Back in 2011, IBM (NYSE:IBM) made headlines by using a computer system called Watson to win a game of Jeopardy against two of the most successful contestants of all time. Watson is a system which can discern meaning from natural language and generate hypotheses by analyzing a vast quantity of data, learning from the results and getting better with time. While Watson has been commercialized to a limited extent up to this point, a recent $1 billion investment from IBM has created a new 2,000-employee division centered around Watson. Watson has the potential to shake up the business-analytics and big-data industries, pressuring competitors like Oracle (NYSE:ORCL) in the process.

The potential of Watson
Services like Watson, delivered over the cloud, are the future of IBM. Watson will be adapted to be delivered over recently acquired SoftLayer's cloud infrastructure, offering access to the service without specialized hardware. Watson could potentially be used in any industry where huge amounts of data are involved, providing fast analysis while getting smarter with time. There are currently a few companies working with IBM to implement Watson, including Asian bank DBS and various hospitals. These early customers will allow IBM to prove Watson's worth to other industries.

Big data has become big business, with IT spending on big data estimated to have reached $34 billion in 2013. The challenge facing companies is not simply the amount of data, but its unstructured nature. Neat, machine-readable, structured data isn't too difficult to analyze, even if there's a large amount. It's everything else -- books, journals, web pages, and health records -- that pose the real problem. This is the problem that Watson sets out to solve.

DBS is investing millions of dollars over the next few years on IBM's technology, hoping to use Watson to deliver personalized financial advice to wealthy clients. In the health-care business, Watson can help make better diagnoses based on a patient's health record, symptoms, family history, and current medications, along with the latest medical research. The vast amount of data involved is one of the reasons why as many as 20% of diagnoses in the United States turn out of be incorrect, and Watson should be able to improve upon this number.

Call centers are another good example of an area where Watson could make a big impact. Instead of having to employ thousands of people to receive calls and help customers, companies could rely on Watson to do the bulk of the work. Watson can analyze questions asked by customers, mine all of the available data about the product or service involved, and provide an answer which will get more accurate the more Watson is used.

Not without challenges
The main problem with Watson is that it needs to be tuned for each specific application, along with being fed an enormous amount of relevant data. It's not a simple plug-and-play solution, and the difficulty of training Watson for a specific task is one reason why adoption so far has been slow. IBM has put $100 million of its $1 billion investment toward funding start-ups that are building products around Watson, and more than 750 businesses have contacted IBM so far about using the system. This venture fund should help Watson gain more widespread adoption, but the system still needs to prove that it's useful before more businesses take the plunge.

IBM wants to turn Watson into a $10 billion business over the next decade, or about 10% of today's annual revenue. The goal is extremely ambitious, and it shows that IBM is continuing its push toward high-margin software and services. Business analytics, the unit that Watson will be a part of, helps companies and organizations make the right decisions, and Watson brings a unique capability to IBM's suite of services.

Watson is bad news for competitors like Oracle, which also offers big-data and business-analytics services, because it provides a unique service which will be difficult to replicate. Watson is a differentiator, and if the system proves useful to those companies currently testing it, it could be the reason why customers choose IBM over the competition. There won't be a flood of customers switching from Oracle to IBM due to significant switching costs, but Watson gives IBM a very important edge.

The bottom line
IBM's $1 billion investment in Watson shows that the company is serious about turning the Jeopardy-slaying system into a multi-billion-dollar product. The system is still in its proof-of-concept stage, but Watson has the potential to revolutionize big data. Services like Watson, delivered over the cloud, are the future of IBM.

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Timothy Green has no position in any stocks mentioned. The Motley Fool owns shares of 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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