How easy will it be for IBM to digest Red Hat?

Imagine our surprise the day before a lunch scheduled with the CTO of Red Hat when IBM announced it was buying his company.

Sometimes the journalism gods, those that are left, smile on even the humblest of hacks and today it was our turn. Lunch with Chris Wright (pictured below, with said hack) had already been arranged with the promise of delivering the kind of light Linux chit-chat over a glass of red that we all secretly crave. But then, out of the blue (pun intended) IBM announced it’s going to buy Red Hat for $34 billion and things suddenly got a bit more spicy.

Now, you don’t get to be the CTO of a major company by speaking injudiciously to the press, so we didn’t expect Wright to have much to say on the relative merits of the acquisition itself. Instead we wanted to know more about what Red Hat brings to the table, such that a venerable tech giant would want to drop such a serious chunk of change on it.

The core of Red Hat’s product strategy for the past few years has been the hybrid cloud. In its simplest terms this refers to the use of both private, on-premise server capacity and the public cloud as found in colossal data centers provided by the likes of AWS, Microsoft and Google. Increasingly this applies to pretty much all larger enterprises so it’s a pretty important place to be if you’re serious about the B2B tech space.

Sharing this writer’s love of a pun, Wright conceded that the cloud is a nebulous term, but that’s why you need companies that have made it their business to get their heads around it, such as Red Hat. IBM is, and always has been, a B2B tech company, so it’s easy to see why it would want to buy a company that specialises in one of the most important and arcane manifestations of that.

Everyone in tech has probably had to puzzle over one of those baffling software architecture slides that attempt to explain how everything fits together via the use of endless rectangles piled on top of each other like some geeky game of Jenga. Throw hundreds of those into a virtualised environment spanning any number of actual physical locations and you get somewhere close to the kind of challenge faced by today’s CTO.

Between the cloud and the cloud user lies an extended value chain of technologies and services dedicated to making that relationship as useful and intuitive as possible. One good example of this is the banking app, through which anyone can now whizz thousands of pounds around the world in an instant. For this to be made possible a hell of a lot of robust technologies have to exist between the bank’s servers and the client device.

According to Wright, Red Hat plays across that whole value chain, so for that reason alone it’s easy to see its appeal to IBM. But Red Hat is also deeply rooted in the Linux, open-source culture, which isn’t necessarily an obvious fit with IBM’s notoriously rigid corporate philosophy. As with so much M&A, how effectively the cultures of the two organisations are reconciled will be the single most important factor in determining whether this deal goes down smoothly or results in corporate indigestion.

Chris Wright Red Hat Telecoms

IBM aims to boost its strategic imperatives with $34 billion acquisition of Red Hat

IBM has announced by far the largest acquisition in its history with the acquisition of cloud and open source software vendor Red Hat.

$34 billion is several times more than IBM has previously spent on an acquisition, which indicates just how important it thinks this is to its future prosperity. Red Hat has expanded from a developer of Linux-based business software to being involved in most places you might find B2B open source software, including the cloud and telecoms.

While most venerable tech companies seem to be in a constant state of so-called transformation, this has especially been the case with IBM as it seeks to replace its declining legacy businesses with shiny new ones. As a consequence it has four clear strategic imperatives in the form of cloud, security, analytics and mobile, revenue from which recently overtook legacy stuff for the first time.

But IBM has apparently decided this organic transformation isn’t happening quickly enough and has decided a nice, juicy bit of M&A is required to hasten the process. Most reports are focusing on how Red Hat will contribute to IBM’s hybrid cloud efforts, and thus give it a boost in competing with the likes of Amazon, but Red Hat’s activities in the telco cloud specifically shouldn’t be underplayed.

“The acquisition of Red Hat is a game-changer,” hyperbolised IBM Dictator (Chairman, President and CEO) Ginni Rometty. “It changes everything about the cloud market. IBM will become the world’s number one hybrid cloud provider, offering companies the only open cloud solution that will unlock the full value of the cloud for their businesses.

