“Blockchain is an interesting technology that every enterprise is going to use down the road. ” — Arvind Krishna, Director of IBM Research
CBR is proud to present the 2nd installment of Blockchain Talk, a series of articles dedicated to sharing blockchain commentaries made by public companies during earnings and investor conference calls. These commentaries are essential for understanding how the industry is evolving, yet they are difficult to find.
In this article, we focus on IBM’s blockchain initiatives, as presented by two CFOs and IBM’s Director of IBM Research during their latest earnings call (4Q17) and two recent investor conferences hosted by Wells Fargo and RBC Capial Markets.
Though still early days, IBM is clearly bullish and has announced multiple exciting initiatives. The company has also indicated that they will increase investments to support the development of the technology. We wish them the best!
1/19/2018, Prepared Remarks of Earnings Presentation
Editor’s note: In the prepared remarks for 4Q17 earnings, IBM mentioned “blockchain” 13 times. This is more than double the 6 times they mentioned “blockchain” for 3Q17 earnings. Their enthusiasm for the technology is certainly growing and, this time around, indicated increased investments to support the technology.
Jim Kavanaugh, CFO (new position):
This was our first full quarter with the z14, and with pervasive encryption and the ability to address new technologies like blockchain, we’re adding new clients and new workloads to the platform.
Nearly half of the more than 9,000 patents in 2017 are for advancements in AI, cloud computing, cybersecurity, blockchain and quantum computing.
We also continue to make progress in emerging areas like blockchain. Remember that for us, blockchain is a set of technologies that allow our clients to simplify complex, end-to-end processes in a way that couldn’t have been done before. It requires the attributes of immutability, permissioning, and scalability and we’re already performing thousands of transactions per second. And we offer some of the most advanced cryptography available to verify transactions. So, by running on Z, we provide industry-leading technology to help improve security and performance for our clients’ blockchain networks. We have engaged in blockchain projects with hundreds of clients, and since the release of our IBM Blockchain Platform in the third quarter, we’ve collaborated on 35 active networks with clients such as CLS, Everledger, KBank, London Stock Exchange, and Mizuho. These reflect a wide variety of use cases like cross-border payments in financial services, supply chains in retail, valuable goods authentication in industrials and digital identification for governments. This quarter, we extended our Food Safety initiative with Walmart into China, and just this week we announced the creation of a joint venture with Maersk, to provide more efficient and secure global trade using blockchain technology.
Revenue in our Digital Strategy and ix business grew about 40 percent, and we’re also seeing good growth in the new practices we’ve built around our innovative technologies like AI and blockchain. The reason we’re able to lead in these emerging areas is because of the technology, as well as our ability to implement these platforms into our clients’ workflows.
We’re continuing to address emerging workloads across the z platform, like blockchain, machine learning, dev ops and payments. We closed 10 instant payments deals this quarter across several markets, and in the emerging blockchain space, the Beijing Institute of Technology selected the IBM LinuxONE platform to run their blockchain solution.
In 2018, we’ll maintain a high level of investment. This is important as we continue to build out capabilities in AI, in cloud, in security, and in blockchain, just to name a few.
12/05/2017, Wells Fargo Conference
Arvind Krishna, SVP Hybrid Cloud & Director of IBM Research:
Blockchain, which is, I think, an interesting technology that every enterprise is going to use down the road, runs natively on the mainframe, using by the way not just those encryption things I talked about, but also other abilities around keys and secure containers and so on. And so blockchain on the mainframe is another piece of technology, which is going to drive a lot of workload going forward.
So when we use the word blockchain, we are not talking about cryptocurrency. Now I want to make that clear. So blockchain for us has got nothing to do with bitcoin or ether currency. I think blockchain might have its uses there that’s discussion over a glass of wine or over the bar, okay.
So when I use the word blockchain, it’s about using the patented technology that’s in there, in order to really do for transactions what kind of the Internet did for information. So, when we’re using the world blockchain, it’s about how do I create trust amongst multiple parties when they might inherently never want to trust each other. And that means in the contrast just one of the parties to hold the data. So a blockchain is that technology. So it has to have a certain set of properties. One, in a world where governments have regulations and people care about things like fraud and corrupt practices, meaning you got to know who you’re doing business with, the first property you got to have is [ph] be provisioned (21:44).
Two, when an enterprise may care about who wrote the code and where is the code and nobody can change the code without asking, there’s got to be governance. And that’s why we believe that the underlying fabric has got to be an open source, but with governance, meaning there it’s body whether it’s a Linux foundation, which is the one we promote or it could be Apache or it could be one of those, so that there is a clear governance on how the code is done and it cannot be just done by one or two people, or as some people do, which is open source by one company to me is not open source. I mean, that is a different form of marketing, I’ll call it that.
The third piece is it’s got to be immutable, meaning if you put something on the blockchain, the trust comes about because nobody can change it, and so there is immutable nature. And fourth, it’s got to have scale, because those that are limited to 7 or 15 transactions a second don’t really scale for enterprise usage. So I’ll park that in one place and say, so when we use the word blockchain, it’s about technology for enterprise transactions that can go at scale, that can help create trust, when there might not be trust present amongst all the parties. So we’ve got the technology piece parked and Hyperledger as the fabric that we will endorse and push. Others may come in the future, so I’m not going to sort of [ph] this thing (22:59), but no cryptocurrency, so I want to put that aside.
