Is IBM's Watson Overhyped & Soon to Be Outdone?

IBM Watson may be the first name that comes to mind when you think artificial intelligence, ever since it beat out a human on the Jeopardy! quiz show back in 2011, but skepticism is mounting around whether the company will be the best -- or most profitable -- name in AI as the market picks up traction.

IBM Corp. (NYSE: IBM) makes a big deal about Watson. In fact, it's published over 200 press releases with Watson in the headline in the past five years and mentioned it at least 200 times in its prepared remarks on earnings reports since 2013, as well as investing more than $20 billion, according to Jefferies & Co. Inc. . The investment bank, however, believes the AI platform will struggle to keep up with competition, as the services component of AI deployments and the cost of doing business present problems for Watson adoption. (See IBM Watson Faces Tough Road – Analyst.)

"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," James Kisner, Jefferies senior vice president, IT hardware and communications infrastructure equities research, writes in a research note this week. "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."

Jefferies acknowledges that Watson remains one of the most complete cognitive platforms available on the market today, but it sees it struggling to attract interest from companies that don't want to endure the significant consulting work to gather and curate the data required to take advantage of it. (See IBM Leads $15M Funding Round for AI Programming Startup.)

Other companies are also stepping up their AI recruitment efforts -- Jefferies says that Amazon.com Inc. (Nasdaq: AMZN) has ten times more job listings than IBM. (See IBM: AI Needs More Than Just Technology.)

What's more, companies have more choices when it comes to APIs. IBM dropped its pricing for Watson Conversations by 70% back in October, which -- in part -- leads Jefferies to determine that IBM barely recoups its cost of capital from AI investments. Jefferies estimates Watson plus associated pull-through revenue will only contribute between 3% to 5% to consensus earnings per share in 2019. (See Element AI Raises $102M to Bring AI to All.)

It sees competitors Nvidia Corp. (Nasdaq: NVDA), Pure Storage and, to a lesser degree, Mellanox Technologies Ltd. (Nasdaq: MLNX) gaining the most from both the uptick in AI adoption and in IBM's struggles.

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While Watson was arguably the first and most well known name in AI, it's far from the only player today. AI is attracting interest from every major tech company and a slew of new startups. The technology is being explored by telecom service providers and enterprises spanning every major vertical as a way to improve their applications and customer service, better manage networks, improve security, do speech and image recognition and understand customer data. Jefferies says that private capital formation in AI has grown more than 50% to $4.25 billion in 2016 with nearly 1,900 startups in the space. (See Darktrace Raises $75M to Fight Cybercrime With AI and Eurobites: London AI Startup Thinks Big.)

The bank isn't the only one expressing skepticism about IBM's prospects in the AI market either. An article published in the MIT Technology Review last month illustrates the disillusionment many have had -- not in the tech that runs Watson, but in the hype around its potential, the expense of the system and the relative lack of progress so far.

Both the MIT article and Jefferies acknowledge Watson's technical superiority and its potential, but both are also skeptical it can live up to the hype -- or at least that by the time it does, others will have caught up.

— Sarah Thomas, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, Director, Women in Comms

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