Recession Alert: IBM Gooses System i Maintenance Prices

Published: March 24, 2008

by Timothy Prickett Morgan

Well, IBM doesn't do it very often, but last week it raised the monthly and annual maintenance on AS/400 and iSeries servers and related auxiliary expansion boxes and peripherals associated with the vintage OS/400 servers that populate its vast installed base. The OS/400 server platforms out there in the world were not the only machines affected. Vintage RS/6000 and pSeries, System/390 and zSeries, and other Netfinity and xSeries platforms also had increased maintenance charges. So did various older models of IBM's tape and disk products.

If you want to check your own product numbers against those IBM raised maintenance fees on, you need to consult two documents. Changes to Enterprise Service Agreement (ESA) onsite, 24x7 support were outlined in this announcement letter, while changes in Minimum Monthly Maintenance Charge (MMMC) 24x7 and IBM onsite repair maintenance fees were detailed in this separate announcement letter.

As IBM has traditionally done for as long as many of us can remember, the price increases were announced three months before they are to take effect; in this case that means maintenance prices go up on July 18. However, warranty upgrade prices are increased effective March 18.

Considering the wobbly state of the economy in the United States and the very likely spread of a slowdown in spending in general and IT spending in particular in Western Europe and even--yes, even, since no one is immune from an economic slowdown--the Asia/Pacific region, the price increases that IBM has instituted for the AS/400 and iSeries line are pretty modest. As you can see from the table that I built that cherry picks the AS/400 and iSeries products from the entirety of IBM's maintenance price increases, the hikes are right around 5 percent for systems and range from 5 percent to 9.5 percent on processor feature cards and other features that have their own maintenance fees within these systems. Averaged out across all systems, the price increase for the AS/400 and iSeries systems amounts to 5.1 percent, and this will help bolster IBM's vast Global Services behemoth, which accounts for more than half of Big Blue's overall sales these days. The price increases are in effect for various 9401, 9402, 9404, and 9406 class AS/400 machines, and reach as far back as the E series AS/400s from 1992 to the 7XX class AS/400e machines from 1999. That means monthly and annual maintenance prices also increased by around 5 percent on AS/400 F, 3XX, 4XX, 5XX, and 6XX series machines; prices also went up on the SXX mixed-mode AS/400 application servers. (Remember those?)

It is hard to say how much extra money this will generate for IBM, since the company doesn't break out maintenance fees by product platform. Back in 1993, when IBM got an estimated $12.5 billion from the AS/400 installed base (including systems, software, services, external and internal disk arrays, other gear, and maintenance on the systems, not including about $1.5 billion in PC and CRT sales), about $3.6 billion of that (about 29 percent) came from maintenance fees. By 2004, I reckoned in the OS/400 ecosystem series I published in 2005 that IBM's iSeries-related sales were about $4.5 billion to $5 billion, with between $1.2 billion and $1.44 billion coming from system maintenance. IBM used to charge a lot more for maintenance, and there used to be a much larger base of System/3X gear and AS/400 gear kicking in maintenance. It is probably a safe bet that maintenance fees coming in from AS/400, iSeries, and System i shops are probably generating about $1 billion in revenues annually, and most of that is on older gear. If every machine was hit by the maintenance increase, it would work out to $50 million in extra cash. Across all IBM's vintage servers, it is going to be a much bigger number, of course. In the final quarter of 2007, maintenance services for hardware and software accounted for 12 percent of Global Services' $10 billion in sales, or about $1.2 billion. What that means is two things. The OS/400 and i5/OS platforms account for roughly a quarter of the maintenance dough that IBM brings in (provided the other three quarters of maintenance revenues were similar), which is not surprising considering there are probably 400,000 to 500,000 AS/400, iSeries, and System i machines out there and maybe 200,000 customers (not all of whom pay for maintenance, of course). It also means that IBM's maintenance revenues overall are growing faster than the price hike the company just instituted for selected vintage servers last week. That in turn suggests to me that some companies are opting out of maintenance on older gear, willing to buy spare machines on the cheap instead, perhaps, and that those who are still paying maintenance and who want IBM to hold their hand are being asked to pay more.

What is surprising to me is that the price is not higher. As we reported a year ago, IBM raised maintenance prices on various expansion boxes and peripherals last March--but not on the servers themselves--by an average of 37.6 percent, with some increases in the triple digits. In February 2006, when Global Services was in the midst of a restructuring after disappointing Wall Street, IBM raised maintenance on iSeries servers and various expansion boxes by between 17 percent and 19 percent. Vintage AS/400s saw a roughly 9 percent increase in April 2006 in maintenance fees (the same machines that saw price increases last week, specifically). As was the case last time, the first and second generations of iSeries machines as well as System i machines did not see price hikes on maintenance. But I would not be surprised to see iSeries 8XX models get a maintenance price increase sometime this year if IBM wants to encourage people to do a push-pull upgrade to a new System i. Why IBM didn't do this last week is a bit of a mystery, in fact. But maybe IBM is trying to maximize the number of people who pay maintenance and get a little bit more out of them, and if it raises prices too high, maybe it knows it will lose more money than it gains as customers figure out other ways to maintain their gear, such as keeping spare boxes around.

The last time system maintenance fees rose by such a modest amount was in March 2003, when IBM boosted prices across the board on AS/400 B, C, D, E, F, CISC AS (2XX and 3XX), first generation RISC AS (4XX and 5XX), AS/400e SXX and 6XX, and AS/400 7XX machines by 5 to 6 percent. Vintage AS/400s also saw maintenance prices increase by 9 percent in 1999, and in April 1996, IBM raised maintenance fees on System/36 gear by 15 percent and on vintage AS/400 gear by 9 to 13 percent.

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