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International Business Machines Corp. Invests $3 Billion in the Internet of Things

By Leo Sun – Apr 2, 2015 at 10:20AM

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IBM just streamlined its IoT businesses to capitalize on the spread of connected devices.

IBM (IBM -1.26%) recently established a new Internet of Things unit, promising to invest $3 billion in the business over the next four years.

The IoT market, which consists of devices with embedded sensors communicating with one another, is frequently considered the next evolutionary step of the post-PC market. Research firm IDC forecasts the global IoT sector will grow from $1.9 trillion in 2013 to $7.1 trillion in 2020.

Source: Wikimedia Commons, Mark Ahsmann.

IBM previously invested in the IoT market with its "smarter planet and cities" initiatives, which connected devices with its cloud-based analytics services. The establishment of an IoT unit formalizes and streamlines those efforts.

IBM will place over 2,000 consultants, researchers, and developers specializing in IoT solutions in the new unit. The segment will promote IBM's Bluemix IoT platform as a service to help developers create and deploy specialized analytics apps for connected devices. IBM said the new unit would work with a wide variety of IoT partners, including AT&T, ARM Holdings, and The Weather Company.

How IoT fits into IBM's long-term strategies
This isn't the first time IBM has established a new business unit to focus on a high-growth industry. Last year, it invested $1 billion to create a dedicated business unit for Watson, its data-processing AI platform. It also invested $1.2 billion in accelerating the growth of its cloud-based businesses.

Those investments are necessary to generate fresh revenue growth for IBM, which has posted 11 consecutive quarters of falling revenue. The company blamed those declines on weak client spending, sluggish demand in the software sector, its divestment of lower-margin businesses, and a strengthening dollar hurting foreign sales.

Some investors blame the slowdown on former CEO Sam Palmisano, who promised to double IBM's annual earnings from $10.01 per share in fiscal 2009 to $20 per share in 2015. Palmisano's plan sounded good, but it mainly consisted of dumping lower-margin businesses, slashing jobs, and inflating earnings with debt-financed buybacks. That strategy arguably prevented IBM from pursuing acquisitions of higher-growth cloud-based companies.

A step in the right direction
Under CEO Ginni Rometty, who replaced Palmisano in early 2012, the wheels have been turning in the right direction again. Over the past three years, IBM acquired cloud computing giant Softlayer Technologies for $2 billion, signed big hybrid cloud deals with companies such as Lufthansa and ABN Amro, dramatically reduced buybacks, and abandoned the $20 EPS plan.

IBM also categorized its cloud, data analytics, mobile, social, and security efforts into a group known as "strategic imperatives." According to CFO Martin Schroeter, revenue from the strategic imperative units rose 16% year over year to $25 billion, accounting for 27% of IBM's top line. Schroeter said he believes those businesses could generate $40 billion in annual revenue by 2018.

Since IoT technology weaves together all five of IBM's strategic imperatives, it can be considered the common thread that holds all of its highest-growth businesses together.

Competitors everywhere
That might sound like a solid plan, but Big Blue faces competitors everywhere in the IoT land grab.

In the industrial sector, where IoT devices can streamline workflow and manufacturing processes, General Electric (GE -2.59%) offers its own platform, Predix. In the networking world, IBM faces Cisco (CSCO -0.71%), which is integrating data analytics capabilities into its networking hardware. Since GE and Cisco are 800-pound gorillas in their respective industries, IBM isn't tackling them head-on. Instead, it is forging mutually beneficial deals with both companies.

Last year, IBM, GE, Cisco, AT&T, and Intel formed the Industrial Internet Consortium to create new communication standards for IoT devices. IBM and Cisco are also allied in the former's aforementioned "smart city and planet" efforts. However, ambitions could eventually trump partnerships if these companies' services start overlapping.

The connected future
IBM's investment in IoT tech is a smart move that complements its strategic initiatives, but it's not a magic bullet that can solve the company's growth issues overnight. Instead, it should be considered a long-term play that will keep Big Blue invested in one of the hottest growth markets in the tech sector.

 

Leo Sun has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems and Intel. The Motley Fool owns shares of General Electric Company and International Business Machines. 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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