 Live from Las Vegas, it's theCUBE, covering IBM Think 2018, brought to you by IBM. Welcome to theCUBE. We are live at the inaugural IBM Think 2018. I'm Lisa Martin joined by John Furrier and Dave Vellante. Guys, this is the first day of three days of coverage from theCUBE, but this is a combination of six different IBM events from the past. Tell me a little bit about your perspective about what you think that means. They're projected to have about 40,000 plus people here, but big change. Yeah, I mean, this is, I mean, we've been covering IBM today, how many years, was this 2011? I think we've been to pretty much every single event they had, they had IOD, information on demand, out and on and on. Impact, pulse, edge, hate for love. All coming together. I mean, this is IBM looking at the market saying it's better to run a big tent event as a kind of a coming together, a global celebration, a global information gathering, a global sales partnership ecosystem development. And I think it's finally IBM's taken a play out of what others have done. Salesforce does it, Oracle's done it, Amazon does it with the re-invent. They pull all their resources into one event. Now here's the problem, IBM is massively huge. So, you know, theCUBE goes to all those events. Now it's five X the demand for Kube content, five X the demand for Keynotes. So they're here at the Mandalay Bay. They probably need to do a bigger job next year, but it's a good move for IBM. And I love the Think logo. I love the Think branding. That's a throwback to the old Tom Watson generation, which the roots of IBM were all about just think, solve problems and really market the best solutions to customers. To me, they can bring back those old IBM ethos and the roots and really get back into the cloud game, which they've been falling behind on, but their last earnings were up, Dave. So they've had a nice little break of the negative streak, but AI is a tailwind for them. IoT is a tailwind. Blockchain is potentially an abler down the road. I mean, Dave, your thoughts on just that, the business aspect of that. Well, so first on the Think, they have consolidated I think six shows. They used to have really deep dives into things like infrastructure or analytics, et cetera. Now they've said, okay, let's make the big 10, as John was saying. What's interesting is every one of those drill down events, Lisa, you had big themes, whether it was cognitive or cloud, or digital transformation. So I think it's a smart move. Michelle Paluso, Bob Lord came in and said, hey, we're going to change things up a little bit and we're going to play in the big leagues with, as John said, Salesforce, et cetera. You're right, John, IBM sort of finally, after Ginny Rometti came on in 2012, it had some number of the trade press reports and number of quarters of revenue. It was double-digit, like 17 consecutive quarters. But remember, IBM, we've said it for years, IBM's got a shrink to grow and the growth, they eked out 1% growth in constant currency. Currency is finally now a tailwind for IBM. It's a $79 billion company, a lot smaller. Remember, IBM used to be well over a $100 billion company and it's got a $140, $150 billion market cap. So it's trading at about 2x, almost 2x revenue. And it's because IBM has an eclectic mix. They've got mainframe, they've got other hardware, they got rid of their x86 business, which is for the low margin business. They've got services, which is a great business for them, huge cash flow, they got $120 billion services backlog right now, so amazing potential future earnings. But services is a lower margin business. IBM also has this huge software business, tens of billions of dollars in software, which is a very high margin business. So put it all together and IBM's trying to get back to a 50% gross margin model. They're throwing off a lot of cash. They threw off $13 billion in free cash flow last year. Interestingly, about 80% of that went back to shareholders in the form of cherry purchases and the like. And that's how IBM has sort of kept the stock price up and continues now. We'll see what happens next year. They'll be very conservative about growth, so tepid growth, huge advantage from the tax reform. IBM is one of these companies that is going to benefit in a big way from tax reform, gives them a lot of flexibility. And I would also, if I was advising IBM, I'm not, but if I was advising Michelle Paluso, I'd basically look at, you're too big to have one big show. I would do one big business show, like Think, and then also have a separate event on technical. Because one of the things we look at their schedule here, is business and AI, cloud and data, modern infrastructure, security and resilience. That alone can stack the deck for three, four days of just business conversations, business transformation, digital transformation, future transformation with blockchain and among other things, power of the data and IoT. That's a full packed set of content. IBM's got a huge R&D organization, they have a huge services organization and technology is the enabler for them to get those margins up. And I think they should have a separate technical thing. Now, we're going to ask them directly, we'll try to get Michelle Paluso on, but. I want to make some comments about the Ginny Rometti tenure. So I first met her in around 2007, 2008, when she was running strategy, actually. She had run a large business for Palmasano. So this is well before she took over in 2012. And she was running strategy and she came out in 2012. At that time, IBM had no cloud, really clear cloud strategy. They were talking cloud, but they didn't have any cloud, public cloud options. So they had to go out and pay $2 billion for software. And then they put in