, people going to slow down and not run at the pace of change, that's going to be accelerated, they're gone. So financially, as you know, I've talked about this a lot, IBM has propped up its stock price with stock buybacks and dividends. People criticize IBM for that, but buying your stock back, if it's undervalued, is a smart move. You know, we'll see if it's not Warren Buffett, obviously thinks it's undervalued. So it's been under under pressure lately, but it's been held up. Two thirds of IBM's free cash flow goes back to buying stock back, taking stock off the flow and dividends. Okay, well if it's an undervalued asset, that's a good move. I have no problem with it either, as long as you're investing in R&D, which IBM obviously does. So the question becomes, okay, will revenue growth occur, and will that prop up the stock price and reduce the need to keep doing those massive buybacks? What do you think? I agree, first of all, I think that the financial engineering side always gets talked about on Wall Street. It's inconsequential. Buying back stock's fine. It's not inconsequential. Well, if they have free cash flow and the stock's undervalued, your point's legit, I'd buy that. The issue is that IBM has an execution risk right now. The big elephant in the room is they're culturally transforming, okay? You have now multiple product lines trying to be jammed down into a set of solutions down to the individual and industry level, and they're trying to bring in some new blood. Can they execute through that with a new rebranding, with the new IBM? It's going to be a challenge for the big, as they say, the big aircraft carrier to try to move and make a quick turn here. So I think that's the only area that I would be super critical of is on the execution side. Well, you love the Michael Delquo, go bigger, but go home. IBM's going big. Well, look, we always speculate Oracle, IBM, VMware. Oh, they're dying, someone has to die. And it's transformation, we're in the media business. Someone has to die. Something's going to be dead. But I think what's going to die is the people who aren't innovating. IBM has a ton of cash and a ton of customers. They're not going anywhere. So, you know, as far as their longevity, they're in a good spot. So it's not like they're in turmoil at all. I think the IoT thing is a brilliant move for them. I said yesterday on my tweet that it could be the wrong strategy to go over rotate and get ahead over your skis with the security kind of climate with the hack last Friday. That's a huge thing. I think that might slow the psychology, the buyer down in terms of deploying IoT. So that's an area to watch. Although Dion Newman was like, what are you talking about security? I go, it's not, let's say your security, it's the climate of security. CIOs, when they hear hacks from surface area of IoT, the first thing they do is they stop. Well, we should talk about that for just for a second. So that hack that occurred last week, the last weekend that took down Twitter and- Yeah, last week. Barthas and Amazon last week, it was, you described it as basically a kitty script, but they attacked DVRs and IP cameras that had factory passwords, factory set. So when the user changed the password, the vulnerability was you could still go in and hack the factory set of passwords. This is so dumb. And these are these devices out of China. It's so dumb, it's ridiculous. But how do you control it? You got millions of these devices out there. In the old days, you do port scans and you find open port, you get in. Knock, boom. Yeah, it's around the old perimeter script. But we've been talking about this on theCUBE. There is no perimeter anymore. You have a perimeter-less environment. You have an increased surface area with IoT. And this is a latest example, front and center of the easiest kitty hack of all time, on a default password. But you were kind of tough on that. You said it was maybe the wrong strategy. What did you mean by that? I mean, from a marketing standpoint, if they are pushing IoT heavily into a market that might have a sentiment of risk, you might not want to over-rotate on that investment, of messaging and being too hype on IoT. I think certainly IoT is going to be a big deal. But if you think about the psychology of the IT guy right now, they're trying to change the airplane engine out at 35,000 feet, just in their own business. Now rolling out IoT is a little bit as a heavy lift. It's a lot of work. Now with a security looming hack that shows that, hey, you don't know, those devices were from the manufacturers. That's not the IT guy's fault. That's the manufacturer's fault. And the default password. I think the value's going to overwhelm that risk. Just like the Snowden, when Snowden came out, everybody's like, oh, Cloud, hold on, and Cloud just keeps exploding. I think there's a bump in the road. It's going to go fast, but the question is, how slow does it slow down? Does it impact the adoption of IoT? Everyone will tell you, and we agree, IoT is a home run. There's no doubt industrial, analog businesses are going to be coming in with digital. That's going to happen. Question is the surface area. The other interesting dynamic there is not just the IT people, it's the operations technology people and the engineers. Engineers