[caption id="attachment_16465" align="aligncenter" width="600"] IBM employees discussing Watson's apps.[/caption] When IBM announced its fourth-quarter results, the continuing drop in its hardware revenues should have come as a surprise to exactly nobody. For the past several quarters, Big Blue has wrestled with its customers abandoning expensive on-premises systems in favor of cloud services or else cheaper hardware slapped together from commodity parts; all those marketing efforts that positioned its hardware as uniquely suited to run its software evidently came to naught. Weakening hardware sales contributed to IBM’s quarterly revenues failing to meet Wall Street expectations. “While we made solid progress in businesses that are powering our future, in view of the company’s overall full year results, my senior team and I have recommended that we forgo our personal annual incentive payments for 2013,” IBM CEO Ginni Rometty wrote in a statement accompanying the results. (When executives give up compensation, you know things are looking pretty bleak.) IBM isn’t the only company feeling the hardware pain. Oracle, despite some modest increases in software sales throughout 2013, has watched its server and equipment divisions suffer. Hewlett-Packard, Dell, and other manufacturers are also doing their best to survive an anemic market for everything from PCs to datacenter hardware. In a totally logical move, these companies have all chosen to compensate for declining hardware sales by focusing on services and software. After years of publicly disparaging the “cloud” as a marketing gimmick, for example, Oracle CEO Larry Ellison had his developers and executives launch a massive public cloud loaded up with all sorts of enterprise apps; he even followed that up by signing alliances to cross-sell cloud products with rivals such as Salesforce. Over at Hewlett-Packard, the attempt to digest the assets from its (possibly ill-advised) Autonomy acquisition continues apace, with analytics tools finding their way into various HP products such as data backup. But IBM might be making the riskiest bet: in addition to devoting more resources and attention to its cloud products (joining everyone else in the tech industry), the company will also pour thousands of researchers and a billion dollars into its Watson supercomputing platform, along with $100 million into an equity fund for Watson’s growing app ecosystem. And that’s just for starters: given IBM’s decision to build a dedicated headquarters for its new Watson Group at 51 Astor Place in New York City, it’s almost certain that the company will continue to dump cash into the project for years to come. At a recent press event in New York City, Rometty suggested that Watson will use its supercomputing power to service four distinct categories: “Transformational Solutions,” which will fundamentally alter industries such as healthcare by applying the platform’s massive analytical abilities to some very big problems; “Enterprise Solutions,” or replicable and scalable solutions for business issues; “Watson Ecosystem,” centered on the Watson developer cloud and associated APIs; and “Watson Foundation,” a portfolio of analytics capabilities. At least in theory, developers will be able to ask Watson questions in natural language and receive insightful answers back; the platform is reportedly adept with unstructured data such as images and unfiltered Web content. Watson already helps a handful of hospitals and medical centers process and interpret oncology data, and IBM hopes that clients will end up using its abilities in everything from customer service to retail. Its sophistication aside, Watson remains a big bet for IBM. If companies decide they need its particular brand of “cognitive computing” in order to make their business operations more efficient, the resulting revenues will more than justify the Watson group’s existence. But if Watson fails to bring in big dollars, IBM could find it much harder to stand out from all the other tech companies pushing some combination of cloud/analytics/services offerings. And given its weakening hardware fortunes, that could lead to a very negative financial situation, indeed.   Image: IBM