Big Blue Pumps Big Bucks into the iSeries

by Timothy Prickett Morgan

The weather in Minnesota has been somewhat mild this year, and I think I know why. All of the cold air that would have normally enveloped the Rochester iSeries labs has somehow been transported to the underworld and Hell has actually begun the process of freezing over. How do I know this? Because today, IBM is significantly and vocally increasing its co-marketing and co-development budget for the iSeries platform and the partners who make applications and tools for it. We're talking hundreds of millions of additional dollars.

Because IT vendors do not generally talk about how much money they spend on advertising, marketing, and partner development, it is hard to get a precise idea of how much more money IBM is pumping into the iSeries. But we can do a little math based on what I have been told by IBMers. Before we get into that, I want to mention the important point: IBM is spending money on the iSeries, and it is spreading it around to the ISV and tool partners to help them better compete in the cut-throat small and medium business (SMB) market that has been the hallmark of the IBM midrange for over three decades.

The public relations spin on the new "iSeries Initiative for Innovation" (spearheaded by Mark Shearer, the newly appointed general manager of the iSeries line, and Peter Bingaman, vice president of marketing for the iSeries) is that it is a "doubling down" on the iSeries investment that IBM has made to date. The announcement of this new iSeries campaign, which will be outlined by IBM this coming week at its annual PartnerWorld business partner shindig (hosted this year in Las Vegas from February 27 through March 2), is being heralded as a $1 billion investment in the iSeries. From what I can gather, this $1 billion represents the total budget for research, development, marketing, sales, and other items (including co-marketing with partners) for the entire iSeries business for 2004 and 2005. And based on that rhetoric, I presume that in a normal two-year span, IBM was spending around $500 million for ongoing iSeries R&D, marketing, and sales (including partner incentives and such).

One number that is relatively easy to figure out from IBM's statements is the value of the expansion of the breadth of services that it has offered its largest iSeries partners to the 2,500 key application software providers and 180 core iSeries tools suppliers in the OS/400 market. According to Bingaman, as part of the iSeries for Innovation campaign, IBM is setting aside a cornucopia of free services that it reckons will be worth, on average, about $50,000 per ISV. At 2,500 ISVs, which the campaign is targeting, that works out to $125 million just for these services alone. Getting a bead on what other parts of the campaign are worth is a bit difficult, partly because IBM doesn't want to be specific and partly because it really depends on how many of the ISVs and tools vendors take part in specific aspects of the program.

"We are crystal clear on the three things we need to tackle this year to grow the iSeries business," explains Bingaman. "Notice I said 'grow'? We are not talking about installed base management with iSeries Initiative for Innovation."

Those three focus areas are interrelated, says Bingaman. First, IBM is going to spend money on advertising, create a new customer-centric iSeries Web site, and put the full court press on members of the business and IT press and analyst communities to educate them better about the iSeries and its advantages in the market. Bingaman says the first thing IBM is going to do this coming week is an advertising campaign called "Why i?" in all the major business publications, starting with a four-page spread in the Wall Street Journal on February and including spots in CIO Magazine, Forbes, Fortune, BusinessWeek and other publications that reach C-level executives. In addition to its own advertising, under the iSeries Initiative for Innovation gives partners, IBM will pay 70 percent of the cost of partner advertising when they promote their own iSeries solutions.

Second, IBM is going to remobilize the core, remaining iSeries ISVs (many have left the market in the past decade) and give them sufficient help and incentives to make the iSeries the most profitable solution they can sell to SMB customers. The third part of the initiative is to shore up and extend the portfolio of applications at those core 2,500 ISVs so they can participate better in the modern world of computing--and do so from the iSeries platform. This latter item is important in two ways. First, it represents a broadening of IBM's field of view beyond its own toolset (predominantly those related to WebSphere middleware and DB2 databases in the past five years) to a much richer and diverse set of third-party tools for modernizing applications. But equally important, the makers of tools to modernize applications can and will be paired with application vendors who need their help in modernizing applications. That makes the iSeries Initiative for Innovation an ecosystem move.

"This could be called 'No ISV Left Behind,'" quips Bingaman, saying that in the past, IBM had been focused on a few dozen application providers and only a handful of tool providers. Doug Fulmer, who headed up the iSeries Tools Network for years and who is now the head of worldwide sales for e-business infrastructure, concurs that IBM has seen the error of its IBM-centric ways. "This is a huge re-investment in the midrange marketplace, which we believe will unleash a lot of technology and opportunity over the next three to four years," says Fulmer. "We're opening up the floodgates."

While neither executive would say this, two things are obviously true--the OS/400 server business represents roughly half of IBM's nearly 500,000 customer sites, and Microsoft, with its deep pockets and new Midrange Alliance Program two months ago, is trying to coerce ISVs and, in turn, OS/400 shops, to move towards .NET and away from RPG, COBOL, and Java. With the economy stabilizing worldwide (more or less) and many OS/400 shops getting ready to spend and needing to modernize their applications, now is clearly a good time to get the OS/400 ecosystem motivated and moving. Even without the Microsoft threat (which is as yet pretty small), the new i5 machines and all of their capabilities makes this a good time to pump some money into the iSeries channel.

