How Low Can You Go?
Published: January 30, 2006
by Timothy Prickett Morgan
We are at the dawn before IBM does yet another rejiggering and possibly a revamping of the OS/400 platform. That makes this a good time to reflect on where the AS/400 started out, where the iSeries has been, and where the i5 is going. Like most of you, I am concerned with the competitive positioning, in terms of feeds and speeds and prices, of the i5 platform; and also like you, I want the OS/400 ecosystem to expand, diversify, and thrive.
To do that, the i5 has to either buck some pretty strong trends or learn how to better surf on them. To IBM's credit, it has done an excellent job keeping the underlying hardware and software technology of the i5 system relevant to modern small and medium business; IBM has done a particularly good job creating systems for larger enterprises that have based all or part of their data processing on the OS/400 platform. The Power4 and Power5 platforms are second to none in performance, as I have shown in numerous articles over the past several years. But high performance, as much as we all love it, is not everything. As far as I can tell, even with the i5 launches in 2004, which spanned from May to August, and some tweaking in 2005 to adjust features and price/performance, the i5 platform is often a laggard when it comes to price/performance in the entry and midrange server market that is dominated by Windows, Unix, and Linux systems today. I took no great pleasure in doing the price/performance analysis in 2004 and 2005 that showed this. It's not a lot of fun to point out the flaws in iSeries pricing. But we all need to do this if we are ever to get IBM to change its ways, and I am hopeful that IBM has heard to calls for a more competitive entry i5 product line in 2006.
The advent of inexpensive dual-core processors in the X64 server market will, I think, make IBM change the way it is pricing the i5. There's no way that IBM can treat the hardware and software on each Power5 core as a whole processor when the rest of the entry and midrange server business is going agnostic about cores and is focusing on sockets. While IBM tried to set the pace with its zSeries, iSeries, and pSeries products for the past five years, counting each processor core as if it were a whole processor and charging for processor activations and systems software accordingly, the server industry is heading in the other direction. For dual-core processors at least, other operating system and middleware players--including IBM's own Software Group when talking about X64 machines--is pricing for software at the socket, not the core, level. This has the effect of cutting the price of systems and application software in half. (Well, if you want to be precise, moving from a single-core to a dual-core chip in the X64 architecture only gets you about 40 percent more performance, so it is more like a 40 percent discount if you gauge pricing against performance.)
The reasoning behind this core agnosticism is that no one can crank up clock speeds to boost performance any more because of thermal issues, and so, the thinking goes, counting processing elements is no longer a fair way to reckon either the cost of a processor or the software that runs on it. Chip makers like Intel, AMD, and Sun Microsystems want to price based on the socket because it is easier, it is practical, and it caused companies that price by the core competitive grief. There's no right or wrong here, of course. Each core in a processor socket can be isolated from the others and can run distinct software in most virtualized server architectures today, so you could make the argument the other way just as easily--as IBM continues to do for its iSeries, pSeries, and zSeries products, which have all been based on dual-core designs since 2001.
This is just one of the issues that the modified i5 line is going to have to contend with, of course. Perhaps bigger issues, and ones that IBM has been hesitant to address, are the factors that high volume sales and aggressive pricing has had on the server business in the past decade. The fact that the i5 line is based on a relatively low volume processor--no matter how good it is--and is manufactured in such low numbers gives it a distinct disadvantage in the insanely competitive server market.
Let's look at some pretty pictures so you can see the pressure the i5, and indeed all servers, are under.
First, let's look at server volumes and server prices over time. The analysts at IDC cooked up the chart below, which shows server volumes over time and the average server value (ASV) of the servers sold from 1996 through 2004 and projecting out from 2005 through 2008. (This data was published in August 2005.)
Figure 1: Server Shipments and Average Server Values. Source: IDC
As you can see from the chart, server volumes were a piddling 2 million units in 1996, and the ASV was north of $35,000 per unit. Why is that? Well, this was the heyday of the Unix market, and even if Unix volumes were low compared to X86 servers, Unix machines cost big bucks because of their reliability and scalability, which drove up ASVs. Also, IBM's mainframes and AS/400s were still going strong in 1996 (relatively speaking, of course), and Digital Equipment, Hewlett-Packard, and a few others were still selling lots of proprietary minicomputers and mainframes. Relentless competition in the Unix space during the dot-com, ERP, and Y2K booms of the late 1990s nearly doubled server volumes, and server makers started grabbing features from high-end machines and throwing them into midrange gear and putting midrange features into entry gear in an effort to keep selling prices from falling. This strategy propped up server ASVs, of course, but it had the long-term effect of erasing some of the distinctions between server classes. This phenomenon has happened many times in the past several decades of the system and server business, and it will keep on happening.
