The Four Hundred

Like the rest of you in the OS/400 market, I have been waiting impatiently for the pricing on the new line of iSeries servers from IBM. While the new technology and packaging is interesting and potentially ground breaking, we really couldn't tell until we could get our hands on pricing information. Last Friday, some of this information finally started leaking out of IBM, and we have a preliminary review of the new pricing. We'll do more analysis in the coming weeks.

Before we get into it, I've built a new salient characteristics table for the new iSeries line. I had transposed the CPW client/server and CPW 5250 power ratings in last week's table. Also, the base pricing for the machines that IBM's press relations people gave out and that we published in last Monday's issue don't match the base pricing we obtained from IBM's iSeries pricing experts last Friday. In some cases, it looks like the numbers that were given to the press were for minimal reasonable configurations rather than for base machines. My point is, forget those prices. Use the table I built this week, which normalizes base hardware pricing by taking out the cost of the required first year of Software Maintenance from all of the machines so you can do like-for-like hardware comparisons. For those of you who can't wait to see this table, you can read it by clicking here . I went straight to this information myself, so I understand that you don't want to listen to explanations first. Go. Just come back. There's information in the text of this story that you need to read.

In addition to this vital characteristics table, I have obtained a number of very useful comparisons between the 2002 iSeries machines and the 2003 iSeries machines. These are all presented in a separate table, and they make, as best as is possible, an apples-to-apples comparisons between the old and new ways of packaging and pricing the iSeries. IBM gave one comparison that stacked up the Model 270 Green Streak machine to the Model 800 Advanced Edition, but did not compare the Model 820 Green Streak machine to the Model 810 Enterprise Edition. IBM compared a more powerful and more expensive Model 820 to this Model 810. I tweaked IBM's comparison so it would compare the Model 820 Green Streak machine to the Model 810. Also, these comparisons, unlike the others that follow, include estimated street prices (essentially a 20 percent discount on the total server cost) to make a fair comparison to Green Streak machines, which were street prices as well. That 20 percent discount is an IBM estimate, but business partners -- who actually will sell most of these machines -- will set the street price, not IBM. Prices could be a little higher, depending on supply and demand. I know you can't wait for this either, so go take a gander at this table, too .

Now let's walk through all of this information, and I will give you some other stuff you need to think about. The first thing you will notice is that the pricing on the entry Model 800 that IBM has been giving out to partners includes the cost of the first year of Software Maintenance services. (Software Maintenance is a relatively new offering that combines Support Line tech support and Software Subscription software support into a single service. Customers buying a new machine have to buy one year's worth of Software Maintenance with their machines. See the separate story in this issue for more on Software Maintenance .) The other base iSeries prices IBM has posted do not include Software Maintenance. I extracted the cost of Software Maintenance and put it in a separate column. The rudimentary price/performance figures I have in the table--for both raw client/server power ($/CPW C/S) and for interactive power ($/CPW 5250)--are reckoned off of this base hardware price without Software Maintenance. Other server vendors do not count required maintenance services in server price/performance analyses, so we aren't going to do it here, either.

While IBM has made 5250 OLTP processing capacity an all-or-none option, and that does not mean this capacity is free by any stretch of the imagination. It surely is not. But IBM's pricing is--no question about it--a lot more reasonable for the bulk of iSeries customers. To be sure, those iSeries customers who were buying powerful iSeries machines with lots of CPW C/S capacity and only modest CPW 5250 capacity are probably going to see a price increase on the interactive bill because they have to buy the Enterprise Edition of the OS/400 software stack, which may have a lot of software components that they are not currently using. But the fact remains that the fully bundled new iSeries machine running Enterprise Edition is much less costly even running 5250 OLTP full-tilt-boogie than an old iSeries machine with minimal 5250 interactive features.