Bluemix, John you're hearing some changes on Bluemix, so we're going to talk about that. But she has had to architect a massive transition. But when you look at IBM's core business, cloud is really one of the new drivers. So $17 billion business. But the drivers of profitability are mainframe. Storage, services, a lot of the same with now a large cloud business that they've taken a lot of different components and pushed it through the cloud and done with Bluemix, what they did with WebSphere, their middleware piece, kind of what Oracle tried to do and has done with Fusion, but a different strategy. All done sort of in the cloud. Now, the big question is, okay, is that going to drive growth for IBM in the next 10 years? The other big question is, what about Watson? You hear a lot about Watson, they don't really clearly break out, okay, this is how much of business we do with Watson. And Wall Street has been clamoring to see that, so. Well, I mean, to me, the cloud is the big story. I think their opportunity is data. That's where Watson kind of ties in. They have the huge client base and the digital transformation style, I think they're going to do really well there. But at the end of the day, the cloud story has always been weak for IBM in the sense of comparing it to what Amazon WebService has been doing. I really want to see how they're differentiating their cloud story because they have to. They cannot compete with Amazon head-to-head. Google's differentiating, Microsoft's differentiating. IBM needs to be in the same league as Microsoft and Amazon. They got to beat Google out for that third spot. To me, if I was giving marching orders to the teams, then we got to be in the top three cloud providers and define it in a way that adds value to customers. And they're not in that top three today. That is a huge story. That's going to keep dragging them down on the Wall Street numbers, in my opinion, unless they do something different. Oh, but I got to counter that because the big difference between IBM Cloud and Amazon Cloud is IBM's got a giant software portfolio. IBM's, as a service, software portfolios, many tens of billions of dollars. So they have a ratable revenue model and a very, very high, software's a 85% zero marginal cost business. Amazon doesn't have that yet. They may, you know, they're going up the stack. But that's huge. The other piece to watch is IBM calls, you know, strategic imperatives, which is cloud and security and IoT and so the new stuff, basically, which is now just under 50% of the revenue model. But that's where companies like IBM and Oracle differentiate from Amazon, is they have the deep software. Now the challenge for IBM is, their software is very bespoke. Their software business is very, very fragmented. They've been trying to bring it together through middleware for what, John? Four or five years, when did they announce Bluemix? We were there. It seems like five years ago. I mean, maybe, yeah, maybe even six. Bluemix was a great, great approach. I think Softlayer might have been, to me at least, the one, I think, thing that held Bluemix back. Just Softlayer, to me, just, not just infrastructure, didn't really kind of make it blend into Bluemix the way I thought it would and hoped it would. We'll see what they say this week. Yeah, but that was the right move. The $2 billion acquisition of Softlayer. Had they not done that, they would be like Dell EMC, no cloud. They'd be Dell EMC with a huge software business, on-prem software business. Well, Dave, the Markershire numbers on cloud shows IBM not making it. So like, to me, that story has to be. I disagree with that. I disagree. So you got the big three, right? And then you got Oracle and IBM. And it's sort of a distant, I don't know what order. I guess IBM would be a little bit ahead of Oracle. But you got one, two, three, and then distant four and five. Excluding Alibaba and the China cloud, which is huge. But IBM's- Not in the U.S., though. In China, but IBM's strategy to me is the right one. Drive software revenue as Oracle as well, because that's the ace in the hole relative to the infrastructure clouds. They don't want to compete head-to-head in infrastructure as a service. That would be a disaster. I mean, I'm tracking the cloud heavily, you know that. So I look at IBM a little bit differently than you. My view is simple. In the cloud game right now, they're not making it. However, we know that everyone's defining cloud differently. I mean, Microsoft throws Azure in there. There's software included. Amazon doesn't. Oracle does. So again, that's just- It's a $17 billion business. Hold on, hold on. That's just mangling the numbers. Oh, granted, they maybe put some hosting in there. They have to have, it's not about the cloud's stories, but the cloud value. IBM has a lot of piece parts that they can actually put together for a cloud package, infrastructure, and set of software services. Bluemix tried to do that. So I think if they can look at cloud in a way that helps IBM, that gives them a way to move the goalpost, a way to change the game. To me, that's what I'm looking for, because IBM should not be out of the cloud business. If they don't go down- But they're not out of the cloud business. It's a $17 billion cloud business. How can you say they're out of the cloud business? That's the same assertion to make. I'm not saying they're out of the cloud business, but look what happened to VMware. They were in the cloud business. Yeah, but VMware was BS. We all know that. They had fake cloud. I mean, at least IBM's got a real cloud built upon software. And yes, they transformed a hosting business and a bare metal cloud into what has ultimately come to the IBM cloud, where they were now rebranding. It takes a