becoming developers, which is a whole new persona. This whole business is exploding. So that's why I think massive opportunities for IBM. I think a rising stock price is a tailwind for you. And I would expect this company's going to start really motoring. Here's my tell sign. I look at IBM right now. It's great stuff. I feel good, the Kool-Aid injection with Ginny today was great. I feel good about IBM's messaging and all the things coming together. Here's the tell sign. Bob Pitchiano's vision of insight economy is totally legit. I buy that 100%. The proof points that's going to come out of that have to be use case examples of demonstrable value creation, whether it's a startup that comes out of the woodwork, some kid in a dorm room, or someone who's working on their own full-time startup or an innovator that takes a unique twist to a workflow and creates an insight and can build a business and create wealth around that. That would be, if we start seeing those kinds of examples, not kind of the low-end examples, but a real pop of value. I mean, look at Airbnb and Uber. They're the poster childs of the sharing economy. So they need to see some of those kinds, not, I mean that's a unicorn, but they came out of that economy. But that's when the insight economies work. When you can say, hey, that kid changed the landscape of an industry because they changed a feature of a workflow because of some insight, automated it through cloud at it and created value. So IBM's got to hit an inflection point on the volume of its cloud business and its SaaS business. It hasn't hit it yet. And you can tell from the gross margins. Gross margins actually drop. You would think as they shift to a SaaS model that margins are going to increase. I predict that they will. They just haven't yet. And that's a sign that they have not hit that critical mass. You know, like I think Amazon has, clearly Microsoft is hitting that as well. And I think IBM will. It's just maybe going to take a couple more. The other thing I liked, we had Inder Paul Bandari, Chief Data Officer at IBM on. He was going down kind of a geeky road by talking about deep learning data science. IBM's got the CDO chops. They have 10 years of legacy in this industry with the show. Information on demand started 10 years ago. It's the 10th anniversary of essentially the data shows that I'd call it. So now Watson show really kind of encapsulates the 10 year run of them being in this business. So it's not like they woke up and said, hey, let's do the Watson show. So I think it's going to be very interesting to see how it all plays out. I love that interview. I love his framework. I'm not going to go through it now because it's getting late. But he, I think laid out what a CDO, Chief Data Officer has to do to be successful those five things. What do you see for IBM to do next? Obviously come out of the show, what are you looking for them to do? Well, I mean, to me, it's around that relationship between cloud and Watson, right? Those, it's like peanut butter and jelly. Those things got to scale together. And IBM has made the statement, we will not put Watson on anybody else's cloud. It's our Watson, right? So that's a- But yet we heard they want to share Watson. It's through APIs. But that's a significant competitive advantage. If you want to get Watson, you got to go to IBM's cloud. And to me, that's how they get- I thought Nancy Pearson had an interesting insight. She said, we were kind of debating around cloud and Watson and she said, it's the both sides of the same coin, meaning cloud guys talk tech developer and our tech. Watson talks business. So I think that's to me, what I'm looking for, see how those conversations increase. So that's what I'm going to look for. And of course, they get the World of Watson event, developer event, November 9th in San Francisco. We're going to, I'm going to try to make it there with the, bring the cube there if we can. And we'll probably see a bit of variety of different events and I'll see out in the field. So just overall, great event. I give them a good solid A on this stage. I'd say, you know, good A, not A plus, but I'll give them a nice A. What will you give them? Give them a letter grade. I would say it's an A. I think, listen, I loved insight. I thought IBM insight was one of the better shows that we did each year. And I thought this exceeded traditional, the historical insight shows. You know, there's still, I mean, they put a good prism on, you saw everything through the Watson prism, but there's a lot of other stuff behind it. You know, the old, the legacy IOD business, the Cognos business. I mean, it's still, still a lot of different stovepipes that IBM has to bring together. So a lot more work to do. But it was a great show. Cognitive is the key message. Awesome new cases. Cognitive is the key message. Well, Dave, great to host with you again. We've been kind of on different show runs here for a while, but great to see you. Thanks to all the guys here. Seth and Patrick doing the IBM videos out there. Greg, Brandon, the guys are kicking butt out there and all the people back at the ranch. So look at eagle.com live blogging. Burke doing the crowd chat. And thanks for watching here at theCUBE here live in Mandalay Bay. Thanks for watching. See you at the next show.