Why 2014 Will Be a Crucial Year in IBM's History

NEW YORK (TheStreet) -- Fueled by cloud, big data, and Watson, 2014 will prove an important 12 months in IBM's (IBM) 103-year history.  From its early days manufacturing punch cards, cheese slicers and grocery scales, IBM grew into a twentieth-century tech behemoth, and it continues to change shape.

The last few months have been particularly busy for the Armonk, N.Y.-based firm, marked by major M&A, billion-dollar investments in supercomputer and cloud technology, as well as plans to rebalance the tech giant's workforce.

Stuart Williams, vice president of Technology Business Research, described 2014 as a pivotal year for IBM in a note released this week.

"At its core, IBM is an information management company, not a technology company," he wrote. "By shifting its focus to a service-oriented customer engagement strategy, automating its data centers and slimming its hardware business, IBM seeks to shed low-profit, low-differentiation businesses and build a more agile and profitable company based on offering flexible, 'IBM any way you want it' information management solutions."

Keen to shift its focus away from hardware to higher-margin areas such as software and services, IBM kicked 2014 off with an investment of more than $1 billion in its Watson supercomputer group, focused on R&D and is bringing cloud-based applications and services to market. Watson forms part of IBM's big push into 'cognitive computing', where computers can learn and interact with people in a natural fashion.

Shortly after ramping up its Watson strategy, IBM announced the Group's first investment to support start-ups and VC-backed businesses that are building cognitive apps in the Watson Developer Cloud.

Further evidence of IBM's metamorphosis continued in late January, when it clinched a $2.3 billion deal to sell its x86 server business to Chinese tech heavyweight Lenovo, echoing the sale of its PC business to the Beijing-based firm in 2005.

Last month, IBM announced a $1 billion-plus investment in Platform-as-a-Service (Paas), bolstering the cloud credentials of its WebSphere middleware, and unveiling 'BlueMix', an open beta for developers which combines IBM's software with third-party and open technologies.

"This is turning into a watershed year for IBM, as the company sheds its x86 server business, opens its Power platform for licensing, launches an expanded 'Cognitive Computing' business led by its groundbreaking Watson platform, and unveils a new 'IBM as a Service' strategy," wrote Williams. "This transformation dramatically changes the way IBM engages with its customers, and it will shift IBM's ecosystem and force competitors to adapt, adopt and improve."

JP Morgan analyst Mark Moskowitz also believes that Watson gives IBM a head start on its competitors, which include HP (HPQ) and Microsoft (MSFT).

"Currently, there are no direct competitive offerings to Watson, positioning IBM to be a first-mover in monetizing cognitive computing and related services," he wrote, in a note released this week. "With Watson, the customer does not procure any hardware from IBM but instead pays for data analytics run as part of a cloud-based service."

Moskowitz, who has a "neutral" rating on IBM, estimates that Watson could contribute $2 billion to the company's annual revenue by 2017.

Earlier this week, IBM closed its acquisition of Cloudant, a privately held database-as-a-service (DBaaS) provider, which lets developers create mobile and Web apps. Big Blue has been touting Cloudant as reinforcing its 'Blue Mix' effort, as well as a complement to its Big Data and Analytics technology.

Big data refers to the management of vast quantities of unstructured data, or information that is outside the realm of traditional databases. Examples include email messages, PowerPoint presentations, audio, video and social media information.

Charles King, principal analyst at research firm Pund-IT, feels the Cloudant acquisition reflects one of the company's long-standing obsessions. "The company's historical focus on enterprise customers and its deep understanding of their computing infrastructure requirements, development organizations and other IT practices is well-known in the industry to the point where competitors use it as a goad," he wrote, in a recent note. "But in Cloudant, IBM appears to have found a kindred spirit."

IBM, however, continues to feel hardware-related strain while it shifts into more lucrative areas. The company missed Wall Street's revenue forecast in its recent fourth-quarter results, weighed down by weakness in hardware sales. Revenue from the company's Systems and Technology business declined 26% year-over-year in the fourth quarter, while Sofware and Services revenue grew 3% and 2%, respectively. The company's Business Analytics revenue climbed 9% over the same period, with Cloud revenue climbing a massive 69%.

"It appears IBM is getting more focused on revenue growth, including lowering the base through divestitures," wrote UBS analyst Steve Milunovich, in a note. "We think it is too early to buy the stock but have argued that 2015 should be a better year."

Shares of IBM, which have dipped more than 9% over the last 12 months, gained 0.5% to reach $188.09 in Thursday trading.

--Written by James Rogers in New York.

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