 Live from the Mandalay Convention Center in Las Vegas, Nevada, it's theCUBE at IBM Insight 2014. Here are your hosts, John Furrier and Dave Vellante. Hello everyone, we are here live in Las Vegas. This is theCUBE, our flagship program. We go out to the events and extract the sizzling noise. I'm John Furrier with my co-host Dave Vellante for the next two days. We'll be wall-to-wall coverage for IBM Insight 2014. Here are your hosts, John Furrier and Dave Vellante. We'll be wall-to-wall coverage for IBM Insight, IBM's premier show around big data, big data analytics and how that's disrupting and transforming social business, engagement, and mainly cloud mobile and social infrastructure and applications. Dave and I will be talking to all the top guests, top executives. We have Steve Mills coming on today, analyst Ray Wang from Constellation Group and a variety of experts and practitioners. And of course we are live in the ground in Las Vegas. Here at the Mandalay Bay Convention Hall inside the IBM Social Lounge, Go Insight is their brand. They have a special new digital experience, kind of a second screen if you will and theCUBE is here headlining that event. And also check out IBM Insight, Insight Go. They have great celebrities like Veronica Belmont who's here. Kind of curating and co-hosting, playing DJ to the social crowd of influencers and we're going to have some of those folks on as well. And mainly the goal is to bring a digital experience and IBM really is leading this transformation with technology in the cloud, technology from mobile and more importantly their expertise in software and analytics. And we saw some amazing keynotes this morning in Heechoo. So I was on stage, CUBE alumni talking about really the most important aspect of this new software resolution. That's the data impact. They announced data works, they announced dash DB from the cloud and acquisition and a variety of other things. I was really talking about the technologies under the hood powering this next generation of software around big data and internet of things. And internet of things is not just computers and machines and probes and sensors, it's people too and that's mobile connected device. Dave, I want to get your thoughts on this because this is our wheelhouse, you know. And last year I was looking at the videos from IBM IOD Information on Demand which now the show's renamed Insight which really kind of brings together the business outcomes aspect on the business model side but also focuses on the technology where you see Watson at the center of the value proposition. You're seeing software as a key component. So your thoughts. IOD now called Insight. Here are the keynotes. What's your thoughts? Well John, let me start with the event itself. So IOD was a collection of IBM's analytics business, it's all Cognos business, maybe some information management throne and it was a sort of a strange compendium of different businesses within IBM. When the big data meme hit, IBM looked at that as an opportunity to, as I said before, superglue its analytics business to that big data theme. Redefine what big data is. In other words, transcending just Hadoop. Of course we were at big data NYC last week, a lot of Hadoop talk, a lot of elephants in the room, a lot of NoSQL which we still believe is the main spring of big data but nonetheless, IBM's perspective is that big data transcends Hadoop and then it's got a zillion examples of that and certainly it's software business and it's analytics business underscore that as well the Watson business came in and they've tied that into the IOD of what is now the IBM Insight theme. And so really IBM has become a leader in that marketplace of thought leader in analytics and this is really one of the biggest big data shows. Now of course it's bringing together a lot of traditional, whether it's data warehousing or business intelligence activities with the new big data, you know, classical Hadoop type businesses. IBM as you know has a huge portfolio, John, of all these different businesses and it's really rebranded and it's done a very, very good job there. The challenge I see that IBM faces is IBM's in transition. It's quote-unquote old businesses are declining quite quickly and it's new businesses aren't yet large enough to offset those declines. So last quarter it's obviously well reported seven, eight days ago, IBM reported a big miss and that's been in the news, the stock took a big hit and Ginny Rometti came out and said we didn't execute well, we have to accelerate the transition to the new businesses. What are those new businesses? Well, it's cloud, it's analytics, it's things, vertical businesses around things like Watson, certainly big data and engagement and you've heard a lot today at the keynotes around cloud, engagement and of course data analytics. As I said, IBM's big challenge during that transformation is that the new stuff isn't big enough, John, to offset the decline in the old stuff. Yeah, Dave, I think it's right on it. Let's talk about the IBM situation. Obviously they got hammered in the news and they really took it on the chin and I was commenting on Twitter and on crowd chats that IBM really was unwarranted. I mean, we've been covering a lot of the IBM shows now going on our fourth year here with theCUBE, we've been on the ground, we've been embedded, almost embedded in IBM during this transformation. We saw them make their moves, certainly we just recently reported at a recent event around their divestiture of the Intel server, chips, low-end servers and really focusing on the power rate here within IBM. And here's why I think IBM is not going to go anywhere soon in terms of being extinct. And a lot of people were trashing IBM saying, hey, you know, the stock buybacks were not in concern, let me address that. Let's take stock buybacks. Stock buybacks are financially engineering tactic for companies to build back the stock when they think there's value and they buy back that stock to control the float. The float is the number of shares available in the market and this is a standard tactic of a lot of companies. During transitional markets, they buy back the stock, they buy back that stock because they want to control the float and manage the hedge funds and all the arbitrage folks out there for short-term gains and we've seen companies like Michael Dell and Dell Computer go private. IBM can't go private but what they can do is control their float. That's a completely separate issue from the fact that IBM has been retrenching in all aspects of their business. I think certainly the margin expansion question, we've asked Steve Mills that direct question, is a legitimate question. I think that is something that they need to look at and certainly the cloud technologies puts pressure on those margins, no doubt. However, the companies that will be