IBM Struggles to Turn Watson Into a Major Business

Huge public relations successes can create unrealistic expectations. Especially if the product or service garnering the attention is not already the beneficiary of a well-thought out strategy prepared in anticipation of the hoped-for success.

IBM's Watson super computer grabbed global headlines when it beat to very bright humans to win the TV game show 'Jeopardy.'

But it appears that the unit created around the device has struggled to turn its notoriety into the sort of multi-billion dollar business that is now the minimally acceptable threshold for major corporate initiatives.

Given the investment required and the Law of Big Numbers - the returns required to 'move the needle ' - or attain sufficient scale that stock price and market value for multi-billion enterprises are affected, IBM and enterprises like it must deliver bold and astonishing growth. This is true whether the outcome is measured in currencies for the private sector or in more universal terms for public sector programs. At just under $100 million in sales, Watson is considered a corporate pygmy. If it does not reach $1 billion in revenue within five years, it will probably be shelved.

The ability to turn a public relation coup into a strategic triumph is as much art as science. Timing, communication, brand awareness and other intangibles all play a role. But building a major brand that generates substantial financial returns also requires a market that sees, shares - and is willing to pay for the opportunity. JL

Spencer Ante reports in the Wall Street Journal:

Three years after International Business Machines Corp. IBM in Your Value Your Change Short position began trying to turn its "Jeopardy"-winning computer into a big business, revenue from Watson is far from the company's ambitious targets.

IBM Chief Executive Virginia "Ginni" Rometty has told executives she hopes Watson will generate $10 billion in annual revenue within 10 years, according to an October 2013 conference-call transcript reviewed by The Wall Street Journal. She set that target after the executive in charge of Watson said its business plan would bring in $1 billion of revenue a year by 2018. That would make Watson the fastest IBM business unit to reach the $1 billion milestone.

But Watson had total revenue of less than $100 million as of late October, according to the transcript. One of its first big projects, with the University of Texas M.D. Anderson Cancer Center, was "in a ditch" in early 2013, said Manoj Saxena, the executive overseeing Watson.

IBM executives still believe Watson could become one of the biggest innovations in the company's 103-year history, alongside the mainframe and personal computer. In a sign of Watson's potential, IBM plans a major announcement about the business Thursday, said a person familiar with the matter.

"Watson has rapidly moved from an industry-first research initiative to a commercial reality" that tackles business and social problems, an IBM spokesman said. "IBM is making excellent progress with clients and with partners in advancing Watson, and we are excited about Watson's future as a cloud service and as technology that will change lives." Watson also helps IBM sell other technology as customers prepare to use the supercomputer.

During an internal conference call in May, Mr. Saxena said he would "probably" give the Watson team a grade of B+.

Watson's key distinction from other analytical software is its ability to "learn." Feed it medical cases, and Watson will rank possible treatments by "confidence score." During training, doctors tell Watson when it makes a bad recommendation, and the supercomputer learns from its mistakes.

IBM is developing versions of Watson that can match cancer patients to clinical drug trials or recommend an investment strategy after reviewing a customer's portfolio.

Watson is having more trouble solving real-life problems than "Jeopardy" questions, according to a review of internal IBM documents and interviews with Watson's first customers.

For example, Watson's basic learning process requires IBM engineers to master the technicalities of a customer's business—and translate those requirements into usable software. The process has been arduous.

In addition, Watson doesn't work with the data-center technology offered by SoftLayer Technologies Inc., the cloud-computing provider IBM acquired for $2 billion. IBM also hasn't figured out how to generate a reliable revenue stream from Watson, according to the October conference call.

Citigroup Inc. has been collaborating with IBM since March 2012 to develop a version of Watson that can recommend financial products to consumers. It hasn't been launched yet. A Citigroup spokeswoman said the bank is "continuing to identify and test uses for Watson."

So far, just a handful of customers are using Watson in their daily business. With the supercomputer's help, health insurer WellPoint Inc. determines if doctors' requested treatments meet company guidelines and a patient's insurance policy. Elizabeth Bigham, a WellPoint vice president, said Watson initially took too long to "learn" WellPoint's policies.

Ms. Rometty, IBM's chief executive, met with WellPoint CEO Joseph Swedish to help resolve the problems. IBM reworked Watson's training regimen at WellPoint's request, and the system improved. "It has become part of the way we do business," Ms. Bigham said.

Two years ago, doctors at M.D. Anderson began working with IBM to build a version of Watson that would recommend leukemia treatments by mining medical literature.

After the initial stumbles, Anderson and IBM officials said the project is back on track. Lynda Chin, M.D. Anderson's chairwoman of genomic medicine, says the leukemia-treatment adviser could be used later this year. It might be two more years before Watson could handle other types of cancer.

IBM began exploring Watson's commercial potential before the computer beat two "Jeopardy" champions on live television in 2011. The company is looking to revive growth and modernize an aging technology portfolio.

Under former CEO Samuel Palmisano, IBM routinely met Wall Street's financial expectations. Since Ms. Rometty took over in early 2012, IBM has stumbled more often as new technologies threaten some of its lucrative franchises. IBM shares have lagged behind the overall stock market.

"They need to have something special and they are hoping [Watson] is it," says Stephen Baker, author of "Final Jeopardy," a book about the making of Watson. Rivals like Google Inc. could threaten IBM with "tools within shouting range" of Watson that give customers most of what they need at much lower cost, he added.

IBM's biggest bets are in health care, where it believes Watson can improve care and lower costs by identifying the best treatment option from thousands of academic studies and millions of patient records.

In 2012, Memorial Sloan-Kettering Cancer Center in New York began work on an adviser to recommend cancer treatments. Dr. Mark Kris, a Sloan-Kettering oncologist, said an early version of the Watson tool could be used on patients later this year if it passes tests.

At his office, he pulled out an iPad and showed a screen from Watson that listed three potential treatments. Watson was less than 32% confident that any of them were correct. "Just like cancer, it is much more complex than we thought," Dr. Kris said.

IBM's deal with M.D. Anderson last year is the largest Watson deal, valued at nearly $15 million. IBM executives hope it could grow to $100 million.

The project initially ran awry because IBM's engineers and Anderson's doctors didn't understand each other. IBM's developers worked elsewhere and only visited Houston every few weeks to talk to doctors.

Last spring, Dr. Chin and Watson's chief technology officer, began to meet at least once a week. IBM developers now meet with doctors several times a week. "We all found it painful, but the product is much better now," said Dr. Chin.

M.D. Anderson is working on its broader version of Watson and hopes to have it done within 18 to 24 months.