UPDATED 22:45 EDT / JULY 16 2017


Wall Street analyst says IBM Watson is ‘outgunned’ in AI battle

IBM Corp. has been left reeling ahead of its earnings call Tuesday following a scathing report last week on its Watson artificial intelligence business unit.

The report comes from Wall Street analyst firm Jefferies & Co.’s James Kisner, who argued that IBM is being “outgunned” in the battle for artificial intelligence, even though he says Watson is one of the “most complete” AI offerings in the field.

IBM has made a big deal of Watson as it struggles to transition to a new era of cloud-based technologies. Jeffries noted that the company has invested more than $20 billion in the platform, while mentioning its name more than 200 times in prepared remarks on its earnings reports since 2013. But despite this, the investment bank said, Watson will struggle to keep up with its competitors because of the complexity of its services component and the cost of using it.

“Our checks suggest that while IBM offers one of the more mature cognitive computing platforms today, the hefty services component of many AI deployments will be a hindrance to adoption,” Kisner, Jefferies’ senior vice president of IT hardware and communications infrastructure equities research, said in a research note. “We also believe IBM appears outgunned in the war for AI talent and will likely see increasing competition. Finally, our analysis suggests that the returns on IBM’s investments aren’t likely to be above the cost of capital.”

Even though Watson is regarded as one of the most complete AI platforms around, Jeffries said, it will struggle to attract much attention because of the significant investment required in order to gather and curate the data necessary to use the platform to its full potential.

IBM is also facing tough competition in the AI sphere of late, with rivals such as Amazon.com Inc., Google Inc., Facebook Inc. and Microsoft Corp. all building their own AI offerings to rival Watson. Jeffries also noted that IBM cut its pricing for Watson Conversations by 70 percent last October, and said this means the company is barely recouping the cost of capital from its AI investments. As such, the research firm estimates, Watson plus its associated pull-through revenues will contribute just 3 to 5 percent of consensus earnings per share in 2019.

Jeffries isn’t alone in its critique of IBM’s Watson platform. Back in May for example, Chamath Palihapitiya, chief executive officer of venture capitalist firm Social Capital, dismissed Watson as a “joke,” saying its success is due more to IBM’s PR department than any serious AI science.

Watson has gotten some love. however. MIT Technology Review recently argued that the platform “will be a leader in applying AI to health care’s woes,” once it manages to obtain all of the data it needs to be trained properly. The MIT article noted that it’s not just IBM that struggles to obtain this data, but all AI-intensive firms.

Image: Leo Suarez/Flickr

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