very successful in the future, in our opinion in theCUBE and the research we've done at Wikibon is Software Drives Margins and that is classic business. Now, they're a little bit late to the game with cloud, they've got Softlayer, they've got Bluemix booting up but they have Watson and they have a very robust, mature software business. They're getting rid of the boxes and there's really going to be two types of companies in my opinion in the future that will be very, very successful. Those with software that rely on hardware and those guys are going to be fighting because they got to carry that hardware and folks who have just software. IBM is moving to a point where they'll have some gear but more importantly the value creation will be on the software side so I believe that IBM is perfectly positioned around, not just the messaging but they've been delivering on it. You look at their announcements, you will see database as a service, that's the cloud and acquisition, dash TV. You've got Watson at the centerpiece and a lot of people are criticizing Watson's not happening fast enough but that's very much a broad technology. So IBM really is taking it on the chin in the short term but I think if they stay the course, I think that's going to be fundamentally the thing that we're going to watch. If they start body swerving to appease the market then they're going to be in a death spiral in my opinion, they can't do that. They've got to stand their mission, they have great messaging, they're on a right vector into what we believe is the right marketplace. We've been saying this for three years, cloud, mobile and social and certainly they're going to have to take it in the short term but I think they're moving quickly in the software, your take on that. Well I want to start with the stock buyback. A lot of people will criticize that but if a company is not willing to buy its own stock the street will punish you. I go back to the early 1990s when IBM was under this big downsizing headwind and pressure shifting to microprocessor based systems which are much lower margin. What IBM did at the time to forestall that decline was they essentially transitioned their rental base to purchase so IBM played a financial engineering game and really aggressively started to take what was a monthly revenue deferred revenue model which was renting mainframes largely and transitioning those to a purchase and that took a couple of years many many months and over multi-year period and it was able to keep IBM propped up. It was sort of a financial masking of the decline and in some ways IBM did some similar moves with the stock buybacks. Very aggressive stock buybacks. Having said that if you don't buy back your stock these days with your excess cash the street will punish you. Now the big and you look of course John you look at someone like Yahoo where Marissa Meyer bought back a lot of stock and that worked out very well so the question is will those continue? And so and I think in some regards they have to. Of course it does drain free cash flow. I think the big headwind that IBM has transitioned in its major businesses. Revenue was down 4%, it was down 2% in constant currency this last quarter services was down 3% flat in constant currency. The systems and technology group, the hardware group was way down. Mainframes were way down. Power was way down. Storage was way down. So you're seeing multiple double digit declines. IBM will point to things like Flash which were growing but Flash is not nearly big enough for major declines. Power 8 which is ostensibly a growth area you know down in the business. IBM is jettisoning its system X business selling that to Lenovo it's getting out of the micro electronics business essentially having an acquisition i.e. paying to get to have somebody take that business global foundries and essentially it's got a number of vertically integrated business units that it's launching. Things like cloud security, smarter commerce Watson, Tivoli was a bright spot up 3% in the quarter, WebSphere was up, but again those businesses not nearly large enough to offset the decline. And I'll add to that unlike HP EMC a lot of these companies that we see struggling a little bit free cash flow was flat so that's a bit of a concern that IBM is not generating as much free cash flow as it has in the past. What about services Dave? We talk about services all the time IBM really kind of rebounded with during the transition when their first major turnaround kind of they had their Meg Whitman moment almost a decade ago or more where the IBM services really led to charge on that so what's your take on that now certainly a little bit of mix you got some product leadership going on what's your take on that are they poised to be the IBM global services king and can they rely on that as a crutch is it an opportunity are they lagging, are they winning, what's your take? Well a lot of the global services business John was outsourcing and outsourcing was my mess for less and IBM dominated that business the acquisition of PWC was one of the one of the best acquisitions ever in the history of the computer industry I'll put it close to but somewhat behind obviously VMware but right up there really helped transition IBM into a global services powerhouse Lou Gerster made that decision you know a decade plus ago and said we will have a single throat to choke we're not going to go optimize on the product level and sell different points of entry into the customer we're going to have a single point of entry into the customer and that obviously worked very well for IBM the tradeoff is now it's coming to roost right it's hard to pick a product where IBM is actually dominant with the exception of mainframes and so Oracle got the lead in database Well the cloud is a mainframe but I want to bring up the services piece of the cloud Agile is something that's been a technical term moving into the business landscape where Agile is about business outcomes of deployment really shortening up there buy by the drink, land and expand this is the new business model dynamics we're seeing with cloud and mobile infrastructure certainly security, perimeterless security is a hot focus so IBM kind of has all the software products they have a good arsenal of products in their bag if you will but does that impact services as a create an undervalued services infrastructure in terms of deploying people and resources or are they good well again IBM made the bet on services to become a leader the economics of services are different than the economics of hardware products and software products but IBM has done a great job certainly within software I mean Steve Mills we're going to have on later led the architecture of the IBM software group and completely transformed that business IBM decided many many years ago that the growth areas