>> Narrator: Live from Las Vegas, it's theCUBE. Covering IBM Think 2018, brought to you by IBM. >> Welcome to theCUBE, we are live at the inaugural IBM Think 2018. I'm Lisa Martin joined by John Furrier and Dave Vellante. Guys this is first day of three days of coverage from theCUBE but this is a combination of six different IBM events from the past. Tell me a little bit about your perspective about what you think that means or they're projecting to have about 40,000 plus people here. Big change. >> Yeah, I mean, this is, we've been covering IBM how many years? Was since 2011 we've been to? Pretty much every single event they've had. They had IOD, information on demand on and on and on but really. >> Impact, pulse edge. >> All coming together. I mean this is IBM looking at the market saying, it's better to run a big tent event as a kind of coming together, a global celebration global information gathering a global sales partnership ecosystem development, and I think it's finally IBM's taking a play out of what others have done. Sales Force does it, Oracle's done it, Amazon does it with reinvent, they pull all their resources into one event. Now here's the problem, IBM is massively huge so, you know the cube goes to all those events now it's 5x the demand for cube content, 5x the demand for keynotes so, they're here at the Mandalay Bay, they're probably going to have to, need to a bigger job next year. But it's a good move for IBM and I love the fake logo, I love the Think branding. That's a throwback to the old Tom Watson generation which the roots of IBM were all about, just think, solve problems and really market the best solutions to customers. To me, if they can bring back those old IBM ethos and the roots and really get back into the cloud game which they've been falling behind on but their last earnings were up Dave. So they've had a nice little break of the negative streak, but AI is a tailwind for them, IOT is a tailwind, blockchain is potentially an enabler down the road, I mean Dave your thoughts on just that the business aspect of that. >> Well, so first on Think they have consolidated six shows they used to have really deep dives into things like infrastructure or analytics, et cetera. Now, they've said okay, let's make the big ched, as John was saying. What's interesting is every one of those drill down events Lisa you had big themes whether it was cognitive or cloud or digital transformation so, I think it's a smart move. Michele Paluso, Bob Lord came in, said, hey, we're going to change things up a little bit and we're going to play in the big leagues with, as John said, Sales Force, et cetera. You're right John, IBM sort of finally after Jenny Rimetti came on in 2012 and had some number of the trade press reports and number of quarters of revenue declining. >> It was double digit like 17 consecutive quarters. >> But remember IBM we've said it for years IBM's got to shrink to grow and in the growth they eat down one percent growth in constant currency. Currency is finally now a tailwind for IBM. It's a $79 billion company, a lot smaller, remember, IBM used to be well over a $100 billion company. And its got a $140, a $150 billion market cap. So it's trading at about 2x, almost 2x revenue and it's because IBM has an eclectic mix they've got mainframe, they've got other hardware. They got rid of their x86 business which was a low margin business. They've got services, which is a great business for them, huge cash flow. You get a $120 billion services backlog right now. So amazing potential future earnings but service is a lower margin business. IBM has this huge software business, you know 10s of billions of dollars in software which is a very high margin business. So put it all together and IBM's trying to get back to a 50% gross margin model. They're throwing off a lot of cash. They threw off $13 billion in free cash flow last year. Interestingly, about 80% of that went back to shareholders in the form of share purchase and the like. And that's how IBM, sort of, kept the stock price up and continues, and now we'll see what happens next year they're being very conservative about growth, so tepid growth. Huge advantage from the tax reform. IBM is one of these companies that is going to benefit in a big way from tax reform, gives it a lot of flexibility. >> And I would also, if I was advising IBM, I'm not, but if I was advising Michele Paluso I'd basically, look at, you're too big to have one big show. I would do one big business show, like Think, then also have a separate event on technical. Because one of the things we look at their schedule here it's business and AI, cloud and data, modern infrastructure, security and resilience. That alone could stack the deck for three, four days of business conversations business transformation, digital transformation, future transformation with blockchain among other things, power of the data and IOT. That's a full packed set of content. IBM's got a huge R&D organization Dave, they have a huge services organization and technology's the enabler for them to get those margins up and I think they should have a separate technical Think. Now. we're going to ask them directly with try to get Michele Paluso on but. >> I want to make some comments about the Jenny Rametti tenure because I first met her around 2007, 2008, when she was running strategy actually. She had run a large business for Palmasano so this is a while before she took over in 2012. And she was running strategy and then she came on in 2012. At that time IBM had no cloud really clear cloud strategy. They were talking cloud but they didn't have any cloud, public cloud options so they had to go out and pay two billion dollars for software. And then they put in Blue Mix, John you're hearing some changes on Blue Mix so we're going to talk about that. But she's had to