Moreover, the value of the software in the Enterprise Edition--WebSphere Express or WebSphere Application Server plus DB2 Query, Data Propagator, DB2 SMP, DB2 Extenders, Performance Tools, HA Switchable Resources, Tivoli Storage Manager, Lotus Sametime, Lotus Quickplace, Backup Media and Recovery Services, and Media and Storage Extensions--is significant. I have not added this information to my tables, but on a 3-way Model 825 configured with WebSphere Express, the value of this supplemental stack of software that rides on top of OS/400 and DB2 is $107,280; with WebSphere Application server on each processor, the value is $128,133. On an 8-way Model 870, the Enterprise Edition stack plus WebSphere Express is valued at $173,090, and with WebSphere Application Server, it's worth $228,698. On the 16-way version of the Model 890, the Enterprise Edition stack with WebSphere Express was priced at $253,456 prior to this announcement, and with WebSphere proper, the stack cost $364,672. And finally, on a 24-way Model 890, the WebSphere Express variant of the Enterprise Edition stack was valued at $290,256 and the WebSphere proper stack was valued at $457,080. To be sure, IBM is charging a premium to get 5250 OLTP capacity. But it is giving back to the customers as well with this software stack. IBM's no fool. By making this software a part of the stack, it will drive up the usage of these components. This will not make some tool makers (ISVs), who offer products that compete against the components in this Enterprise Edition stack, very happy. IBM is clearly trying to offset the price cuts by driving up software sales and software usage. Getting a single stack out there also simplifies the tech support headaches IBM has, since all new iSeries customers who use 5250 applications (excepting those who buy the entry Model 800) will have exactly the same software.

So has the price of 5250 interactive capacity, which has been fairly constant for five years, come down, and if so, by how much? That's hard to say, but I've never been afraid to dice and slice things. If you want to be generous, you subtract the difference between a Standard Edition and Enterprise Edition of the new iSeries line, take out the value of the Enterprise Edition software stack, and the remaining money is the value of full interactive capacity on the machine. If you think that IBM is ramming software down your throat, you subtract the two and ignore the value of the Enterprise Edition software stack and that is the cost of full 5250 processing capacity. When you do all of the math, and you are generous to IBM in your calculations, the cost of that 5250 OLTP capacity ranges from $34 to $40 per CPW 5250 on the base 3-way Model 825 (depending on the WebSphere option selected), from $61 to $66 per CPW 5250 on the base 8-way Model 870, from $35 to $41 per CPW 5250 on the base 16-way Model 890, and from $22 to $28 per CPW on the base 24-way Model 890. If you don't want to be generous and consider the imposition of the software stack in the Enterprise Edition as a necessary evil, then the value of the 5250 OLTP capacity is $69 per CPW on the 3-way Model 825, $81 per CPW for the 8-way Model 870, $54 per CPW on the 16-way Model 890, and $38 per CPW on the 24-way Model 890.

I'm fairly well known as a cynic about computer makers, but these are dramatic price cuts on 5250 processing capacity, even if you aren't being generous to IBM's marketeers. Let's do some more math. A four-way Model 820-2349 with a total of 4200 raw CPWs of processing power costs $335,000 with 70 CPWs of 5250 processing capacity activated and $1,359,000 with 2,000 CPWs of 5250 capacity activated. So adding that incremental 1,930 CPWs of 5250 capacity cost $1,024,000, or about $531 per CPW 5250. That's almost five times more costly than on the new Model 825, and using the least generous comparison. Similarly, jumping from minimum to maximum 5250 capacity on a 12-way Model 840-2353 costs $246 per CPW, on a 16-way Model 890 it costs $226 per CPW, and on a 24-way Model 890 it costs $215 per CPW.

IBM is not giving away 5250 processing capacity, to be sure. But compared to the exorbitant (some might have said ridiculous) pricing IBM has been charging for 5250 interactive features in the past few years, this will sure feel like it to a lot of customers.

Another significant facet of the price changes is that IBM has downshifted the software tiers for machines of a given power class with the new iSeries line. Dropping customers from a P50 to P30 tier or a P10 tier down to P05 is going to save companies buying third-party software a lot of dough. How external software vendors are going to cope with customers who are essentially downgrading their software tiers as they upgrade from AS/400 or first-generation iSeries to second-generation iSeries machines remains to be seen. They are not going to be inclined to give rebates--that is for sure. These lower tiers make the machine much more attractive to new customers, which is why IBM did it.