“Most companies today are only 20 percent along their cloud journey, renting compute power to cut costs,” she said. “The next 80 percent is about unlocking real business value and driving growth. This is the next chapter of the cloud. It requires shifting business applications to hybrid cloud, extracting more data and optimizing every part of the business, from supply chains to sales.”

IBM Red Hat Rometty Whitehurst cropped

“Open source is the default choice for modern IT solutions, and I’m incredibly proud of the role Red Hat has played in making that a reality in the enterprise,” said Jim Whitehurst, President and CEO, Red Hat (pictured, with Rometty). “Joining forces with IBM will provide us with a greater level of scale, resources and capabilities to accelerate the impact of open source as the basis for digital transformation and bring Red Hat to an even wider audience –  all while preserving our unique culture and unwavering commitment to open source innovation.”

Cloud and open source have been major themes in the tech M&A scene recently. Microsoft continued its transition from closed software box-shifter with the recent $7.5 billion acquisition of code sharing platform GitHub. Meanwhile open source big data vendors Cloudera and Hortonworks have decided to merge and earlier this year Salsforce dropped $6.5 billion on MuleSoft to power its Integration Cloud.

In M&A, the party line from the company being acquired is usually something along the lines of it enabling them to take the next step in its evolution thanks to the greater resources of its new parent, and this was no exception. “Powered by IBM, we can dramatically scale and accelerate what we are doing today,” said Whitehurst in his email to staff announcing the deal. “Imagine Red Hat with greater resources to grow into the opportunity ahead of us. Imagine Red Hat with the ability to invest even more and faster to accelerate open source innovation in emerging areas.” And so on.

He went on to explain that, while he will report directly to Rometty, Red Hat will continue to operate as a ‘distinct unit’, whatever that means. Usually this sort of talk is designed to sell the concept that it will remain the same company it was before the acquisition, but with loads more cash to play with. Let’s see.

IBM would be mad to mess around with Red Hat too much as it seems to be doing just fine and reported 14% revenue growth in its last quarterlies. Then again you don’t pay a 60% premium for a company just to accrue its revenue and how IBM integrates Red Hat into the rest of its offerings will be what determines the success of this bold move. There are, sadly, no signs the company plans to change its name to Big Blue Hat, which is a worrying early a missed opportunity.

IBM unveils software to detect AI bias, but how do you know it isn’t also biased?

IBM has unveiled its latest offering, the Fairness 360 Kit, which will help identify any bias in AI decision making and recommend adjustments.

It’s area of the burgeoning artificial intelligence segment which could prove to be its downfall. AI is supposed to set of technologies designed to make our lives easier, though the presence of bias in algorithms and outcomes could undermine mass market acceptance. Why would anyone want to integrate technology which potentially could be fundamentally flawed?

“IBM has led the industry and has driven the establishment of values ​​such as trust and transparency in the development of new AI technologies,” said David Kenny, SVP of Cognitive Solutions at IBM. “It is time to bring these values ​​to the table. We are providing companies that use AI with greater transparency and control to face the potential risk of erroneous decision-making.”

Research from the Rand Corporation, a paper entitled ‘An Intelligence in Our Image’, assesses some of the risks associated with bias. While some might be small and non-impactful, errant algorithms in infrastructure, defence systems, or financial markets could cause some pretty significant damage on a global scale. It of course all depends on the purpose of the AI application, though incomplete data, sub-conscious bias from the human programmer or applying the application to a process or situation it was not perfectly designed for could all influence the technology. In short, there are a lot of things which could go wrong with this embryonic technology.

According to the paper, as the breadth and depth of data increases, the demand to make use of insight increases. There is pressure to create more complex algorithms to create value out of the information, though this might be compounding the problem. Some might suggest it is not a good idea to move onto more complex AI applications when the basic ones have not been mastered just yet.

