Beyond ‘Jeopardy’: How IBM will make billions from Watson

Like millions of others, I made a point of staying home a few nights in February 2011 to watch a computer challenge the world’s best “Jeopardy” players. IBM’s Watson won, of course. End of story? Just a stunt? Not at all. After about five years of development and millions in R&D spending, IBM is taking its first steps to bring Watson out of the lab (and TV studio) and make money from it.

IBM, which made Watson a unit of its very profitable software group, has already landed major clients in health care and financial services (two were announced in March), with more in the offing.

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Sure, Watson has an obvious cool factor. Haven’t we been waiting since “2001: A Spce Odyssey” for a computer that could really understand human speech and use the knowledge to do something useful? There’s a larger point, though. As I wrote last month, too many major technology companies seem to be moving away from R&D and innovation, instead spending huge sums on fighting the patent wars or swallowing up little competitors at preposterous valuations. Google spent $12. 5 billion to buy Motorola Mobility for its patent portfolio, and Facebook forked over $1 billion to buy Instagram, a company with no revenue, no business plan, and a cute little product that’s little more than a bell-and-whistle take on photo-sharing sites.

Old-fashioned innovation risk-taking at work IBM, though, took a flyer on a product that combines advances in artificial intelligence, big data, and natural language processing to invent something new. When Big Blue started the project, “we’d be hard-pressed to know if it could be monetized,” says Stephen Gold, who heads Watson Solutions. To me, that’s what innovation is all about: taking a risk and exploring the leading edges of technology.

Gold did not care to say how much IBM spent developing Watson. The project, which came out of the company lab in Hawthorne, N.Y., took the services of 25 doctorate-level researchers and four labs, so it wasn’t cheap. But I’m willing to bet it cost a lot less than the $1 billion shelled out for Instagram.

Did I drink a glass of Big Blue Kool-Aid during my meeting with Gold at San Francisco’s Palace Hotel this week? I don’t think so. If you look at the first real-world applications of Watson, you’ll notice they’re aimed at solving significant problems. Indeed, Watson may wind up saving lives — and, oh yes, make money for IBM and its shareholders.

Watson’s $2.7 billion payoff Suppose you’re a doctor or a nurse practitioner and a patient calls requesting an appointment, complaining of a number of odd symptoms. When he comes in, you might have to order a variety of expensive tests and do a fair amount of research to figure out what’s going on with him. Now suppose you could take the patient’s history and unstructured data from earlier appointments (notes written on a tablet, for example), then comb through millions of articles from medical journals and textbooks to get to the bottom of the issue. That’s exactly what WellPoint, an enormous health benefits company, is doing in a pilot project using Watson.

The potential benefits are obvious: quicker, more accurate diagnoses and fewer unnecessary expensive tests. Starting soon is a partnership with Sloan-Kettering, a leading cancer research institute, to study various forms of cancer with Watson’s help, first with lung cancer, then moving on to breast and prostate cancer.

Gold says that Watson is currently “learning” about oncology and is being trained to answer questions about it, in much the same way it was trained for the “Jeopardy” challenge. An Associated Press report on the IBM/Sloan-Kettering partnership put it this way: “Watson will be fed textbooks, medical journals and — with permission — individual medical records. Then it will be tested with more and more complicated cancer scenarios and assessed with the help of an advisory panel.”

As you may have noticed in the “Jeopardy” events, Watson generally doesn’t give definitive answers. Instead, it calculates a probability that an answer is correct, an important distinction in the world of medical research.

A third pilot program was announced in March: Citigroup will use Watson to study ways to improve customer service. Citigroup hopes that Watson’s content analysis and evidence-based learning abilities can improve customer transactions and simplify the overall banking services. No, that’s not curing cancer. But landing Citigroup as a client is an important step in proving that Watson can be a moneymaker.

How much money Watson can generate still remains to be seen, of course. But in a research note late last year, CLSA analyst Ed Maguire estimated that Watson may generate $2.7 billion in revenue in 2015, adding 52 cents of earnings per share. The technology is so new that IBM is still looking at a variety of pricing models. It will likely be related to results Watson achieves, Gold says.

IBM is not the juggernaut it once was, nor is it quite the paradise for researchers it used to be. But a company that can still spend some $6 billion a year on R&D and embark on what Gold calls “a grand challenge” every decade is a light-year ahead of companies pouring money down the rat holes of useless litigation and frivolous acquisitions.

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