IBM (NYSE:IBM) recently launched a brand new business unit to manage its many Internet of Things projects. Big Blue will pump $3 billion into this unit over the next four years, creating a one-stop shop for enterprise customers in search of IoT solutions.
The move puts IBM in a better position to take advantage of the exploding Internet of Things market. Fellow tech giant Cisco Systems estimates the sector will add $19 trillion of economic value over the next decade. Cisco added server systems to its business mix in order to grab a larger slice of this enormous pie. IBM is moving in the other direction, abandoning most of its hardware to double down on software, services, and data analytics instead.
The IoT unit is key to the future direction of the company, and this fairly quiet announcement could turn out to be a game changer over the next few years. With this in mind, I got Erick Brethenoux on the phone to discuss the new IoT segment. As the director of business analytics and decision management strategy at Big Blue, Erick is knee-deep in this exciting opportunity.
What is this IoT unit?
For starters, I had to know more about the structure and purpose behind the new business unit. Here is how Brethenoux explained the segment, which is organized under the IBM analytics umbrella in the software business segment:
We have been doing a lot of IoT work independently across many different units within IBM, and we believe that given the importance of that data coming across, and the increasing demand on clients to have something that's put together for them to take a look at, it makes sense to bring all these business units together.
It's three things we have within that unit:
One is looking at solutions, to be able to integrate some knowledge that we have learned from some of those applications that we've developed in the marketplace before.
The second thing is a platform where developers can pick some of the components that we are using internally within our applications. Either on a full spread, so the entire application if you want to, or pieces of it for them to integrate with what they are doing, to start using the software that we have developed.
The third one, because we don't have all the data, because we don't have all that knowledge, either, is to build an ecosystem. So we'll be able to just get people that are really good with data, or people who can create multiple frameworks and software development kits from which people can actually integrate and form the data out of and then feed it to their applications. And some people also that are very in on the networking aspect of things, to be able to help us also to have that communication between devices, or between devices and applications, to help us with that. From AT&T, for example.
Bringing these three things together as one unit lets us focus on growing the Internet of Things as a platform.
So it is about prepackaged solutions, a big development platform, and a vibrant ecosystem of exclusive data and expertise. One by one, these components can make a difference -- maybe your project just needs an existing data collection tool or sophisticated analysis at the tail end. IBM can do these things, but it can also build a top-to-bottom solution that combines all three. And that is how the company hopes to stay relevant amid yet another quantum leap in the technology sector.
I asked about direct revenue generation plans, and Brethenoux gently swatted that question aside. IBM has not yet announced any direct revenue-generating business plans around this unit, and it is more of an innovation platform with goals set well into the future. Valuable, sure, but IBM will not report any direct sales from this business unit for some time. Instead, it will boost the overall value of its software and services.
One concrete example: weather data
I wanted more detail on how the IBM Internet of Things platform can help its clients and partners. Happy to oblige, Brethenoux dove deeper into the Weather Company partnership that was announced alongside the IoT unit:
With the Weather Company, there's a lot of data that we have been asked to provide, while we are providing our applications as well in various industries. Remember we are working with a retail company right now actually, and they are asking us to do cross-selling and upselling of some of what they have in stores, and weather plays a very important role in that for example.
And so when we come to them and say, "Weather is a data type you should take into consideration," they are telling us, "We don't have that data. We don't have a meteorological station, and you should bring that data along with the application that you are providing." This is a new thing for IBM, that we have not been providing data and brokering data before.
So that's why we have formed that collaboration with the Weather Company. It helps us provide a consistent application and provide weather data for any application that we are doing worldwide.
This is not only a fresh look at the third piece of the IoT unit -- the expertise ecosystem -- but also a great example of how the Internet of Things can help out in unexpected ways. Weather obviously affects the business prospects of retailers, outdoor entertainment venues, and car dealerships, to name just a few examples. So why not build weather knowledge right into the apps these businesses depend on?
Built-in weather data can improve the back-end business processes behind the scenes but also tie directly into smartphone apps and other mobile tools. Parking outside your favorite home improvement store on a sunny day could send coupons for barbecue grills and beach chairs to your phone. On a rainy day, try indoors projects instead or maybe a heavy duty umbrella.
That is a crude example, but you get the idea. Weather affects businesses, so businesses should have every data point possible to analyze the weather.
Of course, weather data is just one of many, many data sources that can have a profound business impact via the Internet of Things. IBM is working with many other data providers to support its IoT efforts, and you should expect more of these announcements over the next few years.
Another example: airplane engine analytics
The company also mentioned a partnership with United Technologies aerospace division Pratt & Whitney, which triggered memories of an Internet of Things discussion I had with General Electric last year. By collecting tons of data gathered from sensors during ordinary flights, and then running these data points through a massive analysis process, airlines can adjust troublesome routes and avoid costly, unnecessary maintenance. GE does all of this, and now IBM performs the same duties for Pratt & Whitney.
Brethenoux underscored the similarities, with a focus on what IBM does differently:
Analytics is what we do. It's part of our DNA, it's been part of the company for a very long time and we are very good at it. And we have a lot of services around expertise across different domains to help us to do that. So that confers us an advantage.
That being said, I recognize that GE has amazing solutions around that, too, and is very knowledgeable for sure. But in that segment, GE is definitely a competitor of ours.
Brethenoux also clarified that Pratt & Whitney could have developed its own engine analytics and data collection solutions but preferred to partner with IBM instead. That is different from GE, where the aircraft engine manufacturing and the data analysis happen in-house, all at the same company. There are many different paths forward through this new era of heavy data analysis -- IBM simply provides some shortcuts for others to use. I am sure General Electric is busy finding partners that want to tap into its own Internet of Things solutions, but aircraft analytics is not an example of that.
To close out the call, Brethenoux summarized the Internet of Things efforts in two simple sentences:
That segment of the Internet of Things and the data that we produce by those systems that are increasingly coming out whether we want it or not, it's actually something that we are just at the beginning of. I mean, it's going to be amazing opportunities.
In other words, this massive new market is coming, and there is nothing anyone can do to stop it. Why not get excited about it instead, and work hard to tap into this trillion-dollar business opportunity?
So that is exactly what IBM is doing here, and why the company will invest billions of dollars into this new business unit.
Driven by high-margin data services and software operations, this sharp focus on the markets of the future might hurt IBM sales and earnings in the near-term, but it is clearly the right strategy for the long run. It is the main reason why I recently built a Big Blue portfolio for myself. I also suspect that Warren Buffett's $12 billion bet on IBM includes some faith in the rebuilding process, or the Oracle would have taken his investment home to Omaha long ago.
Instead, he keeps buying more IBM stock. Maybe you should, too.
Anders Bylund owns shares of International Business Machines. The Motley Fool recommends Apple and Cisco Systems. The Motley Fool owns shares of Apple, General Electric Company, and International Business Machines. Try any of our Foolish newsletter services free for 30 days.