The simple answer is not to use it, though this is not a feasible solution. Other ideas include conducting regular audits of the algorithms and/or provide more transparency on how the decision making process works. Unfortunately due to the increasingly complex nature of artificial intelligence, offering transparency (the perfect solution) is a pretty useless path to travel. The general public, or even the organizations implementing the technology, will not understand it. In a recent IBM survey, 63% of respondents said they lack the capabilities and internal talent to manage this technology with confidence.

Companies like IBM, Google and Amazon have been doing wonderful things to democratise AI, though this is part of the problem. In increasing the accessibility of AI, these companies are allowing organizations to use the technology without understanding it. These companies are ‘standing on the shoulders of giants’, though they are helpless to identify when there is an issue with the bedrock technology as they had no hand in developing it.

IBM’s answer here is to offer AI which can detect error and bias in other AI technologies. The software service can also be programmed to monitor the specific decision factors that are taken into consideration for any business workflow. It effectively monitors the decision making processes in real-time, and captures potentially unfair results as they occur. The software will identify what factors made the decision tilt to one side or the other, confidence in the recommendation and the factors behind that confidence.

But here is the catch, is it sensible to identify errors in potentially faulty algorithms, with another algorithm? Who is to say there is not fault or bias in the detection software, and what compounded issue could this cause?

IBM continues down the road to recovery

Rome wasn’t built in a day, and IBM’s readiness for the connected era certainly took some time, but another solid quarter perhaps demonstrates the corner has finally been turned.

Perhaps the watershed moment was six months ago, the company’s first quarter of revenue growth following 23 consecutive periods of decline, but the last two results have proved it wasn’t a fluke. Big Blue is back on the right path.

The last three months appear to be solid, if not spectacular. Total revenues stood at $20 billion, up 2% year-on-year, with the Strategic Imperatives (cloud, security, analytics and mobile) revenues at $10.1 billion, a 13% increase and the first time this segment accounted for more than half of total revenues.

“We delivered strong revenue and profit growth in the quarter, underscoring IBM’s progress and momentum in the emerging, high-value segments of the IT industry,” said Ginni Rometty, IBM CEO.  “More clients are engaging IBM on their journey to the cloud, and deploying IBM Cloud, Watson AI, analytics, blockchain and security solutions.  This demonstrates IBM’s unique leadership in providing innovative technology coupled with deep industry expertise, trust and security.”

The transition to the connected, mobile orientated era was a tricky one for IBM, as while the Strategic Imperatives business was growing healthily, it wasn’t compensating for the rapid decline of IBM’s legacy business. This is a trend which seems to have been reversed, with the Strategic Imperatives accounting for $39 billion over the last twelve months, a 12% increase, representing 48% of total revenues.

Dissecting the Strategic Imperatives, analytics grew 5% to $5.4 billion, while cloud jumped 18% year-on-year to $4.7 billion. Mobile accounted for $1.3 billion, up 3% year-on-year, while security brought in $1 billion, a 79% boost from the same period in 2017. 13% year-on-year growth across the Strategic Imperatives certainly makes for positive reading.

IBM might not be anywhere near as influential a business as it was in a previous era, but the future is starting to look a lot brighter. A 3% boost in share price in afterhours trading indicates the market certainly likes the news and the trends.

IBM investment shows Macron’s tech mission is working

French President Emmanuel Macron has a mission, and his mission is to take France to the top of the technology rankings in Europe. With IBM adding an extra 1800 jobs and a training centre in the country, he might well be succeeding.

Last year, Macron, a pro-business former investment banker, set up a fund holding $10 billion in state assets intended to be invested in breakthrough technologies, offered flat 30% tax rate on all capital income and also unemployment insurance for people who leave a job to go start a company. The aim was to re-establish France as a home for industry and create an environment which encouraged the growth of start-ups. It was a bold move, but IBM’s announcement is somewhat of a vindication.

