Jul 6, 2017

The Artificial Intelligence Hype Cycle

Is the AI hype cycle worth the investment? In this video blog, James Jockle, Chief Marketing Officer at Numerix, sits down with Paul Rowady, Director of Research at Alphacution to discuss the recent trend of the artificial intelligence hype cycle sweeping the financial industry.

Video Transcript:

Jim Jockle (Host): Hi, welcome to Numerix video blog, I'm your host Jim Jockle. Joining me today, Director of Research at Alphacution Paul Rowady, Paul thanks for joining us again. As always, we always get into some great conversations in terms of digital transformation, IT spending, resource planning, and the revolution of the banking cycle. But, I want to focus in a little bit on a recent blog you did in terms of the source of the AI hype and clearly 2017 is the year of AI and I think I put on LinkedIn joking around was - if something has an if-then statement: it’s AI. Perhaps you can share some of your thoughts on why is 2017 the year of AI?

Paul Rowady (Guest): So being in this seat where you’re observing how the landscape moves over years and years and years, you tend to see patterns emerge and one of the patterns you see is that each year has its poster child terminology. For instance, last year was Blockchain, and when that happens you get a scenario where these terms get overhyped. Not that they aren’t important, they’re all very important. If you go back to a year before that, digital transformation was the marquee term for a lot of marketing budgets. So, a lot of the content, a lot of the research that was developed, had this terminology, had these buzzwords in there. So, artificial intelligence, AI, machine learning, cognitive solutions, these are all a family of terms with AI being kind of the lead, that we find ourselves this is the term for 2017 and what I discovered in some of our modeling, particularly in the development of our recently release IT services study and in the course of doing that, looked at some of the hardware services players, so HPE and IBM in particular. What I discovered and ultimately drilled down on is that nobody else was mentioning this term AI or in the case of IBM, cognitive solutions. Apple didn’t mention it, Amazon didn’t mention it, Google and Alphabet a little bit, but not tied to financial performance. IBM used the term cognitive 155 times in its 2016 annual report, up from 56 times in its 2015 annual report. Long story short, they’ve reorganized their business so that Watson, their AI voice…

Jockle: The Ken Jennings of artificial intelligence.

Rowady: I have no idea what that is…

Jockle: The guy that Watson beat on Jeopardy.

Rowady: Oh yeah! So, they’re really hitching their wagon to Watson. A lot of their brand identity through some internal reorganization, they’ve got a segment now because their hardware business is in a long-term decline. The services business on top of that is in somewhat of a long-term decline. So, it’s the software and in particular the Watson franchise where they’ve created this new segment called cognitive solutions and allocated 18 billion dollars of their former software bucket to this new cognitive solutions bucket – 18 billion dollars in revenue – and then placed a 1.3-billion-dollar marketing budget on that. So, can we tie the AI hype cycle purely to IBM, certainly not. I mean this is something that’s broadly going on in all industries and certainly is very attractive in the unprecedented transformation in financial services and banking, but a 1.3-billion-dollar budget, there aren’t too many of those around and so I put it as at least a key source of the hype.

Jockle: Now, AI is not new. Arguably, Google, Alphabet has ventured into the concepts of AI probably long before anyone in terms of their underlying search. So, where does it fit? Or where are you seeing the fit within financial services today?

Rowady: If you look at the other side of the coin, what have we had going on now for 6, 7, 8 years? Unprecedented, highly pervasive, very expensive, very uncomfortable regulatory interventionism. How fun is that?

Jockle: Not.

Rowady: Right, not fun. So, this is the reality of this business and a lot of it has to do with banking but a lot of it has to do with the wholesale markets, very complex derivatives which are near and dear to Numerix’s heart. So, this has been a painful transformation to create enterprise risk and put all this fragmented data sources together so that you could get enterprise risk at higher and higher update frequencies so that you can make sure that you’re not deviating from some boundaries and guardrails that have been setup and a lot of people in that transformation have lost their jobs. If we look at it from that angle, I see it as the interest and you could say more broadly in Fintech; Fintech innovation, all of the interest in the blockchain, and distributed ledger technology. This is kind of the counter balancing to the not-so-fun work of transforming what kind of got out of hand over the course of the last three decades or so, or we kind of had to step back and get our risk house together and the response to that is well, innovations sexy, innovations cool, it’s fun to think about hey, if we could do it this way, it would be so much better. It would not only be cheaper, but the results and the functionality and the output would be orders or magnitude better. I think that AI fits into that, where if you’re not too skeptical, because I think there’s a scary side to the AI, and I wrote about that in the blog, I think that sort of promoting the creative juices with topics like AI makes your day go by a little faster than if you’re just focusing on regulation and austerity and the budgets that are no longer there and things like that, that are just not that much fun.

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