It's Elementary, My Dear Watson

IBM hopes to grow using a supercomputer and taking a page out of the Apple book

Jan 14, 2014 at 2:00AM
The super computer named Watson was famous for beating two humans on the TV trivia show Jeopardy a few years ago. Now its inventor, IBM (NYSE:IBM), wants to stop playing games and start generating revenue with it.
 
IBM may utilize something that has worked for tech giant Apple (NASDAQ:AAPL), which in turn may borrow from Big Blue's book. Eventually, investors in both companies may benefit.
 
The problem
IBM is in a revenue slump. Sales have dropped and Watson itself has fallen short of company goals according to some reports.

IBM Revenue (TTM) Chart

IBM revenue data by YCharts.

The company has had to rely on stock buybacks and dividend increases to return value to shareholders. Unfortunately, that might not work much longer, it's time for Watson to step up to the plate.
 
The solution
IBM is going all out and committing $1 billion in additional spending on Watson. A 2,000 employee division headquartered in New York city is being set up.
 
The company has identified personalized health care as a key growth industry over the next few years. Watson, with its cognitive capability, would be invaluable in the effort. IBM will also explore an increased use of Watson in the banking and finance industries. Imagine a computer making stock picks for you down the road?
 
Another area that IBM will focus on will be fostering a cottage industry in applications that run on Watson. The company would take a piece of the pie, much like Apple does from its App store. IBM will kick off things with a $100 million venture capital fund.

The Apple app store reportedly generated sales of $10 billion in 2013 including $3 billion for the company and $7 billion for developers. The app and iTunes segment is one of the strongest aspects of Apple's overall business. Revenue grew over 60% from 2011 to 2013. IBM would love to achieve that level of success using Watson apps.
 
Business pro
And Apple would love to duplicate that performance too. Growth is slowing in the consumer portion of the market so Apple might be taking a page from the IBM book and is pushing sales in the corporate world. More businesses are integrating mobile devices in operations and getting away from PC's. Expect Apple, and its devices, to be in the thick of things.
 
Rumors are flying that the company is developing a "pro" version of the iPad, which would sport a larger screen, contain more memory, and a faster processor. The device may run on a hybrid iOS/Mac OS operating system and would be a cross between the iPad Air and MacBook Air to give users the best of both tablet and PC worlds. Ultimately, it would probably be a brisk seller.
 
Foolish conclusion
Success on TV doesn't necessarily translate to the business world, just ask IBM. However, Big Blue is betting big bucks on the supercomputer Watson to use its cognitive abilities to assist the health care, banking, and finance industries. If IBM is as successful as it was transitioning from a PC manufacturer to a business-to-business services provider, investors may benefit.

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Fellow tech giant Apple is borrowing from the book of IBM and is courting businesses to buy iPhones and iPads. You might be able to profit if Apple succeeds, as it has in the past.
 

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Mark Morelli owns shares of Apple and International Business Machines. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and International Business Machines. 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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