I'm not going to walk you though the 2002 iSeries versus 2003 iSeries table case by case. The table shows that pricing on the new entry iSeries servers (not base machines as in the comparisons above, but configured machines) is consistent with the Model 270 Green Streak deal, with the Model 800 Advanced Edition being about 3 percent more expensive. On the Model 810, pricing is even lower than the Model 820 Green Streak machine for an equivalent amount of raw power and full 5250 OLTP capacity. The Model 810 is about 24 percent less expensive at street prices than the Model 820 Green Streak machine. Pricing on the new Model 825 is about the same compared to the old Model 830 for a configured machine, with an effective 25 percent discount. A configured new Model 870 server is about 12 percent less costly than a configured old Model 840 of equivalent power, and a new Model 890 server is about 18 percent less costly than last year's Model 890. None of these comparisons take into account the value of the Enterprise Edition software stack or any other freebies that IBM is tossing in, like Integrated xSeries Adapters, services vouchers, or education vouchers.

The reason these price cuts are now more dramatic is that IBM has not cut memory or disk prices by anywhere near the amount it has slashed processor and 5250 interactive capacity prices. Memory and storage often account for 50 to 75 percent of the cost of a machine, so this money adds up. IBM says when the new iSeries machines start shipping (the date has changed from February 17 to February 21), it will cut memory prices on these boxes by 10 percent. One of the reasons why IBM didn't cut memory prices further is because customers who might have, for instance, bought a Model 820 with memory that cost $8 per MB prior to the 10 percent price cut will now buy a Model 810, which will have memory that costs $3.15 per MB after the 10 percent price cut. By IBM's reckoning, it has cut entry 512 MB and 1 GB memory card prices by 21 percent in the past 12 months (after the latest 10 percent cut), midrange 512 MB and 1 GB memory prices by 28 percent, and high-end memory of all capacities by 33 percent. As I explained in my iDeal iSeries stories, the pricing on iSeries memory was about 50 percent higher than on the pSeries, and the pSeries was considerably higher than what IBM charges on its top-end xSeries 440. It is my suspicion that clone memory cards made for the pSeries line could easily be re-engineered for the iSeries line (there are multiple suppliers), and if IBM keeps iSeries and pSeries memory prices high, it will foster a clone iSeries and pSeries memory market. Big Blue seems content to wait until that happens to cut prices, and when and if it does happen, it will lower the boom on these clone suppliers in a good, old-fashioned capitalist way that would make Tom Watson, IBM's founder, proud. IBM says further that the price of 18 GB 10K RPM disk drives wil remain at $1,400 a pop, but it is cutting the price on its 35 GB 10K RPM disk drives by 20 percent to $1,960. Pricing on the new PCI-X disk features that we outlined in last Monday's issue was not available as we went to press. Hopefully, I will have them next week.

One last thing. On Model 825, 870, and 890 machines, IBM includes the cost of processor activation and OS/400 licenses for the base number of processors in those machines. As supplemental processors are activated under the Capacity Upgrade on Demand utility computing scheme IBM has implemented on the new iSeries, there will be a processor activation fee that varies by machine plus an OS/400 activation fee, if customers put OS/400 on that processor. An OS/400 license costs $30,000 per processor across all of these CUoD machines, which is simple enough. The permanent processor activation fee on the Model 825 is $20,000 per processor; on the Model 870, it is $25,000 per processor; and on the Model 890, it is $30,000 per processor. Pricing for temporary processor activation assumes that a processor is worth 45 days of processing, so if you think you will use a processor for more than 45 days a year, just buy it. (That works out to $1,100 per day, $1,200 per day, and $1,300 per day on the Model 825, Model 870, and Model 890 machines, respectively.) If customers want to run Linux on an activated processor, they just pay IBM the processor activation fee and then negotiate a Linux license from one of the third-party commercial Linux distributors.

So, in sum: IBM actually cut prices. I'll be damned. Especially if these new iSeries machines don't sell.