long time. This is kind of the point I was making about Ginny earlier. It's a little messy, seeing that sausage made. But at least they have a strategy around that. They're in the cloud game. Dell EMC isn't in the cloud game. HPE isn't in the cloud game. I'm talking public cloud. These were companies that both of VMware, all three of those companies announced they were going in the cloud, they're out. At least IBM, Oracle, obviously the big three are in it. That's my contention. Do you disagree? No, there are a cursor in the cloud game. They're tracking the market share numbers, but again, they're not winning in the cloud game. Okay, so like relative to other players. So let's define winning. Well, I mean, that's how you look at the marketplace. So right now by quote, today's standard, they're at the top three are Amazon, Microsoft, some say Google, Oracle, and IBM would be below that. That's defined by a bunch of stuff. So IBM counts it, I mean, Microsoft counts it differently than Amazon. I look at cloud as simply this. How many sets of services do you have? And how many people are using those services? So there's kind of two dimensions of access there. What's the breadth of services? And then how many people are using those breadth of services? So it's kind of like a quadrant, not a magic quadrant, but like Amazon blows away everybody. Okay, so that's like, they're so far ahead. IBM, if they try to compete that way, my point was that trying to make was, if you compete on trying to match Amazon, you're not going to win. Google's already tapped out of the cloud by that standard. They're going in all in on cloud scale, TensorFlow, AI, targeting the developer community. They're not out of the cloud game, they're taking a different path. That's not their cloud story, that's their cloud plan. They're executing it. Oracle, it's just everything's cloud, right? They'll count anything, if it moves, it's cloud, right? So that's Oracle. Microsoft throws 365 in there to pump their numbers up. But what do they have? And it's doing well by, quote, Wall Street. But some people criticize the technology with Microsoft. So it's kind of a rat race. It's fundamentally at the infrastructure, it's number of services and who's using those services. And then above, say, the Kubernetes line, if you will, it's what applications are driving value. So if you separate applications from under the Kubernetes line orchestration, then you've got two different pictures. You can't blend them in. That's my contention that the blending of apps revenue and infrastructure revenue really makes it a real messy way to squint through who's winning. So let's define leadership. That was good analysis. I'll give you, I'll add some color to that. To me, you've got to be in the cloud game because in order to succeed in the digital economy, you got to have cloud economics. You got to have the ability to do analytics and data. You got to have AI and you got to have cloud economics. What does that mean? You got to have an API platform. You got to have zero marginal cost. You got to have network effects that scale. And you got to be able to track startups. Okay, so those are the sort of components that I look at as cloud momentum. The question I have for IBM is, if the strategic comparatives are now almost 50% of the business and they're higher margin and you're achieving those cloud economics, why are gross margins under pressure? They should be showing gross margin momentum. And that's something to look at. I mean, because cloud should drive huge gross margin. I want to add one more point, because this is fundamentally frames it. If you look at cloud and what DevOps has done where you can actually have programmable infrastructure, that's changed the game. Would you think DevOps has changed the game? Changing? Yeah, sure. The notion of programming. It certainly has for the cloud native guys. Absolutely. So the ability to program the infrastructure takes away the infrastructure being the dependency of what applications can do. Great. Okay, great. Okay, so now that the infrastructure is programmable, the apps kind of are running the show. The successful people that are using cloud today are the ones that nailed the business model logic. So that's where the application does its due diligence. Whoever can come up with the applications and nail the business model, that's where the switching costs are extremely high. That's where the risk is. The risk is no longer in the plumbing, because the plumbing switching costs of the plumbing are a lot lower because there's a lot more technology and sets of services you could provision in and out of that. So you're starting to see the entire strategy chain where it's the applications that'll be driving the value. And that's where the mistakes made there, that's where the cloud game is. And machine intelligence is going to drive that value. That's where Watson versus the consumer guys, and IBM, Ginny, I guarantee tomorrow will make the point that we're not trying to collect your data and sell you ads. You will make that point. I guess unless you go to the weather company's website. Whoever can build the application, who can build the application that builds value? The business logic is now the new DevOps. Everything else is programmable. That's my condition. All right. All right, guys, wow. As you can tell, lots of passion for all things cloud AI ML. You're going to hear all of it today on theCUBE. This is day one of three days of coverage. As John mentioned, we have so many great guests on over the next few days. And hopefully if you weren't with our pop-up, CUBE. Keep watching. I'm Lisa Martin with John Furrier and Dave Vellante. We're going to be back with our first guest after a short break.