 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. Hello everyone, welcome to theCUBE. We are here live in Las Vegas for IBM's World of Watson. This is theCUBE SiliconANGLE's flagship program where we go out to the events and extract the signal from the noise. I'm John Furrier with my co-host this week, Dave Vellante. We are going to be covering wall-to-wall coverage, two days of thought leader conversations and commentary on IBM and their opportunity to go into the expand on big data and rebrand Insight, which is the conference to World of Watson. Obviously, Watson is a flagship brand for IBM as it goes out and explores expansion of big data, internet of things, and many more other cloud related technologies and be part of that digital transformation. Dave, great to see you. We've been covering multiple years. I mean, I think it's been seven years we've been coming to IBM events. And I got to say, this is really the only event I've seen the CEO presenting. Jeannie Romney is here and she's going to be giving a keynote at right around lunchtime. And this is a really big event for IBM. It's a real brand, a rebranding of the event, a big data scene, encapsulation of all the technologies from internet of things all the way down to applications and then down to the lower part stack. But IBM clearly moving up the stack, if you will, in Watson's their key brand. Yeah, so let's talk about the event for a second and what we're seeing this morning. John Kelly, the godfather of Watson is up on stage. So you're right, this is the first event that I've ever attended from IBM where Jeannie has spoken. Lou Gershner, I've seen him speak at previous events, but this is the first customer event during the Jeannie era that I can remember her speaking at, big customer event. 17,000 people here, many, several thousand more watching online at ibmgo.com. And as I say, John Kelly, who's the godfather of Watson, union alum, I was up speaking this morning, talking about sort of how he was a skeptic in 2007 when his team came to him with the idea for Watson because he's like, look, the last 20 years, we've seen so many failures with AI. Well, why should we expect anything different? And obviously some things changed and he made several comments. We all know the story of Jeopardy, et cetera, but he said in the next three to five years, virtually every healthcare professional will be consulting, will want to consult Watson for diagnoses and the like. He said the same thing with M&A because Watson is going to know virtually everything that's public about every single company that's out there. You know, the key to things technologies like Watson, John, is that it can ingest so much information. The fun stat is that a physician would have to read like 1500 documents a week to stay on top of the major trend. So obviously machine assisted intelligence is going to help with that. And then Thomas Friedman is up speaking right now. It's interesting, his comments focusing on Moore's Law is one of the three technology drivers. He talked about the market of digital globalization, mother nature, and Moore's Law. I'm not so sure Moore's Law is in and of itself the same driver that it used to be. You know, we've had Pat Gelsinger on. He talked about how the industry has always marched to the cadence of Moore's Law, John. We've been reporting at SiliconANGLE and Wikibon how that started to flatten out. That's the combination of technologies like AI, like mobile, like big data that are actually going to reshape the innovation curve. And then the last thing I'll say is World of Watson, this conference last couple of years has been called Insight. Basically what IBM did is it sort of didn't jump on the whole big data bandwagon. It jumped in differently with two feet. It really focused on taking its analytics business and then sort of renaming, refocusing that big data business on analytics, riding on top of all the technologies like Hadoop and Flume and Hive and everything else out there to really focus on business outcomes. And for years it was services led so IBM is so dominant in the big data business and now they're shifting that into cognitive, into software and scaling that business both within industries and through its software as a service portfolio rebranded World of Watson. And obviously IBM has really been pivoting hard and some say struggling. I'd say they're actually doing pretty well. We wrote a story on SiliconANGLE.com that talked about the rebranding of software to Bluemix. Obviously Bluemix in my opinion I said on Twitter is just cooler than Softlayer from a brand standpoint. I mean I don't look at Softlayer as like the most innovative thing, it's basically bare metal, it's hosting. And we see rack space going private. So there's not a lot of buzz in that kind of positioning. Amazon is clearly winning on the public cloud. We saw the deal with VMware of which VMware also has a relationship with IBM. So you have IBM going up against essentially Amazon web services in the cloud business. That sets a real interesting piece of the puzzle Dave for World of Watson because if you don't have a stable cloud opportunity, clients are going to kind of reject any notion of using big data. And certainly IoT, internet of things given the hack last week. As we said in theCUBE, IoT increases the surface area. So IBM's customers right now are, from what I'm hearing on the hallway are essentially saying, hey hold on, we're going to under construction at this point, put a hold on all IoT like expenditures until we figure out the security play. Because if there's no cloud security, you don't have state of the art software in agile with DevOps. You are put yourself at more risk, not just from a security standpoint, but you add IoT to an already agile environment. There's a lot of holes for penetration. So attacks and vectors of attacks are increased with surface areas. So the IoT story here is they're pumping it up. We got robots, they got AI, they got Watson. But the reality is, is a security is putting a wet blanket on this opportunity certainly right now and from what we're hearing and what Wikibon is hearing as well is that from the analyst standpoint is that customers are holding going to slow down the IoT until they can understand things like how to do software updates, making sure default passwords aren't set on devices. And ultimately, how do you manage the security piece