were in services and software and it bet heavily on those IBM's business today IBM's certainly de-emphasizing hardware it's made, in fact Steve Mills two months ago in Greenwich speaking to a bunch of analysts put forth some metrics where it used to be over half the business in the IT business was hardware based and IBM's business was largely a hardware based business that's transitioned dramatically so IBM made those bets on software and services but you know it's coming back John and started to be integrated IBM's still trying to figure that out organizationally product wise the portfolio and I have pretty strong opinions on frankly how that should be organized that we can talk about today well I mean one of the things I think about IBM is that that I'm really impressed in is that you heard the keynote on stage this morning after INHE which was an awesome keynote at the Ted at IBM event in San Francisco where INHE Chusa gave a keynote about data kind of a thought leader event in the data world that is active data active data is the holy grail for mobile infrastructure mobile data having databases to service these are the kinds of things that are not kind of new concepts but from a practice standpoint it's moving from the developer world to the business world that's one thing so you're thinking active data every business has active data too they talk about engagement systems of engagement that's a data warehousing term we heard that before but engagement goes well on just data warehousing database storage engagement gets now into the customer interaction piece this to me is where the internet of things model where people are things too become really really critical you're going to start to see in the moment program you're going to see start to see leveraging of their live events immersion immersive experiences where IBM can enable their customers to be more engaging with their customers and that's going to be around social media and social business I think IBM and social business without a doubt they talk about engagement they talk about these things and Dave go back to the web when we were breaking into the business there during the web day web transformation IBM pioneered a concept called e-business we don't talk about e-business anymore because all business is e-business today but IBM really was a leader in that space we saw what they did in the web I'm seeing the same thing going on with social media social business is real this is not a gimmick it's not a PR thing with social media social media is how people are talking they're talking to themselves it's a crowdsource dynamic so the notion of systems of engagement will basically be a complete end to end phenomenon to write to the customer write to people so that's going to impact and transform advertising their customer service and more importantly their customers on how they engage with their customers so I think IBM's big opportunity here John is to have these vertically integrated business units that take into account infrastructures of service security bringing the cloud bringing data in and actually helping clients transform I mean in some respects let Amazon own the startups and sure software has plenty of startups but really I think IBM's big play here John is helping the UPS's of the world the Coca-Cola's the McDonald's their big banks the financial institutions the insurance companies those big companies that are under pressure from all these disruptive startups help them transition to this new world and take advantage of this new digital matrix that's emerging where you have cloud as the bottom layer you've got security you've got systems of engagement and on top of that you've got this transport of data and analytics and putting that all together is a very complicated piece security is a big part of that IBM can help its large Fortune 1000 customers transition and that's really where the place I think the cloud transition IBM has been criticized for being late to the party there they've certainly been full throttled acquisitions we saw the software acquisition on bare metal Amazon is certainly changing the game but I think it's bigger than Amazon I think IBM realizes that cloud is going to be killer and they're building out as fast as they can so I don't think they're going to lose a lot just like we talk about EMC with storage I mean like a lot of people have come along to try to knock EMC off but they have the customer relationships IBM has the relationships so if they can tool up and build that out there capabilities they will win now my only concern about IBM's cloud strategy really comes down to this this is something more of that we could debate on the cube throughout the day but that is this IBM HP EMC you name it they need their own cloud I mean I believe that we're going to go to a multi-cloud world Permanous IT and DevOps kind of ethos driving this new generation it's going to change the economics going to change the customer experiences from social engagement to how they roll out their supply chain et cetera so that being said I believe that IBM needs to own their own cloud without a doubt HP the big guys must have their own cloud because Amazon has a cloud they have their own cloud because look at OpenStack OpenStack is clearly consolidating around we don't want a little piece of the pie here we want building blocks that's all great kumbaya rah rah but you're seeing the big guys roll in because it's some serious business at stake and if they don't have their own clouds Dave I really believe that they need to they're going to be out of the game Well I think they do have their own cloud and the enterprise margin premiums which are you know 10x markup over the core technology whether it's a microprocessor or a disk drive or some infrastructure as a service and that's the big challenge for all of these companies that's frankly John that's why they embrace hybrid cloud because hybrid cloud is not frankly disruptive to their business model so the top line growth and the enterprise margin uplift is a real challenge for all of these guys Well we're excited to be here live in Las Vegas the social lounge here, Insight Go location and we're bringing all the live to live coverage and Dave you know just wrapping up our intro segments very clear the trajectory of this business customers need to create their own systems to integrate data always changing data new data old data at the end of the day the role of the organization and what they deliver to their customers in terms of value is going to come down to how they handle their data and their applications and that's something that we really care about we're going to explore more of that here at IBM Insight we are live on the ground we see events that extract the student from the noise I'm John Furrier with Dave Vellante we'll be right back after this short break