How IBM Plans to Make Money From Supercomputers

Learn how Big Blue could make $10 billion within 10 years from selling Watson supercomputers.

Jan 13, 2014 at 11:16AM

IBM's (NYSE:IBM) recent stock performance has been disappointing. Big Blue delivered a negative 3% return in the past 12 months. A huge name in the tech world, IBM is famous not only for having a presence in every major tech segment, from large hardware to services, but also for its capacity to reinvent itself. For example, the company sold its profitable PC business to Lenovo in 2004 to focus on software solutions.

However, in the past few quarters, Big Blue and other traditional tech players -- such as Oracle (NYSE:ORCL) and Intel (NASDAQ:INTC) -- had a difficult time trying to improve top-line performance. In particular, as institutional clients continue cutting tech budgets -- and relying more on public cloud providers -- it's getting harder for IBM to continue selling private cloud solutions. To improve revenue, the company plans to invest in emerging technology and create new markets. An example is IBM's Watson supercomputer, which could bring in $10 billion in revenue within 10 years. But how exactly does IBM plan to make money from selling supercomputers?

Watson

Source: IBM Corporate website.

The Watson supercomputer
IBM's Watson is an artificially intelligent computer system capable of answering questions in natural language. The supercomputer became famous after winning the first prize of $1 million on "Jeopardy!," after having access to more than 200 million pages of content, including the full text of Wikipedia. The system is also able to carry out hypothesis generation. Moreover, it can learn from its past mistakes, and therefore get smarter with each iteration.

It's no sci-fi, it's just business
This may sound like a sci-fi movie.But the Watson supercomputer has been developed with a clear business focus in mind. For example, after IBM's engineers managed to shrink Watson from the size of a bedroom to a pizza-box sized computer, Big Blue got its first piece of business by renting Watson to hospitals and health-care networks.

As Forbes contributor Bruce Upbin notes, IBM struck a 2012 deal with Memorial Sloan Kettering to use Watson for analyzing thousands of cancer-patient records in order to provide full evidence-based treatment decisions. The supercomputer was programmed in such a way that it doesn't tell doctors what to do. Instead, it provides several options with various degrees of confidence, so doctors can make the final decision.

Watson and its financial applications
The supercomputer could also generate meaningful sales in the financial field, where the capacity of processing large amounts of information in short time is highly appreciated.

Reuters alone is believed to publish more than 9,000 pages of financial news every day. Watson could process all this information, including data about transactions, emails, and research documents, to suggest optimal investment decisions. Singapore-based DBS Group Holdings plans to begin using Watson to help financial planners in wealth management provide more customized service.

Investing in the future
IBM seems confident about the technology behind Watson. The company wants to improve sales and execution. That's why Big Blue recently announced it plans to invest more than $1 billion to establish a new business unit for Watson. The plan is to boost the headcount at Watson Group to around 2,000. Most of the new recruits may be salespeople and consultants.

Foolish bottom line
Last year was a tough year for traditional tech players. To continue growing, the key is to focus on emerging technologies with the ability of creating new markets.

Oracle, a leader in database technology, initially suffered from poor sales of its applications businesses. In response, the software maker has been rolling out its own cloud-based products. Likewise, Intel, which missed the smartphone revolution, recently announced its x86 Pentium-class Edison wearable computer. And as the Watson project shows, IBM is also innovating and searching for new markets. Watson's ability to answer questions in natural language, its several business applications, and the upcoming increase in sales employees should help Big Blue to capitalize on supercomputers.

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Adrian Campos has no position in any stocks mentioned. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel, International Business Machines, and Oracle.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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