But Wait, There's More

IBM Cuts iSeries On-Demand Feature Prices Dramatically
by Timothy Prickett Morgan

IBM last week cut some iSeries feature prices dramatically, making the box more attractive for certain uses, under specific conditions. Big Blue's feature-number schemes for base servers, processors, and OS/400 interactive features make it tough to sort out where prices have been cut, however.

After consulting the IBM sales manuals and price lists, here is what I surmised. First, IBM has cut the cost of its temporary capacity on demand in half. When the revamped iSeries line was announced a year ago, IBM allowed customers to switch on iSeries capacity in the Model 825, Model 870, and Model 890 servers at a daily rate that was approximately equal to the cost of a processor divided by 45 days. That worked out to $1,100 for a Power4 processor in a Model 825, $1,200 for a processor in a Model 870, and $1,300 for a processor in a Model 890. That activation fee included activation for the processor and for the OS/400 license to run on it. As of last week, IBM is charging half that daily rate, or $550 per CPU per day, on the Model 825, $600 per CPU per day for the Model 870, and $650 per CPU per day for the Model 890. This will make temporary capacity activation on these high-end iSeries boxes a lot more appealing. But the question remains if these price cuts will be enough. Assuming that the cost of a processor is amortized over three years (which is the economic life of a computer), an iSeries processor activation should cost around $50 per day in this power class of machines. IBM is still off by more than an order of magnitude. And even if you assume that an iSeries loses all of its value in one year, processor activation is still, after these price cuts, several times more expensive than you'd expect, based on the actual cost of the machines. By the way, the pSeries machines use the 45-day rule to come up with temporary capacity on demand, so this is not a policy that IBM set to extract money only from iSeries customers.

IBM has also cut the prices it is charging for customers who want to prepay for future iSeries processor activation in the new iSeries line for the Model 825, Model 870, and Model 890 servers. IBM announced the prepaid on/off capacity-on-demand processor features for the iSeries in May. It works like a debit card, and at the time it had a price per processor that was 25 percent lower than with the post-pay temporary-capacity-on-demand offering, and it offers the use of a processor for a total of 30 days. After the 33 percent price cut IBM announced last week, 30 days of processor use on a Model 825 costs $16,500, on a Model 870 it costs $18,000, and on a Model 890 it costs $19,500. This is, by the way, the same daily rate IBM is charging for temporary capacity on demand. Prepaying officially does not include a 25 percent discount any more, but a smart shopper will insist on it, since IBM set the precedent.

While I welcome price cuts that move capacity-on-demand pricing closer to its real value, based on the actual acquisition costs of iSeries iron, I am a little concerned about the disparity between rental and buy prices for capacity. This was one of the sticking points that lead to an antitrust lawsuit against IBM in the era of tabulation equipment in the 1950s. Back then, IBM customers could only rent gear; they could not buy it. This gave IBM great power, which it abused and which caused the company to settle the lawsuit and provide list prices for equipment that bore some resemblance to the rental prices so customers could decide for themselves if they wanted to rent or buy. (Fair acquisition prices for computing gear as electronic computers came of age is what fostered both the outsourcing business and the leasing business.) If "on demand" takes off as a concept, it may take another lawsuit to compel IBM to make its rental prices for server capacity bear some resemblance to their acquisition costs. If I know one thing, customers would much rather rent a machine and pay only for the capacity they use. They don't want to buy excess capacity, and they only do so because computers have until now been engineered in a way that requires it. If IBM really wants on demand to take off, all it need do is make the prices for renting capacity have a slight but fair premium compared with acquiring the whole machine. AS/400 customers would line up from the Rochester factory parking lot all the way to Minneapolis to get a deal like that, and IBM would have an absolutely huge OS/400 processor rental base. IBM has to rent the whole machine, of course--not just the extra processors in the box--to make such a deal work. I don't want to own any of it, no more than I want to own my set-top box for cable television.

Other interesting price cuts from last week. IBM chopped the price of the Model 870's OS/400 Enterprise Edition software by 10 percent, to $930,000, on the 8/16-way version of the machine (feature 7421) and cut the price of the software by 28 percent, to $520,000, on the 5/8-way version (feature 7422) of this server.

IBM also cut the prices of OS/400 for the iSeries for high availability servers that are based on this Model 870 server by a similar amount. The Model 870 high availability server in a 5/8-way configuration (feature 7435) now costs $320,000, down 24 percent, while the 8/16-way's license fee is now $530,000, down 9 percent.