Over the next two years, IBM will make a series of investments to create 1800 jobs, 400 of which will be focused on artificial intelligence, coupled with a major expansion ‘new collar’ skills training programme. The investment will focus on technologies such as AI, blockchain, cloud computing and IoT.

“President Macron is making a big bet, and a smart one, that AI is going to transform every job, every profession and every industry,” said IBM CEO Ginni Rometty. “At IBM, we share this belief and see evidence of it every day with Watson driving exponential impact here in France and around the world. That is why we are bringing 1,800 new jobs to France to meet growing demand for AI from our clients.”

The move demonstrates Macron is making the right noises, and must be somewhat of a slap to UK politicians who have been working to make the UK a global centre for artificial intelligence and other breakthrough technologies. London could still be viewed as the centre for start-ups in Europe, there is abundant access to financing in the city after all, but perhaps this is an indication of a loosening strangle hold. Maybe it is a consequence of Brexit, with IBM preferring a HQ within the borders of the EU.

We’re not too sure there is too much weight behind the Brexit argument, but the Macron administration has been doing something the UK hasn’t. Turning daring promises and forthright objectives into actions.

While the UK is still searching for the catalyst to increase FTTH penetration, while also attempting to set the scene for 5G, French infrastructure is getting the investment the digital economy needs. Data released by Arcep demonstrated there is more than simply talk about embracing the digital economy. €9.6 billion was spent over the last 12 months on communications infrastructure, €6.6 billion of which was on the fixed assets. FTTH penetration is still low in comparison to other European nations, but there is certainly gathering momentum.

France Graph

Looking at the regulatory landscape, the government is trying to make it as easy as possible to invest, including creating mechanisms to encourage pooled investment strategies between the operators, and frameworks to manage interoperability so that users perceive them as one. This might be a bit of a pain for the operators in the short-term, but it is much more attractive for consumers and enterprise customers in the long-run.

In short, the French government is creating a landscape which will be deemed much more suitable for the digital economy, but it doesn’t just stop at infrastructure. Education is another area where France is being proactive and forward-looking. A good example of this is also included in the IBM announcement.

IBM is partnering with the French government to roll-out its P-TECH (Pathways to Technology Early College High School) education model. P-TECH was started in 2011 to provide young people the skills and credentials required for 21st century jobs. By September, P-TECH will be in 120 schools in four countries and is on track to prepare more than 75,000 students for ‘new collar’ jobs.

For any company to consider notable investments or expansion in a country there has to be a long-term workforce. To ascertain whether this is going to be the case, looking at education standards is critical and this is another area where the UK falls down. The focus in the UK is too concentrated on traditional subjects, which while very important, are not providing the right skills for the burgeoning technology industry. Countries which incorporate new technology skills, or perhaps introduce writing code as a language alternative to the likes of Spanish or French, will start to look attractive to these multinational corporations.

France might not be the centre of the European technology space as it stands, but Macron is making the right moves to create the perfect environment. Pro-business regulations, actively encouraging investment in the infrastructure which will act as the foundations of the digital economy and an education system which builds skills for the future. The UK could learn a thing or two from France.

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IBM gets currency favours as modest growth continues

IBM has reported a second-consecutive quarter of yearly growth with its Strategic Imperatives outperforming declining legacy units once again, with a little bit of help from currency fluctuations.

Looking at the top-line figures, the business is heading in the right direction. Few would complain with another quarter of year-on-year growth, reversing five years of decline for a second-consecutive quarter, but when you dig a little deeper perhaps all is not as rosy as Big Blue executives would have you believe.

Total revenues were recorded at $19.1 billion, up 5% year-on-year. The cognitive solutions unit brought in $4.3 billion, up 6% year-on-year (2% when adjusted for constant currencies), Global Business Services had revenues of $4.2 billion, up 4% (down 1% when adjusted), Technology Services & Cloud Platforms accounted for $8.6 billion, up 5% (down 1% when adjusted), Systems made $1.5 billion, up 8% (4% when adjusted), while Global Financing had revenues of $405 million, which was flat year-on-year growth (down 4% when adjusted).