The reason IBM will do this, of course, is to make money. Back in December, I did a little math on the back on a bar napkin that went something like this. I figure that in 2003, IBM probably sold something on the order of $1.8 billion in iSeries hardware and OS/400 operating systems (including DB2/400 licenses, of course), and assuming that about half of that is booked as software, the core iSeries business (not including services, other software, and so forth) probably had a gross profit of about $900 million. In 2004, development costs went up because of the eServer i5 and sales were off around 25 percent to around $1.4 billion; that would mean gross profits for the core iSeries business might have dropped to between $400 million and $500 million in 2004. After allocating sales, general, and administration costs, and taxes to this gross profit, the iSeries business is probably a little less profitable than IBM as a whole--probably around 35 percent. Now you can see why IBM is willing to reinvest in the iSeries and why Microsoft is chasing it. Every additional dollar that IBM gets in iSeries sales in 2005 will fall almost straight to the bottom line. MBAs will actually maim and kill for a business like this. Conversely, every dollar that IBM lost in 2004 with the iSeries came right out of the bottom line, and that is precisely what the Microsoft's MAP is all about, ultimately.

"We're not putting money into the platform without expecting additional iSeries sales," explains Fulmer, adding that IBM is now committed to the idea that if it actively assists ISVs and tool vendors as they help OS/400 shops innovate and extend their applications with RFID, Web services, portals, .NET and Java integration, support for mobile devices and wireless technologies, and other hot areas, they will drive more sales of their products, and that will feed back into more i5 hardware and i5/OS software sales. "The hope is that ISVs, tool vendors, distributors, and IBM will help customers make more money, and then we will all make more money. This is the kind of thing I have been asking IBM to do for five years," says Fulmer.

There are three aspects of the iSeries Initiative for Innovation are:

Application Innovation Program: This includes many of the freebies that only the largest ISVs have been able to get out of IBM so far, including free support from IBM's experts in Rochester, Toronto, an other facilities; free virtual server loaner programs for application development and testing; free education for programmers; and free application conversion assistance. These services are where the $50,000 figure that IBM is talking about comes from. That number is the average value of the services that the 2,500 core ISVs in the iSeries community can get.

To take part in the Application Innovation Program, ISVs have to get a PartnerWorld ID, which is free, and then register with IBM to get a solution assessment. Then IBM will come in and help the ISVs extend and modernize their applications based on the technologies they use and the markets they serve; this is tailored for each ISV. Having done that, they set off down the road to modernize their applications and get them certified on the latest gear.

ISVs then enroll in Solution Connection, the online tools that IBM's sales reps and partners use to sell solutions. Once an ISV shows they have one referencable iSeries account running their solution, they are eligible for ServerProven rebates, which scale as high as $64,000, for themselves and their customers. Then, they can go the next step and join PartnerWorld Industry Networks, which gives them up to 70 percent discounts on advertising campaigns in 220 different publications, sales leads through IBM's Sales Connection system, and a $5,000 discount on an IBM Web-based sales tool called KnowledgeStorm.

Tools Innovation Program: Right now, 60 of the 180 tool vendors in the iSeries Tools Network have been cleared to participate in this new campaign, and IBM expects that number to quickly grow to 100 vendors.

To apply to the Tools Innovation Program, involves just about the same process. You join PartnerWorld, and IBM is recommending that tools vendors shoot for the advanced level of membership. Then you nominate your tool for the iSeries Developer's Roadmap. Having done that, you get enrolled in Solution Connection, get ServerProven, and join PartnerWorld Industry Networks to get all of the same goodies that the ISVs get, including virtual loaner server capacity, help from Rochester experts, and so forth.

IBM says it is dedicating iSeries people and co-marketing dollars to the tools end of this campaign, and that it wants the strength of numbers behind it. The tool vendors will also get a periodic review with the technical team in Rochester to keep them in synch with the i5 and i5/OS roadmaps.

iSeries Innovation Program: This last bit is a big change for IBM. In the past, the largest ISVs and customers in the OS/400 market were brought into Rochester and given a sneak peek at what was coming down the pike. Starting now, large and small customers as well as large and small ISV and tools partners will be brought into Rochester to help IBM figure out the i5 and i5/OS roadmap. Bingaman says IBM is still working out how this will work, but it will probably involve formalized advisory councils and Webjams and other informal means of getting input. IBM also plans to add iSeries capability to its Innovation Centers in China, Japan, Italy, France, and Australia.

Bingaman says the zSeries platform launched a similar charter with the mainframe community back in August 2003, and this has, in part, reinvigorated the IBM mainframe. IBM is hoping to repeat this trick again with the iSeries. While IBM is not about to open source OS/400, it can open up the iSeries roadmap and get the OS/400 community involved in making the iSeries a better platform.

"What we are trying to do is remove the cost of doing business with IBM," says Bingaman. "Smaller partners, who were the lifeblood of this business, could not afford to engage with us. Now we are going to open it up."