Eclipse Development Tool Consortium Breaks Free from IBM

Sometimes, you have to let go of a standard you are championing so it can actually become a standard. This is a hard lesson to learn, but kudos to IBM for getting it right with the Eclipse open-source development tool.

IBM funded the Eclipse consortium and its open-source development tool project two years ago with a $40 million grant. Its mission has been to create a single, Java-based toolkit framework that would allow different brands of development tools to snap into that framework. The idea is to standardize tools so programmer can work with tools in a consistent way that allows them to make use of their existing skills (to a certain extent) as they use new tools. This is analogous to operating system windowing environments that have similar functions and feel, even though they are implemented differently and have different features. Windows, Linux, and Mac OS X look a lot more alike than they might otherwise, and this helps users make use of different machines more easily, and it helps application developers more easily create programs for different platforms.

Last week, the Eclipse consortium was reorganized into a nonprofit corporation that is completely independent from IBM. This stands in contrast with the just-announced Java Tools Community, launched in early January by a group of software tools and middleware makers led by Sun Microsystems, the creator of the Java programming language. Both Eclipse and the Sun-backed NetBeans project are trying to deliver open-source integrated development environments for Java coders. Now that IBM is no longer in control of Eclipse, you might think there is a possibility that these four organizations could somehow get it together and create one independent body that controls Java and Java-related tool standards. Don't hold your breath.

History shows that when the IT industry divides into two camps with similar-sized armies on both sides, someone shoots the gap and fills it with an alternative product or approach. To a certain extent, the advent of Linux is the direct result of futile battles (some might say feudal) in the 1990s between Unix International, which was backed by Sun and AT&T, and the Open Software Foundation, backed by Hewlett-Packard, IBM, Digital, and others. Unix International and Open Software Foundation were both trying to jockey for the power to create a Unix standard, and in the meantime, Linux and Windows emerged as cross-hardware alternatives. Windows has curtailed its ambitions to be on X86, Power, Alpha, and MIPS processors and has stuck with only the X86 platform, while Linux has emerged as the true cross-hardware platform. The lack of cooperation among IT players boomerangs at funny angles. In any event, Eclipse has four major open source projects under way, with 19 subprojects, and claims to have logged 18 million product downloads in two years. Those are big numbers.

Oracle Ups Its Bid for PeopleSoft to $9.4 Billion

Database maker and application software provider Oracle last week upped its hostile takeover offer for PeopleSoft by a third, to an all-cash offer of $9.4 billion. The increased bid offers a considerable boost of 62.5 percent over Oracle's initial offer for PeopleSoft of $16 per share.

With the new offer, Oracle can finally be said to be making a credible offer to acquire PeopleSoft, which started the shenanigans between the two application software powerhouses when it paid $2 billion to acquire smaller rival JD Edwards last year. At press time last week, PeopleSoft's shares were trading at around $23 a share, giving the combined PeopleSoft-JDE company a market capitalization of $8.1 billion against expected sales of around $2.9 billion. If this seems like a ridiculous valuation, try Oracle: It will have sales in the range of $9.5 billion in calendar 2004, and it has a market cap of a whopping $72.5 billion.

Oracle's sweetened offer more than compensates for the addition of JDE to PeopleSoft. The fact that Oracle founder Larry Ellison has removed himself from the CEO position at the company to become chairman also gives the top brass at PeopleSoft--namely, founder Dave Duffield--a potential position in a merged Oracle-PeopleSoft company. Oracle looks serious this time, a fact that might be compelled by antitrust investigations by government authorities in the United States and Europe.

What effect any Oracle acquisition might mean on the OS/400 server business is unclear. But the market math is pretty clear. JDE accounted for under $1 billion in sales, and roughly half of that is probably from new sales of software on the iSeries and maintenance of a huge installed base on OS/400 servers; the remaining money came from sales of software on Windows and Unix servers and support for those platforms. The OS/400 platform, then, probably comprises from 15 to 20 percent of PeopleSoft's total sales right now. If you throw Oracle and PeopleSoft together, the OS/400 platform would make up about 3 to 5 percent of those combined companies' total sales. It is hard to imagine OS/400 being given a high priority.

Inter-American Data Acquired by Agilysys

The hotel and casino business is one of the niche markets where the IBM midrange platform has always shined. One of the bigger players in this market, which sells hotel, casino, and property management systems, is Inter-American Data, which hails from the OS/400 application hotbed town of Atlanta. Last week, Agilysys, a $1 billion reseller of IT products from IBM and Hewlett-Packard, acquired privately held Inter-American Data for $36.5 million in cash.