When the worldwide economy tanked in 2000, server volumes declined in 2001 and barely rose in 2002, and those vendors that could shifted their emphasis to Windows and Linux products and tried to keep prices as high as possible on their Unix and proprietary boxes. They did this not because they disliked their Unix and proprietary customers, but because it was the only way to keep from going broke. Technology cycles are not driven by innovation as much as those in the IT industry like to believe. Plenty of good technologies and lots of bad ones are not adopted until there is massive--I would say tectonic--pressure to get off of a technology that is suddenly perceived of as being too expensive. Technological innovation is a necessary condition for change in the data center, but economic and cultural pressure is what usually makes it happen.
What I love about this IDC chart is the fact that projecting out to 2008, IDC slapped down a ruler and drew a nice straight line from 2002 through 2008 to reckon the server volumes, which the company predicts will more than double in that time. I don't know about you, but given server consolidation and virtualization, which are all the rage right now, I have a hard time believing server volumes will not hit a plateau--and soon. Once we all have a virtualized server, we are not going to add new footprints at the same rate. The rate will decline, in fact, because we will just activate processor cores that are probably already in the box. I agree that ASVs will not be able to fall much further than IDC shows--an average of $6,000 across all server types is way, way low by historical standards--but the implication of what I think about decreased server volumes is this: the aggregate revenues in the server business will fall, and fall fast. And when that happens, vendors will look around and re-architect their machines to a lot more features so they can prop up their ASVs and stay in business.
Figure 2: Performance of Servers on the TPC-C OLTP Benchmark, 1993-2005. Source: TPC
It is hard to imagine what server makers might chuck into the servers to make them worth the money they need to make their numbers. Performance has been the feature of choice since the dawn of the system business. You cut the price of a unit of performance, but you convince customers to buy a lot more, either by only offering processing capacity that comes in big chunks (as IBM did with the first-generation PowerPC machines back in 1995) or by moving new workloads onto the box (as IBM has done wonderfully with the zSeries mainframes in the past four years and is trying to do with the iSeries).
In the dash to hold up server ASVs that I think might be on the horizon, I believe that those companies with their own operating systems, middleware, management software, application software, and other gadgets are going to be sorely tempted to bundle more and more of these goodies into their offerings. This puts the iSeries line into a very good position except for two issues.
First, the iSeries is not a high-volume product, with maybe 20,000 to 30,000 units shipped in 2005 (I am trying to get a better idea of this number, and it could be higher). I have no idea what IBM's capacity is to make iSeries, pSeries, and OpenPower servers, but I would guess that IBM cannot boost volumes by the amount that will be necessary for it to go for a more high-volume, low-cost play. I happen to think it should do this, and that it should have done this in 1997, not 2006. Instead of architecting different processors for the servers, workstations, and game machines, IBM should have created an extensible, compatible chip architecture that allowed it to use the same processing elements in different ways. The Power architecture might have 25 to 30 percent of the server volumes today if that were the case. But, the X86 and X64 chips have over 90 percent share because Intel and AMD understand the volume play.
Figure 3: Bang for the Buck on the TPC-C OLTP Benchmark, 1993-2005. Source: TPC
The second problem the iSeries faces is that the vast majority--approaching 90 percent--of iSeries deals are done by resellers. This is great for IBM, which doesn't have to pay for a sales force. But these resellers are peddling a push product--you have to sell an iSeries, but you just take orders for a Windows box--and that takes time, money, and people. The price cuts in 2003 and 2004 that were necessary to keep the iSeries one step behind Windows and more or less at pace with the average Unix box have been devastating to the iSeries channel. Even IBM's "opportunity certification" scheme to keep resellers from undercutting each other to win a deal (and thereby boost their own and IBM's profits) is only a stop-gap measure. When and if IBM rejiggers the iSeries line, dropping prices, the pressure will be back on them again.
What all of this means is that the things IBM needs to do to make the i5 competitive will kill its channel unless it changes how the channel works and makes its money. The desire to protect the channel is what has kept IBM from changing the i5 as radically as many of us have wanted in the past decade. Still, IBM needs to find a way to go volume, to create a vibrant channel that makes money, and make it easier to sell an i5. IBM needs the i5 to meet and beat Windows and Linux, on their own terms and in their own value metrics, as well as being cooperative with Windows and Linux. While some companies will pay a premium for green-screen processing or the ability to run i5/OS, AIX, Linux, and Windows on a single server, the number of companies that do so are far too small and the resulting revenue stream is too small. The zSeries, pSeries, and xSeries server lines are all generating at least twice as much revenues as the iSeries.
It is time to change the game plan and to get creative. And, no, I do not get tired of saying that.