and that's going to come back into the cloud Dave. So cloud and IoT and Watson tie together and are very interrelated and there's some dependencies there and this is going to be the hard conversations that people are going to have. So much to talk about there, John. I mean, you can't talk about analytics and cognitive and things like blockchain and the like, all these new innovations that IBM's bringing out without talking about cloud. And the inflection point for IBM was when it lost that deal to the CIA, to Amazon at the CIA. And IBM, I watched that deal. I read all the documents from the courts. I mean, IBM pulled out all the tricks and some of them kind of dirty in my opinion, even though IBM's generally an above board company, but they played hard to win that deal and they still lost that deal. And when you read the ruling of the judge, it was clear that the Amazon infrastructure was superior. And that was a wake up call for IBM and they went out and paid $2 billion for software. And that became ultimately their platform and you've called it hosting, et cetera. But it gave IBM a platform and an entry into the cloud business and they see that as the digital infrastructure of the future. Well, I mean, I was a little bit critical on software, but I actually worked for IBM. Software is an integral part of infrastructure as a service or I as that is a really critical point and it's table stakes right now in the SaaS business. So, you know, my point of view and Wikibon's documented this as a research firm is that infrastructure as a service is going to be a table stakes item. So you have to have that software fits that. And that's really what they're having up, going up against with Amazon web services. You had blue mix on top of that. That's where the innovation is happening at the platform as a service layer. That's where the action is. That is going to enable all businesses to be SaaS businesses. And I think the battleground, and we've said it two years ago, Dave, you know, when the Wikibon analysts got together and we were here on theCUBE is that essentially the middleware is the past layer. That's the battleground. That's where the action's happening. And that's why blue mix is getting the branding over software and that's where the innovation is. And that's going to enable all businesses to wake up and be software companies. So like Oracle, IBM, well it obviously competes for infrastructure as a service with Amazon. It doesn't have to stop there. So it has to go out and do things like buy clever safe to have an object store. It does that. It's adding in video services to obviously compete with what Amazon's doing with things like Twitch. So it's building out basic infrastructure. You know, you talk about bare metal all the time. It's got the basic security and other infrastructure. It's running its databases in the cloud, et cetera, et cetera, et cetera. We use software, so we actually have quite a bit of experience. We use Amazon web services as well. The key for IBM in my view anyway is they're going from massive differentiation. So it's no coincidence that you cannot buy Watson services on anybody else's cloud. If you want Watson, and when IBM sees this as a big differentiator and a big value add, you must go to the IBM cloud to procure those services. So they're going from massive differentiation play. That's big. You asked, you talked about, you know, some people saying, you know, they're winning, they're losing, whatever. The scorecard to me is the financials. So if you look at this company's financials, last summer we were talking about Brexit. You know, there was a lot of uncertainty around Brexit. This latest quarter just came out last week. IBM did $19 billion in revenue, basically flat revenue year to year, which is good. This is the first time in a while that IBM has not declined. But there was some margin contraction and people are concerned about that. I'm not so concerned. I think what's happening is IBM's business mix is shifting to cloud and software as a service, which on paper and theory should be significantly higher margin than the traditional professional services that IBM has been living off of for these last several years, but they're still not at scale. They're building up to scale. The other key metric is that 40% of IBM's business now is what they call associated with these strategic imperatives. It's cloud, it's analytics, it's Watson. Interestingly, they don't actually quantify how big the Watson business is. They kind of change the categories. They've shuffled the deck a little bit to make it hard for the Wall Street analysts to really squint through and understand exactly how much contribution is coming from Watson. So they're still struggling, I think that's true, to have the new stuff grow and offset the decline in the old stuff, which is obviously the Z series is going through a product cycle challenge. We were at the original Z13 announcement and Q4 is usually good for mainframe. We'll see if that works. I want to get your take on the first off. I didn't interrupt you. I know you're on a roll there, but just take a step back. So IBM, you think strategically those deals that they're doing is not reflective to their growth strategy? Do you think that's helping them or hurting their business? When you say it with the deals, what's your deal? You said the strategic areas that IBM has been testing. The strategic investor is now 40% of the business, which is to me a key milestone. That's kind of what you're looking for, but it's still not enough. Is that sustainable? Yes, it is, I think it is, but the key that everybody's looking for is can we see growth again? Can that 40% grow faster than the 60% that's in decline? And it's so far that hasn't happened. It's just a struggle just to keep flat. The margin contraction is a concern for people. They're concerned about the quality of revenues. Again, I'm not so much concerned long-term because I think long-term, the cloud as you shift to a ratable model might hurt your margins when you're in lower volume, but eventually it's going to print money. What's IBM's prospects in your opinion? Well, their prospects are to have high value differentiation in cognitive and in analytics and in other emerging areas like blockchain and other emerging services. But the key to me, John, is it cannot go head-to-head with Amazon because Amazon's volume and Microsoft's volume