In each of these business units, where relevant, the strategic imperatives unit demonstrated growth which outperformed the group on the whole, but without the assistance of fluctuating currencies the picture would not have been anywhere near as pleasant. The future-proofed aspects of the Big Blue machine are outweighing the negative from the legacy business unit, however after five years of finding itself, some in the market would have been hoping the impact might have been a bit more substantial.

Last quarter, the first which IBM turned around the year-on-year decline, offered a glimpse of potential for IBM. It might be too early to expect great things, but the potential has been there for what seems like years now. Executives have been promising the strategic imperatives would save Big Blue, and there have been gradual improvements, but gradual improvements cannot be seen as satisfactory anymore, not when the rest of the industry is plundering cloud golds.

IBM would consider itself one of the world’s leading IT companies, certainly ahead of the curve, but these figures do not add up. Gartner forecasts global IT spend will increase by 6.2% across the next 12 months, with enterprise software spending is forecast to experience the highest growth in 2018 with an 11.1% and IT services expecting a 7.4% boost. These forecasts could act as a good average for the industry on the whole, the better performers growing above and the lesser ones below it. IBM is currently below it.

When compared to competitors the picture is also a bit gloomier. Consultancy rival Accenture grew 15% in the last quarter (though this is down to 10% when adjusted for constant currencies), HPE, which competes with IBM in the storage space, was up 11% year-on-year, while cloud competitor AWS demonstrated a 45% boost in revenues. Microsoft is a company which is a good comparison for IBM considering it has also recently redefined the direction of the business, demonstrated 12% growth in its most recent financial results. This 12% also includes the Microsoft legacy business which is weighing it down heavily.

IBM is heading the right direction, but at a slower pace than everyone else. The firm might want to reclaim its lofty spot at the top of the technology world, but at this rate it will end up being relegated to the ‘also ran’ category.

IBM arrives to make iOS apps smarter

Artificial intelligence is set to take the world by storm before too long, but Apple hasn’t really shown it is any good in this growing field. Hopefully an extended partnership with IBM can bring greater fortunes.

It shouldn’t be considered a bad move from the iLeader, as while many will point to Google or Amazon as the leaders in the AI race, IBM is no mug, despite not getting as much attention as it probably deserves. Don’t forget, Watson is a powerful AI offering which has the potential to enhance the labouring Apple AI efforts.

The partnership will see Apple and IBM more closely combine IBM Watson machine learning with Apple Core ML in an effort to make it simpler for business customers to create apps and developers to build secure, AI-powered solutions. Using Watson’s machine learning capabilities, Apple aims to enable the creation of apps that continuously learn and adapt; the more a user interacts with the app, the more powerful and accurate it becomes. It’s the digital, connected dream, which has not blossomed into reality just yet.

The first Watson service which will be available for developers will be the Watson Visual Recognition Service, a tool which has been trained to recognise what images actually are. This might prove to be a particularly interesting development as it moves apps and AI into the world of unstructured data (i.e. not text). Considering the internet and real-life is primarily make up of what should be classed as unstructured information, this opens up a huge number of opportunities for new apps and business ideas. Augmented reality is one area which could benefit from strides forward in this area.

This initiative is yet another step to bring to the two closer together in a partnership which dates back to 2014. While these might not seem like the most likely chums, it does make sense. IBM has knowledge of the enterprise world, Apple knows consumer-technology and how to capture an audience. IBM sells the apps and the intelligence components, its co-designed with the Apple team, and then Apple has the opportunity to go into the business and sell all sorts of iPhones, iPads and Macs. It works.

The announcement took place at Think 2018, IBM’s customer event, where artificial intelligence has taken centre stage over the first few days. Considering IBM is trying to shift its overall focus away from legacy technology and onto its strategic imperatives (of which AI has a very prominent role) this should surprise few, but it does just show the influence of AI, even in these early days.

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