Inside IBM's billion-dollar bet on Watson

Watson now has the weight of IBM on its shoulders.

Big Blue, the largest technology company on the planet, with 400,000 employees, is betting big on Watson, a cognitive supercomputer with artificial intelligence capabilities that learns from, and teaches, its human subjects.

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Watson vaulted to fame by beating the tar out of his human opponents on Jeopardy, a show watched by millions, three years ago.

Now, under the tutelage of IBM’s Watson Group and flush with $1 billion in spending money from IBM, Watson is getting set to plant its flag in Manhattan’s East Village. IBM is throwing open the doors in September to 51 Astor Place, Watson’s new $100 million glass-walled office, for developers, designers, and data scientists.

What is Watson? The short answer is it’s a cognitive cloud-based service. Watson takes information on any topic, like medicine, physics, education, or healthcare, synthesizes the data, and produces better information from it, according to Michael DiTanna, the Watson Group’s 23-year-old senior advisor for digital strategy. Clients hire Watson as an assistant, and Watson is designed to scale expertise in any field imaginable, he said.

Using Watson doesn’t come cheap. Clients pay licensing fees based on how much they use. $500,000 gets you unrestricted access to the Watson developer cloud for enterprise, which means killer access for those buying into it.

There are now three Watson computers, each the size of a large pizza box. In its first iteration, Watson was the size of a large room crammed with servers.

Watson has become a call to arms in the States for those interested in helping transform IBM into a true blue disrupter with a focus on mobile, if possible.

“IBM has a long history of reinventing who they are, and this goes back to the day of the minicomputer division,” said Stephen Gold, the Watson Group’s chief marketing officer. “With Watson, we’re using the $1 billion to help advance a new era of cognitive technology.”

IBM created the Watson Group as a startup within the company’s vast ecosystem.

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Out of that $1 billion, $100 million is earmarked for a venture fund to be spent on Watson-centric startups. So far, the fund has invested in two: Welltok and Fluid. Exact amounts haven’t been publicly disclosed.

Another $100 million was spent on the 51 Astor Place lease, not purchase, and on hiring over 1,000 new technologists. When the Watson Group finally moves into its new HQ at summer’s end, occupying six whole floors, it will employ 2,000.

Time will tell if Watson is a smash. Or a dud.

But it’s hard not be swept up in the optimism. Watson now has 800 clients and partners, like NY’s respected Sloane-Kettering Cancer Center, which uses Watson’s cloud for suggestions on treating cancer patients. At Austin’s SXSW festival in March, Watson drove around the city in a food truck, taking orders from customers and suggesting recipes to human chefs. Watson app contests have become ubiquitous.

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“Think of us as the best funded startup around,” said Michael Karasick, the Watson Group’s vice president of innovations and head of its $100 million venture fund.

Karasick, a computer scientist by trade, who joined the company in 1988, spoke to VentureBeat from IBM’s Almaden research lab in San Jose, Calif.

“Watson has an insatiable appetite for data,” he said. “In fact, if it wasn’t for big data, Watson wouldn’t exist. And there’s a lot riding on this. Cognitive capabilities are making their way into lots of IBM products in order to make them smarter,” he said.

Watson may only run on a single server, but its power is undeniable. While the Watson Group is not yet open source — “let’s revisit that question in a year,” Karasick said — app developers are flocking to the platform. To support and stoke that interest, members of the Watson team are often on the road, traveling around the United States to show the curious, and skeptical, what it can do. Like, just ask it any question you want.

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Karasick, for his part, asked me to publish a link for the Watson Group employment website.

For its public debut on Jeopardy, Watson processed 200 million pages of information and responded to host Alex Trebeck within three seconds, often delivering responses that were uncannily accurate. The humans trying to keep up with Watson were blown out of the water.

These days, Watson’s myriad capabilities are helping investment advisors to be wise with money, answering complex questions for law enforcement agencies, and suggesting highly evolved treatment solutions for patients in hospitals.

And based on your genetics, Watson can predict possible diseases you may face down the road.

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By choosing 51 Astor Place as its New York City flagship office, IBM is also sending a message that it’s changing with the times. Back in the day, the East Village neighborhood was the turf of choice for drug dealers, pimps, prostitutes, and punks. It’s now one of Manhattan’s most expensive neighborhoods.

Analyst R. Ray Wang of Constellation Research recently went to 51 Astor Place for a series of meetings. He was blown away by the positive vibe and the open, flexible work spaces. He was struck by the sharp contrast to other IBM facilities he’s visited.

“It’s not your typical IBM office. If there’s a team that’s going to reinvent IBM, it’s going to come from the Watson Group,” he said.

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IBM was actually founded in uptown Manhattan, near Columbia University, 100 years ago, although it has been based in suburban Armonk, New York, for decades. Google, by comparison, was founded in 1998 in Menlo Park, Calif.