and Google's volume is a different ballgame. It's going to be hard for IBM to take those guys head-on and make money. We're seeing lots of changes in the industry, Dell and EMC competing with a low-cost business model. IBM's got to compete up the stack, like Oracle, in high-margin businesses. Can this talk about up the stack because you've got AI as the big showcase, buzzword, okay, AI is going to be great and they've got bots and all that stuff. Okay, I get what AI does. It basically automates. But given all the hacks in the IoT area, and I just put out a post highlighting some Wikibon research that's been going extremely well, this seven segments of IoT. Personal IoT, home IoT, health IoT, small business IoT, office IoT and industrial IoT. And I started the post out by quoting Jeffrey Imel, the CEO of GE. He said, yesterday we went to bed an industrial company and today we woke up a software company. I was at the stage at Dell EMC World. And that to me is interesting. And that highlights that all businesses are going to wake up and be software SaaS companies. So the game to your point about moving up the stack is can IBM change their business model and their execution to service that kind of demand for software SaaS, change their business practices, change their pricing, change their execution. This is the million dollar question, a zillion dollar question that's on the table. And I think the answer is with BlueMix you can see the path. I mean, IBM, yes, yes, BlueMix is the key. I agree with that. They wanted an acquisition spree and bought a zillion SaaS companies in the last 10 years. Obviously Cognos was a big one, big five billion dollar acquisitions, but lots of little industry focused and other SaaS companies. BlueMix is the key to bringing those all together. IBM didn't really go through. I mean, a web sphere is in part, I guess, their sort of version of Oracle Fusion, but they didn't really go through a whole giant rewrite. That essentially is what BlueMix is. It's sort of a- Well, they started from, they built up in the ground up, they launched in the queue. 14 version of what IBM did with web sphere back in the day and it's their middleware layer. So, you know, the key is developers, as you know. And when we first saw- What's up with that? Open source. They got open source action going on. They open source blockchain. They open source pretty much everything. They have a Linux DNA from the old days. IBM is really investing heavily in the developer ecosystem. We saw Kate Swanson last night, I mean Meg Swanson last night about when she kicked off BlueMix. They're getting traction, Dave. And I think the key is, can they attract and retain the developer community in this new enterprise hybrid cloud, private hybrid public cloud opportunity to enable business to be SaaS companies? To me, that is the holy grail. And Watson is the linchpin there. I mean, that's the hook for developers in the enterprise. Now, you just saw that 60 minutes special a couple of weeks ago. This was the last Sunday. Charlie Rose, it was a huge win for IBM PR. I mean, Google, Facebook, Amazon, Apple got virtually no love. It was all IBM, all the time, all Watson. So, relative to the companies that I just mentioned, you can argue that, well, they might have some more advanced AI, but relative to the traditional enterprise competitors that IBM goes up against, I mean, IBM's mopping up the floor. I mean, Oracle is, you don't hear anything about Oracle in AI, SAP's not talking about it, although I put them less of a competitor, but certainly Dell and EMC have nothing there, Cisco. I mean, these infrastructure companies don't play there. It's going to be interesting to see if IBM with its services and its industry focus and its software prowess and now its cloud can get a foothold in AI and incognitive. It seems to have an early lead there. And companies like Google, Facebook, doesn't participate directly in the enterprise. Amazon struggle to play in the enterprise. I mean, Amazon's playing in the enterprise as a deal with VMware. They're making all this noise about a deal with VMware. Compared to what IBM's doing in the enterprise with Watson and services, it's nothing. Well, we're here, World of Watson, expanding this first inaugural show of the new brand. I like the range of the show. It's got a great mix of big data all the way down to the edge, certainly with the AI and the internet of things. Again, I'm kind of pessimistic about IoT right now, given the hacking stuff, but I think this is a key work area for IBM, but the story's solid. IBM has always had a solid story. We go back to talking about Pigeano years ago. Their messaging and their people are on point on this. And the question is, can they execute? Can they run like the wind? Can they build that cloud business? So it's stable, state-of-the-art, and enables the digital SaaS business for their customers. So we're going to be breaking it down. We're going to talk to all the top executives at IBM, some customers, some select customers here. And we're going to get the data. We're going to share that with you. And of course, go to ibmgo.com, powered by SiliconANGLE Media. That's our technology, powering all the IBM events. And we're proud of that. The videos are there from the keynotes. Also, all the cube videos signed into that. It's registration required. I want to make a point. You talked about the mix. Mix is a challenge for IBM, because IBM's mix is complicated. When you look at the data works announcement, there's five or six different components of ingest and analyze and model. Those are sort of existing products that IBM had and then cobbled together with some organic stuff. So in IBM has historically been able to shield that complexity with services. But as we know, services in this day and age is not going to scale. So IBM's big challenge is, can you take that services, excellence and knowledge and industry expertise and codify it into software and deliver that at scale? That's the challenge. And that's the winning formula for IBM in my opinion. And of course, go to siliconangle.com. We've got some stories up there. I posted one this morning on the seven areas of IoT. Go to wikibond.com for all the greatest latest research subscription required. And of course, go to the cube, siliconangle.tv at IBM Go. We'll wrap up with more live coverage from World of Watson after this short break. I remember.