architect a massive transition. But when you look at IBM's core business cloud is really one of the new drivers. So, $17 billion business. But the drivers' profitability are mainframe, storage, services, a lot of the same without a large cloud business which they've taken a lot of different components and pushed it through the cloud and done with Blue Mix what they did with Websphere, their middleware piece. Kind of what Oracle tried to do and has done with Fusion but a different strategy. All done sort of in the cloud. Now, the big question is okay is that going to drive growth for IBM in the next 10 years? The other big question is, what about Watson? You hear a lot about Watson. They don't really clearly breakout, okay this is how much business we do with Watson and Wall Street has been clamoring to see that, so. >> Well I mean to me cloud is the big story I think their opportunity is data. That's where Watson kind of ties in. They have a huge client base, the digital transformation style, I think they're going to do really well there. But the at the end of the day the cloud story has always been weak for IBM in the sense of, comparing it to what Amazon web services has been doing. So you know I really want to see how they're differentiating their cloud story because they have to. They cannot compete with Amazon head to head. Google's differentiating, Microsoft's differentiating. IBM needs to be in the same league as Microsoft and Amazon. They got to beat Google out for that third spot. To me if I was marching giving marching orders as a theme, said, we got to be in the top three cloud providers, and define it in a way that adds values to customers, and they're not in that top three today. That is a huge story. That's going to keep dragging them down on the Wall Street numbers, in my opinion, unless they do something different. >> Well, I got to counter that because the big difference between IBM cloud and Amazon cloud is IBM's got a giant software portfolio. IBM's as a service software portfolio's many 10s of billions of dollars. So they have a ratable revenue model and a very, very, software's, 85%, zero marginal cost business. Amazon doesn't have that yet and they may they're going up the stack. But that's huge. The other piece to watch is IBM calls strategic imperatives, which is cloud and security and IOT and the new stuff basically which is now just under 50% of the revenue model. But that's where companies like IBM and Oracle differentiate from Amazon is they have the deep software. Now the challenge for IBM is their software is very bespoke. Their software business is very, very fragmented. They've been trying to bring it together through middleware for what, John, four or five years? When did they announce Blue Mix? We were there. >> It seems like five years ago, I mean yeah, maybe even six. >> Dave: Yeah. >> Blue Mix was a great approach I think soft layer might have been, to me at least, the one I think the thing that held Blue Mix back. Just soft layer, to me, just it's just infrastructure didn't really kind of make it blend in the Blue Mix the way I thought it would and hoped it would. We'll see what they say this week. >> Yeah but that was the right move. The two billion dollar acquisition of soft layer, had they not done that, they would be like Dell EMC, no cloud. They'd be Dell EMC with a huge software business on prim software business. >> Well Dave the market share numbers on cloud, I mean shows, IBM not making it so like, to me, that story has to be >> I disagree with that I disagree. So you got the big three, right? And then you got Oracle and IBM. There sort of a distant, I don't know what order I guess IBM would be a little ahead of Oracle but you got one, two, three and then distant four and five, excluding Alibaba and the China cloud which is huge. But IBM is-- >> In China, not the U.S. though. >> In China, but IBM's strategy to me is the right one. Drive software revenue as, Oracle as well because that's the ace in the hole relative to the infrastructure clouds. They don't want to compete head to head in infrastructures and service. That would be a disaster. >> I mean look at, I'm tracking the cloud heavily you know that so, I look at IBM a little bit differently than you. My view is simple. In the cloud game right now they're not making it. However, we know that everyone's defining cloud differently. I mean Microsoft throws Azure in there the software included. Amazon doesn't. Oracle does so again that's just-- >> Dave: It's a $17 billion business. >> Hold on, hold on that's just mangling the numbers. >> And granted they may be >> So, so they. puts some hosting in there. >> They have to have to have it's not about the cloud story it's about the cloud value. IBM has a lot of piece parts that they can actually put together for a cloud package. Infrastructure instead of software services. Blue Mix tried to do that. So I think, they, if they can look at cloud in a way that's helps IBM, that gives them a way to move the goal post the way to change the game to me that's what I'm looking for. Because IBM should not be out of the cloud business. If they don't go down-- >> But they're not out of the cloud business, it's a $17 billion cloud business, how can you say they're out of the cloud business? That's an insane >> I'm not saying that they're. insertion to make. >> I'm not saying they're out of the cloud business but look what happened to VM ware, they were in the cloud business and-- >> Yeah but VM ware was BS, we all know that. They had fake cloud, at least IBM's got a real cloud built upon softlayer and yes they transformed a hosting business in bare metal cloud into what is ultimately come the IBM cloud where they're now rebranding. It takes a long time. This is kind of the point I was making about about Jenny earlier. There's it's a little messy. Seeing