While some look at Big Blue as a staid monolith that throws billions of dollars at the next big thing in tech, be it cloud, security, or machine learning, this IBM is different, insist ‘the suits.’ They point to the Watson Group as prime evidence that IBM is changing, that it’s no longer as unhip and stodgy as its reputation makes it out to be.

In fact, IBM is reaching out to tech hustlers in Manhattan to help direct the company to what is hip, and worth pursuing, in the city’s thriving so-called Silicon Alley. According to Shai Goldman, a VC at 500 Startups, there are about 1,000 startups in New York, roughly 400 of them venture backed.

Tech consultant Teddy Angelus was floored when he recently received a cold call from someone at the Watson Group. The group then hired Angelus for his help in making introductions to the city’s young app developers. Angelus led his new employer to the Turntotech space in lower Manhattan. Thereafter, Angelus led a seminar on Watson for coders who didn’t know what it was.

“It was great,” Angelus said of the Watson meet up. “But there are still many people who don’t know who the hell Watson is. But that’s changing.”

IBM can afford to fail, of course — even if the $1 billion Watson investment doesn’t pay off, it’s a drop in the bucket for a company that posted revenue of $99.7 billion in 2013, down from 2012’s $104.5 billion. IBM’s 2013 net was $16 billion and assets totaled a whopping $126.2 billion.

But company executives aren’t expecting to fail here.

Along with establishing cachet, Watson is also a big potential revenue stream for IBM. While Gold and Karasick declined to say how much cash Watson was pulling in or what their revenue target is for next year, a source told VentureBeat that the company was counting on the Watson Group to become a $1 billion (revenue) startup within five years.

“They are counting on Watson to deliver,” said the source, who declined to be named.

Gold agreed.

“Watson isn’t just a single entity within IBM,” he said. “Watson is growing quickly, and what you’re seeing is a company rallying around the technology.”

Failure, Gold said, is not an option.

“Is Watson going to be the next big destination? Absolutely,” he said.

Watson’s latest focus is mobile, IBM execs told VentureBeat. According to research group Gartner, the mobile space, with its approximately 500 app developers, gaming outfits, ad plays, and brokers, among others, was worth nearly $18 billion last year. That number is expected to surpass $35 billion by the end of this year.

While IBM insists the Watson Group is not acting as the company’s in-house app store, developers are already lining up to build upon its API.

“Anybody that uses Watson pays. We are building a large ecosystem, with Watson as the services platform. So, we’re building up a large ecosystem of apps for domain experts, healthcare, legal services, and the public sector,” Karasick said.

The Watson Group is taking a close look at Google Glass and the app ecosystem being engineered around it by outside developers. The group debuted a “Google Glass” beta program earlier this year, in which IBM employees were asked how they’d incorporate Watson with the glasses.

Those who gave notable answers were given Watson for their iPhones and iPads. Now those same employees can consult Watson’s cognitive abilities on their mobile devices on the go.

Apple and IBM announced a new partnership Monday that caught many by surprise. Apple trumpeted the relationship in a blog post. While the Watson Group wasn’t named in the release, there is speculation about IBM that Watson could soon be working with Apple’s Siri.

Apple did not respond to emails for comment. But Apple chief Tim Cook tweeted Monday:

“Today Apple and IBM announced a landmark enterprise partnership. Thanks Ginni! #Apple #IBM”

The blog post read in part:

“The new IBM MobileFirst for iOS solutions will be built in an exclusive collaboration that draws on the distinct strengths of each company: IBM’s big data and analytics capabilities, with the power of more than 100,000 IBM industry and domain consultants and software developers behind it, fused with Apple’s legendary consumer experience, hardware and software integration and developer platform. The combination will create apps that can transform specific aspects of how businesses and employees work using iPhone and iPad, allowing companies to achieve new levels of efficiency, effectiveness and customer satisfaction — faster and easier than ever before.”

Analyst Wang said the Watson Group, and Watson, would likely change IBM for the better, and he pointed to some of the cutting-edge design teams he’s come across at IBM offices around the world, a stark contrast to the company’s old image.

“You’re seeing the changes with IBM’s design teams, people sporting tattoos, crazy haircuts, piercings, that are building the company’s latest UI user experiences.”

Wang has no doubt the Watson Group is IBM’s ticket to becoming a major disrupter like Google, Twitter, and a few choice others.

“Watson is the real deal,” Wang said. “They’re going full throttle on this thing.”

As for DiTanna, the Watson Group’s 22 year-old senior advisor for digital strategy, he was in agreement that Watson is what will change the face of IBM as a trend-setting, cutting-edge tech juggernaut.

“Watson is a bet for IBM,” he said. “The last time we launched a group like this was the PC business.”

IBM folded that division earlier this century. Many are hoping that same fate won’t befall Watson.