Used OS/400 Software a Small But Growing Market

by Alex Woodie

You probably knew that you could buy and sell used AS/400 and iSeries hardware. But did you know that you can also buy and sell used IBM OS/400 software too? If you weren't aware of this, you're not alone. According to Software Clearinghouse, the only pure-play broker of pre-owned OS/400 software, nine out of ten iSeries professionals mistakenly think only the hardware is transferable. However, changes IBM made to licensing agreements with i5/OS will soon put a damper on this small, but growing, market.

Software Clearinghouse is in a business category all its own. The Lexington, Kentucky, business was founded by Michael Hardy and his partners in late 2001. It opened up for business in early 2002 as the only company that buys and sells OS/400 software, and it keeps inventory (in the form of license keys and proofs of entitlement) on hand. Several other companies also stock inventory of OS/400 software, but these shops focus mostly on selling used AS/400 and iSeries hardware, which makes Software Clearinghouse the only company specializing in this small and unique segment of the market.

Since most iSeries professionals don't know about the possibilities of buying or selling used OS/400 software, Hardy decided to set up a booth at the COMMON conference in Chicago a couple of weeks ago and take his message straight to the people. Educating people about this, Hardy discovered, is difficult work. "More than 90 percent of the people who came by the booth had no idea that software could even be transferred," Hardy says. "If they have the proper documentation, that software has value."

OS/400 software had been non-transferable for many years, but IBM changed that policy in 1999 to allow OS/400 software to be bought and sold, Hardy says. Of course, only individuals who actually read their 40-page license agreements would have discovered this change, in small print, way in the very back. But it is legal and official now, and Rochester will even (grudgingly) help you obtain used software and sort out ownership issues, particularly if you're paid up on Software Maintenance.

Buying Used OS/400 Software

So who buys used OS/400 software? There are actually several situations where the availability of older versions of software can be a lifesaver for companies, particularly if they've gotten behind on their hardware or operating system upgrades and are not current on Software Maintenance (and therefore don't expect any help from Rochester).

"We have customers who can't buy OS/400 V4R5 or V5R1 from IBM anymore. They're stuck on a back release, or their vendor doesn't support the new release," Hardy says. "Or there are situations where a business partner might have loaded a program, and they thought they owned the license, but they did not, and the customer is faced with a very large bill they were not expecting. Those are our three largest drivers of people buying software. The fourth is customers adding used systems they buy from IBM Global Financing."

Software Clearinghouse's most popular products are WebSphere Development Studio, Client Access, and BRMS, the backup and recovery utility. Other OS/400 products the company commonly has on hand are Query/400, DB2 SQL Query Manager, RPG and COBOL compilers, and MQ Series Integrator. Software Clearinghouse also sells licenses for HACMP, the AIX high availability product. But most of its business is in OS/400 software, Hardy says.

Buyers must be very specific about the OS/400 release and the hardware tier they're in, but despite these hurdles, Software Clearinghouse satisfies the requests of its clients from about one-third to one-half of the time, Hardy says. Most deals are for two or three software seats at a time, and are sold through business partners. Software Clearinghouse moved a few hundred seats in 2004, Hardy says. It's not a big business, but it is growing.

The savings for used software buyers can be quite high. The clearinghouse sells a bundle of the five most popular tools--WebSphere Development Studio, Client Access, Query/400, DB2 SQL Query Manager, the Performance Tools, and BRMS--for around $25,000 for a P20 box (depending of course on the going market rate). Buying this software new from IBM would set a customer back about $65,000. The savings routinely average more than 50 percent compared to full retail price, Hardy says.

Selling Used OS/400 Software

Companies can also make a nice little pile of cash selling their own OS/400-based software, a fact that Hardy is very interested in circulating as widely as possible. While the opportunity is much less for sellers (say around 10 percent of the value of the software when it was new, although that figure, of course, is market driven and will vary daily), that's money most companies don't even realize is on the table, if they know where to look. "The value is in buying. You're not going get rich selling software," Hardy says. "But most people don't realize there's any value, so any value they get out of it" is pure gravy.

Server consolidation and the migration to LPAR systems is--by far--the number one driver of sales of used OS/400 software to the Clearinghouse, Hardy says. "They end up with what I call 'shelfware.' They forget they're going to have it consolidated, and it evaporates into thin air over time," he says.

The real value of used OS/400 software is not the CD the programs sit on. Every iSeries ships with a set of CDs that hold the full array of system software. It's the license keys and proof of entitlements that hold the value, and this is what Software Clearinghouse deals in. Unfortunately, these valuable papers often end up in the trash can.

"Most of the time, that documentation gets thrown away," Hardy says. "Some end users don't recognize that's the entitlement for their software. It comes in a large box with other manuals. Without that documentation, you can't sell it. IBM won't replace that documentation. If you upgrade, they'll give you new documentation," but only if you're on maintenance.

i5/OS Ends Used Software Opportunity

Now that you know about the market opportunity for used software and the tremendous wealth of OS/400 software lying in landfills across the world, you may be disappointed to learn that the window of opportunity for used software is closing. IBM changed course last year and, with i5/OS V5R3, software licenses are no longer transferable. So once you upgrade to V5R3, you give up the right to sell the software. While this leaves a fertile market for V5R1 and V5R2 products, it's a shrinking opportunity.

"The whole game ends with V5R3," Hardy says. "IBM recognized this was growing fairly quickly, and changed the terms and conditions. It's been a year since V5R3 came out, and business has been up 40 percent since then. What's going to go down is the supply. The demand won't ever go down, the problem is going to be the supply."

Despite the limited lifespan of this business, don't expect to see a raft of used OS/400 software brokers coming down this river. It takes a while to make the right connections with Rochester's asset management team, and get everything squared away to make the process as smooth as possible for the customer. "There are a lot of hoops to jump through, and you have to know the ropes," Hardy says. "IBM isn't making the hoops any easier to jump through. They're making them smaller, and they're lighting them on fire."