IBM's AI Rollercoaster, Demis Calls for AI Watchdog, NY Pauses AI Data Centers | Diet TBPN

**John Coogan** (0:00)
IBM is absolutely nuking. The stock is down 25%. Boom, IBM. Well, that is a crazy chart. What is that, the, that's the one week chart?
It looks better on the five year, because the stock is actually way up in the AI era since the launch of ChatGPT. IBM has done really, really well. The stock has basically doubled since the introduction of ChatGPT during the AI era. You know, are you going to be a winner or a loser? Are you going to get steamrolled, slopped, something like that? But it's been doing well up until today when the company reset the narrative around their server business specifically. So the high level reason that IBM is not well positioned in the token path to use the Brad Gerstner and Gavin Baker parlayans is that AI spending is currently flowing into GPUs, memory, networking, hyperscale cloud computing and frontier model inference. IBM is not a major winner in those categories. Just to refresh on IBM because interesting business with a great name, International Business Machines. The first business machines they made were punch card systems. They made clocks.
It's like you're running a business. You need a machine.

**Jordi Hays** (1:09)
You're going to need a great clock.

**John Coogan** (1:10)
You're going to need a clock. No, it really was part of the business.

**Jordi Hays** (1:13)
Not just any clock.

**John Coogan** (1:13)
Like a clock that works really well.

**Jordi Hays** (1:15)
That's right.

**John Coogan** (1:15)
A professional clock. Clock Pro Max.

**Jordi Hays** (1:17)
It keeps you on time.

**John Coogan** (1:18)
Exactly. Clock Pro Max.

**Jordi Hays** (1:20)
It's the lightest that is best-looking fastest.

**John Coogan** (1:22)
Not fastest. You own a fast clock.
But tabulating machines. Basically, a bunch of different ways to process information mechanically. That foundational insight was pretty simple. It was, businesses will continually pay forever to automate record keeping. At a high level, that's been working forever. And they're continuously...

**Jordi Hays** (1:44)
Do you know if they ever tried to sell a clock as a SaaS product? Time as a service?

**John Coogan** (1:50)
Hmm.
If you really, really squint Red Hat Kubernetes, it's keeping time between distributed systems. Maybe there's something there. But when you're running a database across a bunch of different servers, there's some timekeeping aspect that's important. But no, I don't think they ever did. With the IBM that people know, the mainframe business, that started in 1964 System 360, it was a compatible family of devices, which is interesting. It's not just one, people think one mainframe, but it was actually a whole bunch of different systems that you can upgrade piecemeal without redesigning the entire workflow. So you need a little bit more storage, you upgrade that, you need a little bit more compute, you upgrade that. And this turned IBM into the dominant supplier of corporate computing banks, insurers, airlines, manufacturers, governments. They all used IBM as the central system for their hardware and software. This was the mainframe era. And the whole reason that IBM in particular became dominant in mainframes was they focused on high reliability, long customer relationships, expensive switching costs. It's very difficult once you're in the IBM ecosystem to weed your way out. Proprietary software tied to the hardware.
Certain software would only run on IBM hardware so you couldn't re-platform. You had to rip everything out, which is very difficult for a large bank or a large airline in the 60s and 70s.

**Jordi Hays** (3:07)
Good for business.

**John Coogan** (3:08)
And they also had huge support and consulting contracts associated with all the software and the hardware that they were delivering. Sort of a precursor to the Ford deployed engineer if you squint a little bit. But the PC era was the real turning point. So the IBM PC launched in 1981 This legitimized the personal computing market and set up two new companies, Intel and Microsoft, to capture immense value during the next computing boom. So the IBM PC ran Windows and used an Intel chip. At the time, IBM was doing 30 billion in revenue, Intel was doing less than 1 billion, and Microsoft was only doing 17 million in sales. And so I think Microsoft had like 120 employees. And all of a sudden, those two companies became ultimately way, way, way bigger, like 10 times as big. So the market eventually fractured and proposals to break IBM into separate companies started to pop up. The market fractured because once you had an Intel chipset and Windows operating system, you could run Windows on a different chipset and you could have a different chipset with different operating system. And the value capture piece, there were just other PC manufacturers that came in. And then obviously Apple with their anti-IBM like challenge the man campaign. So the market was fracturing and there was a bunch of proposals during the 80s and 90s to break up the company into separate units. Lou Gerstner, who became CEO in 1993, rejected that idea. And he said, quote, we do not necessarily need to manufacture every piece of technology. We need to be the company that makes of all of it work together. So we have to work together. We're gonna be the integrator, the systems integrator. His strategy ultimately produced three things. IBM global services, large outsourcing contracts and a vast consulting organization. And that's a lot of what we know about IBM today. So services businesses do have limitations though. Lower margins, higher head count, slower organic growth, price competition, et cetera. In 2019, IBM acquired Red Hat for $34 billion and spun off its traditional managed infrastructure outsourcing business in 2021 So today, you can think of IBM as sort of three key businesses. They have software, which is 44% of the business. That's at 80% gross margins. Great business.