This seems like something of a discount price, compared with the $40 million in revenues that Inter-American Data booked in 2003, which also saw Inter-American Data deliver 10 percent operating margins on those sales. But even in growing markets like the hospitality business, IT shops are hesitant to make big investments right now. With Agilysys behind it, Inter-American Data will have access to a much wider channel to push its products; with Inter-American Data, Agilysys gets a profitable company that has software and services revenues, an installed base that upgrades, and a new product to push to customers to further boost sales of Inter-American Data products.

Agilysys is based in Cleveland, Ohio, and used to be known under a different name: Pioneer-Standard. The company is one of the largest distributors of IT products in the world, and competes against Arrow Electronics and Avnet. These three companies all beginning with A are the master distributors for the iSeries.

Red Hat Launches Server Provisioning Service

Commercial Linux distributor Red Hat has announced that it will be offering a remote Linux server provisioning service, which it calls Software Provisioning, through its Red Hat Network support mechanism. The offering will be made available to all Linux customers, including iSeries customers who opt for Red Hat's Linux for their logical partitions.

For a few hundred dollars per year per server, system administrators will be able to install and provision Enterprise Linux on servers using Red Hat's own network. Red Hat also supplies a carbon-copy of Red Hat Network for customers who want to store it locally for $26,500. The Linux provisioning features of Red Hat Network have APIs that will allow other systems management and provisioning tools to hook into it, too.

Red Hat Network, which has been available since 2000, already included an update module that provides errata reporting and can automatically patch single desktops or servers. A management module to the service was aimed at commercial customers who want to group systems together as a single management group (such as in a cluster of Linux boxes that all have essentially the same configuration) and who want to have role-based access to policies, access, and job schedules for a single administrator of the group. The new provisioning module of Red Hat Network, being used by RackSpace, a Linux-based hosting service to manage its 5,000 servers, can provision and reprovision servers and roll them back to stable states if something goes wrong. Applications can be provisioned onto the Red Hat instances, too.

IBM to Push Linux As Upgrade for Two Million Windows NT Servers

Microsoft stopped selling Windows NT 4.0 Server in July 2002, but some two million servers are still out there plugging along in the X86 installed base running that very popular implementation of the Windows platform. After December 31, 2004, non-security patches will are no longer available for Windows NT server, and a year later, per-incident, premier support services, and online support (including security-related fixes) will no longer be available for the server version of Windows NT 4. This, IBM thinks, is a big opportunity to drive Linux sales.

To that end, Big Blue has announced that it will be gearing up its vast 90,000-strong partner channel to sell products and services to help Windows NT Server customers to move to Linux on its own xSeries iron. Right now, IBM is focusing its efforts on teaching its partners how to do Windows-to-Linux, SQL Server-to-DB2, and Exchange-to-Domino migrations. IBM is preparing a set of marketing programs called MigrateNow for partners, but has not detailed the specific incentives it will give to either partners or their customers as they consider the jump to Linux from Windows.

It is hard to say how many of those Windows NT servers are really in play. For small and midsized businesses that have more or less grown up with Windows as their major computing platform, Linux is about as attractive to them as Unix was--meaning not much. If Microsoft alienates these customers with high software and services costs, they will train themselves and make the jump, but if the pricing isn't too exorbitant, they will move to Windows 2000 or Windows 2003. Very large organizations with big racks of Windows NT machines in their data centers or single units spread out across their departments are ripe for the picking, however. These companies have Unix skills and can hire cheap Linux skills, and making such a jump is not that big of a deal--particularly for print, file, Web, and e-mail serving.

Whatever IBM does, you can expect that the running of Linux inside logical partitions on its zSeries mainframes and pSeries and iSeries midrange boxes will be a big part of the deal. IBM will, of course, push Linux on its BladeCenter blade servers and its xSeries tower and rack servers, too.

It is hard to reckon how many Windows NT servers are installed at OS/400 shops, but here's a good guess: There are about 225,000 shops, with an average of just over two OS/400 servers per site. About 85 percent of those OS/400 shops run Windows in one flavor or another on their servers, and they probably have at least three to five Windows servers, on average, per site. (Many companies have one or two, some companies have hundreds.) Windows NT represents about 25 percent of the overall Windows server installed base. When you do the math, that works out to between 575,000 and 950,000 Windows servers at OS/400 shops with approximately 145,000 to 235,000 of them running Windows NT. These are big numbers.

Get the Latest OS/400 PTF Guide

Our partner DLB Associates has been keeping track of IBM's PTF updates to OS/400 and its related programs. Here are the latest OS/400 PTF Guides:

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