that sausage made. But at least they have strategy around that. They're in the cloud game. Dell EMC isn't in the cloud game. HPE isn't in the cloud game. I'm talking public cloud. These were companies that both VM ware all three of those companies announced they were going into the cloud, they're out. At least IBM, Oracle, obviously the big three are in it. That's my contention. >> So let's talk it. Do you disagree? >> No, of course they're in the cloud game. They're tracking the market share numbers but again they're not winning in the cloud Dave, okay? So like in relative to other players. >> Dave: Alright so let's define winning. >> Well, I mean >> Define winning. it depends on how you look at the marketplace. So, right now, by quote, today's standard, there are the top three are Amazon, Microsoft some say Google, Oracle and IBM would be below that. That's defined by a bunch of stuff so IBM counts it I mean Microsoft counts it differently than Amazon. I look at cloud as simply this. How many sets of services do you have? And how many people are using those services? So it's kind of two dimensions of access there. Plus the breadth of services and how many people are using those breadth of services so it's kind of like a quadrant not a magic quadrant but like Amazon blows away everybody okay so that's like, they're so far ahead. IBM, if they try to compete that way, my point was that I was trying to make was if you compete on trying to match Amazon you're not going to win. Google's already tapped out of the cloud by that standard. They're going in all in on cloud scale, sensor flow, AI targeting the developer community. They're not out of the cloud game. They're taking a different path. That's not their cloud story. That's their cloud plan. They're executing it. Oracle, it's just, everything's cloud. They'll count anything that moves is cloud right? So that's Oracle. Microsoft throws 365 in there to bump their numbers up but what do they have? Azure and it's doing well by quote Wall Street. But some people criticize the technology with Microsoft. So, it's kind of a rat race. It's fundamentally at the infrastructure it's the number of services and who's using those services and then above say the Kubernetes line if you will, it's what applications are driving value. So if you separate applications from under the Kubernetes line orchestration, then you got two different pictures. You can't blend them in. That's my contention that the blending of apps revenue and infrastructure revenue really makes it a real messy way to squint through who's winning. >> So let's define leadership, although that was good, good analysis. I'll give you, I'll add some color to that. To me you've got to be in the cloud game because in order to succeed in the digital economy you got to have cloud economics. You got to have you got to have the ability to to do analytics and data you got to have AI and you got to have cloud economics. What does that mean? You got to have, you know, an API platform. You got to have zero marginal costs. You got to have network effects is scaled and you got to be able to track startups. Okay, so those are the sort of components that I look at as a cloud momentum. The question I have for IBM is if the strategic imperatives are now almost 50% of the business and their higher margin and you're achieving those cloud economics why are gross margins under pressure? Right? They should be showing gross margin momentum and that's something to look at. >> Well, I mean-- >> Alright guys. >> Because cloud should drive huge gross margins. >> Hold on I got to add one more point because this fundamentally frames it. If you look at cloud and what DevOps has done where you can actually have programmable infrastructure that's changed the game. Would you think DevOps has changed the game? >> Changing? >> Yeah, changing. Yeah, sure. >> The notion of programming It certainly has for the cloud native guys, absolutely. >> So the ability to program the infrastructure takes away the infrastructure being the dependency of what applications can do. >> Dave: Agreed. >> Okay, okay, great. So now that the infrastructure's programmable the apps kind of are running the show. The successful people that are using the cloud today are the ones that nailed the business model logic. So that's what the application does it's due diligence. Whoever can come up with the applications and nail the business model that's where the switching costs are extremely high that's where the risk is. The risk is no longer in the plumbing because the plumbing, switching costs of the plumbing are a lot lower because there's a lot more technology and sets the services you can provision in and out of that so you're starting to see the entire strategy chain where it's the applications that'll be driving the value and that's where the mistakes if made there that's where the cloud game ends. >> And machine intelligence is going to drive that value and that's where Watson versus you know the consumer guys and IBM Jenny, I guarantee tomorrow will make the point that we're not trying to collect your data and sell you ads. You will make that point. >> Whoever. >> I guess unless you go to the weather company's website. >> Whoever can build the application, it builds value. The business logic is now the new devops because everything else is programmable. That's my contention. >> Dave: Alright. >> Alright guys wow. As you can tell lots of passion for all things cloud, AI and now you're going to hear all of it today on theCUBE. This is day one of three days of coverage as John mentioned. We've so many great guests on over the next few days and hopefully a few more with our pop-up CUBE. Keep watching, I'm Lisa Martin with John Furrier and Dave Vallante. We're going to be back with our first guest after a short break. (funky digital music)