So why am I so excited about it? So one is, we internally use blockchains for our financing application, so by the way IBM, because we sell high value computer equipment, many of our either intermediate dealers or clients want financing, while it goes from point of manufacture to point of delivery. No definitive letter of credit from a bank, albeit that’s a bit more time and usually over a much wider set of goods, but you get disputes. Okay, what tax rate? Okay, is the tax rate where I’d sign the PO or is the tax rate where we receive the goods, or is it from the point of manufacture? You get all these disputes and resolving them becomes a lot easier when everybody can trust that the information is correctly put on a blockchain.
But to talk about a solution, so that’s an internal use case, to really make it come home is one that we are doing, where I think Walmart is the anchor, I’ll call it, tenant in the solution around food safety. So, food safety just, by the way quick aside, $80 billion a year of spend in the U.S. or $10 billion of food thrown away because suspected contamination, tens to dozens of people die each year from it. So you got to get down to from the point of origin how does the food supplier say, this is the food that I put on. Here is this point of authenticity, here is the intermediate cold chain, here is somebody who might take a mango and slice it up, here is somebody who may can that, then it gets on a pallet, then it gets shipped out to warehouse, then it might make its way to a store.
So food safety is a great supply chain application I think. It’s just one which has a crying need. And so Walmart said, all right, we are going to ask our suppliers to put the source of food down on a blockchain, and then you get intermediate processes also say, this is what we put and it’s on the same blockchain. So today where it might be almost impossible, it might take weeks to figure out where it went from source to destination, on a blockchain it takes just seconds when you add analytics and AI, it’s not just the blockchain by itself, into doing that. And the business model, whenever people want to get information, they pay for the analytic or they pay for a certification is how you get about it. So whenever you have a high volume, albeit not low latency. Nobody here cares about milliseconds of latency, but you do care about seconds and minutes. It’s a great, great application.
So thinking about supply chain, thinking about the physical world of these is where I believe that blockchain is going to have a huge, huge impact. And you can go out from there to thinking about shipping of goods across the ocean, safety associated with this. Is this the chemical I need to worry about or not? And worrying about finance trails across countries, I think, are all examples where I think blockchain or enterprise blockchain is going to make a huge impact.
11/08/2017, RBC Capital Markets Conference
Martin Schroeter, CFO:
So for us, blockchain is a set of technologies with a common fabric, a set of tools, and security features that allow our clients to achieve and simplify complex end-to-end processes in a way that they couldn’t have done before in such a low-cost, open way.
So I’m going to give you an example about how we use it in IBM even, because I think it’s a good example. So we run a global financing business. I used to run global financing before I had this job. And global financing, we’re providing capital to our end-users and capital to our business partners in those relationships, for instance, with our commercial financing. So think of very high cycle-time capital providing for a group of business partners. We roughly originate $30 billion to $35 billion a year of capital infusion into those partners. It turns over every 45, 60 days. But within that process are a series of, as you would imagine, of disputes. So we send an invoice to a business partner and they say well you’ve got the wrong state tax. I need Texas, not Missouri, or something.
So there’s a whole series of disputes that happened in this $35 billion of originations. We use a blockchain internally, because we’re connected with all of our partners, we use a blockchain to take the cycle time to resolve those disputes down from four months to about two days. Because everyone now has visibility to the blockchain, and everyone can see – well, I’m going to come back to everyone. Everyone has visibility to their pieces of those transactions, and we can sort out very quickly as we move back through the transaction history on where the problem was.
And I think this is a critical element, so when we talk about what our blockchains – how we view blockchain versus a cryptocurrency, first, there is very much a scalability element to this, for us. So we run blockchains in the – you have to be in the thousands of transactions per second, because that’s the enterprise world in which we live. That’s how we think about the blockchain, we put it into global financing. But there is a scalability element to this that’s really important for our clients. How do you get high throughput in an enterprise world?
We also think about the permission aspect of it, and permission means that – and it’s important for governments, important for banks, it’s important for anybody in a regulated environment to know who’s in their blockchain. You have to be – in the way we implement blockchains with our clients, you have to be permission, which means I can either let you in or not, but I know who’s in my blockchain, right? So you don’t have bad actors who are participating in this ecosystem.
And then you have to have this idea of immutability, that you can’t actually go back and change something, right? That would sort of render useless the idea of a blockchain, that I can trust this network to always know what the one version of the truth is; if you don’t have immutability you have multiple versions of the truth, which is a real problem in an enterprise world.
So when we think about blockchain, again, I gave an example of how we use it in global financing, but we are now in discussions, and we’ve talked publicly about how we use it for food safety, how we use it to clear securities, how we use it to clear currencies. So there’s a financial market element to this, and there’s also a whole series of business process elements, such as food safety, such as shipping and the process that happens from shipper to recipient. It’s a massively complex process, and our clients see the need to use a blockchain.
Again, it has to have those attributes of scalability, immutability, and permissioning, but once you have that ecosystem built up, it’s an incredibly powerful tool that will change, fundamentally, how a lot of industries work.
And so, we bring not only a set of technologies, we put a ton of code, 45,000-plus lines of code I think, into an open-source environment so that the open ledger can work. So we put a lot of technology and we have a lot of experts on the technology side who can help make it all work, along with tools, and along with security, and end-user management and things. And then we have a series of consultants who can help our clients put this into their business process because they understand their industry.
So, in the enterprise world, again, having new technology is important, but knowing how to deploy it and how to use it in a viable way is just as important. So our view of blockchain is that it will fundamentally change, again, fundamentally change processes, but it has to have a few characteristics in order for it to really take off, and we think and we expect that this is going to be a nice big growing business at some point for us.
Right now, our blockchain is not really in the ledger. Right? We’re not – the technology we’re providing was done free. We put it into open source. There’s no monetization stream in that. We’re doing some work for clients with our consultants, but by and large, our blockchain opportunity is still ahead of us.