IBM (NYSE:IBM) has been transforming itself over the past few years. The company has embraced the cloud, acquiring cloud infrastructure company SoftLayer in 2013 and using it to build its Bluemix cloud platform. Analytics and Big Data services, delivered over the cloud, have become key growth areas for IBM, and the company has invested heavily, pouring $1 billion into its cognitive computing system, Watson.
The latest initiative, a $3 billion investment to create a new Internet of Things unit, could easily be viewed as management simply chasing trends. But this effort is an extension of all of the work IBM has done over the past few years to build out its analytics and cloud capabilities. The new IBM is built for the Internet of Things.
Where IBM fits into the IoT
The Internet of Things has received a great deal of attention recently, and the tens of billions of devices and sensors that will eventually be connected to the Internet represent a major opportunity for many companies, from chipmakers such as Intel to radio-frequency component manufacturers like Skyworks Solutions.
But the devices themselves are only part of the story. The enormous amount of data generated from all of these connected devices needs to be stored and analyzed, not a trivial task. This is the realm of Big Data, where data sets are so large and complex that standard methods of information management and processing fall short.
IBM already has a very large analytics business, which generated $17 billion of revenue in 2014. About 55% of this business is software, and if it were considered as a separate business, it would be the fifth largest software company in the world. Throughout its history, IBM has invested a total of $26 billion in building its analytics and Big Data capabilities, making it one of the leaders in the industry today.
The cloud business has also gotten big, generating $7 billion of revenue in 2014, half of which was delivered "as-a-service." These cloud and analytics capabilities make the company a perfect match for dealing with the deluge of data streaming from the Internet of Things.
Part of the recent Internet of Things announcement was a new partnership with The Weather Company. The Weather Company provides weather forecasting services to a variety of industries, ranging from aviation to insurance, allowing businesses that can be affected by weather to have the best information available. It collects weather data from thousands of sources, generating more than 10 billion forecasts per day.
The IBM partnership will bring these business-to-business services to the cloud, giving developers using the Bluemix cloud platform to build mobile and Web apps access to this wealth of data. Watson will be used to develop industry-specific analytics solutions, and IBM will also train consultants from its services business to help clients integrate this new service into their applications.
A tough fight ahead
This is just one example of how combining the cloud with advanced analytics capabilities can transform a vast amount of data into valuable insights for businesses. While its transformation over the past few years has positioned IBM well to take advantage of the Internet of Things, it is certainly not the only company targeting this market.
Amazon, the largest provider of cloud infrastructure services, is building its own analytics capabilities, offering Internet of Things and Big Data services through Amazon Web Services. Microsoft announced its Azure Internet of Things Suite earlier this year. Both Oracle and SAP also have big analytics businesses, and both are targeting the Internet of Things as well.
IBM has traditionally sold hardware, software, and services to its customers, but with much of the processing and analysis related to the Internet of Things likely to happen in the cloud, Big Blue will need to make its cloud platform better than the rest in order to win customers.
One thing investors should not do is underestimate IBM. The ultimate winner in this market will be the company that provides the most value to its customers, generating the best insights from the data. It will take more than a big cloud to succeed, and IBM's vast analytics business, along with its ability to consistently generate a tremendous number of technology patents, will give the company an advantage. IBM has been granted the most U.S. patents every year for the past two decades, according to IFI Claims Patent Services.
The Internet of Things is ultimately a buzzword that translates into "lots of data" -- IBM is positioned to be at the center of this movement.
Timothy Green owns shares of International Business Machines. The Motley Fool recommends Amazon.com and Intel. The Motley Fool owns shares of Amazon.com, International Business Machines, Oracle, and Skyworks Solutions. 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.