A.I. Innovation: Why IBM Bought Cognea

Learn why Cognea is part of IBM's plan to start a potential new era of computing, and what this reveals about its growth outlook.

May 28, 2014 at 12:30PM

IBM (NYSE:IBM) is betting big on a possible technology revolution, commonly referred to as the cognitive computing era. Throughout the years, the company has designed an artificial intelligence, Watson, which is essentially a supercomputer that's able to learn. In January, IBM created a business unit called Watson Group, in which the company is investing $1 billion, expecting to make profit of approximately $10 billion in the next ten years. Recently, the tech giant acquired Cognea, a start-up that works to give virtual digital assistants a variety of personalities that relate to the user. This move could further differentiate IBM's voice assistant technology from competitors like Google (NASDAQ:GOOG) and Microsoft (NASDAQ:MSFT), potentially solving its revenue growth issues.

Improving Watson
Three years ago, Watson caught the public attention when it won the TV quiz show "Jeopardy." Since then, IBM has continued to improve the system, working with a group of doctors from M.D. Anderson to create a system that can generate possible treatments for cancer patients. Today, Watson is used as an important tool for insurer WellPoint, and also as an investment advisor for clients of Singapore-based bank DBS. Also, many start-ups funded by IBM base their services on this voice assistant. With the acquisition of Cognea, IBM can turn Watson into a computer that adopts a variety of personalities that relate to users in different contexts, whether in casual chatting or intellectual problem-solving.

Battling with the public cloud
As IBM is lately undergoing revenue growth issues -- oftentimes linked to its private cloud business services being substituted by a public cloud -- Watson seems like a bold move to increase the company's top line in future years. As Bloomberg points out, the company has had a 77% increase in profit since 2007, far above the 42% broader market index. However, sales have decreased since 2011 and have shown no significant growth since 2007.

The bright side is that many corporations still trust their valuable data to IBM's security and uptime track record, as the public cloud is often still be regarded as an unsafe method of storing important data. So, the company might need several years to create a track record that most major corporations can trust. In the meantime, IBM must look for new ways to increase sales. If it manages to surpass setbacks and tap into Watson's potential, IBM could increase both top and bottom lines significantly in the next years.

The potential behind cognitive computing
The variety of uses given to Watson serve to illustrate its future potential. In regard to health care, this kind of cognitive computer can access vast amounts of data, including thousands of medical studies, patient records, prescriptions, and treatments for a variety of illnesses, as well as keep up with the latest studies. In that sense, Watson is able to put valuable data together to provide possible solutions to doctors. As the Wall Street Journal pointed out, IBM believes that these unique features can improve health care and lower costs.

So far, IBM engineers have had to overcome many setbacks to make Watson work properly, but the battle is not over, yet. As a Bloomberg Businessweek article shows, prominent computer scientist Klaus-Peter Adlassnig suggests that Watson is currently equivalent to a doctor with an immense amount of knowledge, but "cripplingly literal-minded." With that being said, if IBM manages to eventually fix Watson's present weaknesses, it might turn into a valuable tool with a strong demand from everyday people, agencies, and corporations.

Differentiation from other digital assistants
Microsoft will release its own voice assistant, Cortana, later this year. This virtual assistant can engage in natural conversations with the user, and is designed to help with practical purposes like offering reminders or restaurant recommendations. Also, it learns from users' responses. Other digital assistants on the market include Google Now and Apple's Siri. Both are useful tools for searching, but Google Now tends to promote more Google-related services in Android.

Certainly, the aforementioned voice assistants serve as added value to their respective operating systems. However, the large cloud data that IBM can access sets Watson apart. The company's digital assistant is essentially an expert that can help users with a variety of subjects. Plus, with the potential that could come from Cognea, Watson is better able to understand and relate to a user's personality. Michael Rhodin, Senior vice-president of IBM Watson Group, suggests that this characteristic will differentiate Watson from "today's talking' smartphones."

Bottom line
The acquisition of Cognea offers better differentiation features for Watson. Moreover, it is a way for IBM to increase revenue growth in the future. However, Watson must overcome several obstacles to truly evolve as a tool with a high demand in the market. 

If you thought the Internet boom of the 1990s was big...
The growth of the Internet has changed our world forever. It also made many investors rich. Why? They were there in the beginning in this once in a generation industry. Fortunately for investors today, they have the opportunity to get in on the ground floor of what promises to become the next multi-trillion dollar industry. Not only that, but The Motley Fool has identified the one stock that is poised to benefit from this major development. Click here now to get the facts in this eye-opening video.

Alvaro Campos has no position in any stocks mentioned. The Motley Fool recommends Google (C shares). The Motley Fool owns shares of Google (C shares), International Business Machines, and Microsoft. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information