IBM Leaves iSeries Thin Client Biz, Third Parties Move In

by Dan Burger

Because of this intense margin pressure, IBM has outsourced its PC manufacturing, and if the pressure continues to increase, Big Blue may walk away from it entirely. That Dell and Compaq are interested in the thin client market at all is an indication of the weakness in the PC industry and their desire to find growth in other markets that resemble their core PC markets. IT industry forecasters predict that the thin client market will show growth in the neighborhood of 70 percent per year during the next several years. That's why Dell and Compaq are coming into this market. IBM, which has never been a low-cost manufacturer of anything, is leaving it because it cannot compete with these two companies, which push much higher volumes.

Thin client vendors say they are happy IBM has moved out of their neighborhood, and readily point toward a revitalized market. IBM's final 5250 terminal, the InfoWindow, is currently available only through authorized resellers, and only while supplies last. Resellers say the supply probably will not last beyond the end of April. According to IBM, it will continue to offer support for the machines, although the duration of that support has not been announced.

An estimated 10 percent of the IBM midrange and mainframe market continues to use twinax. And of those making the transition to Ethernet, many continue to use the dumb terminal for heads-down data entry. The replacement of dumb terminals is still a good business for many smaller vendors. But a bigger share of business belongs to the emulation terminals running Microsoft Windows CE, and migrating users in that direction is the most common trend in the IBM-hosted environments. Some vendors offer Linux-based thin clients as well, and they do so because Linux is cheaper--being essentially free--than Windows CE, and because it also has a groundswell of support because of the emergence of open source in the commercial IT market.

IBM has made terminals since there were mainframes and minicomputers, and it has been in the thin client business since 1996, when the AS/400 Division cut a reseller deal with Network Computing Devices, a maker of the X-terminals commonly used on Unix systems. Big Blue never seemed to get a good handle on the thin client business, even though it had, through NCD, a decent head start. The installed base was mostly built on the fact that the product said IBM on it, which was good enough for a lot of shops. Customer satisfaction was widely considered to be poor, and some of their needs, particularly among OS/400 shops, were not met. The software behind early AS/400 thin clients was complex on the server side and limited on the client side, even for simple 5250 terminal replacements. Some companies wanted to buy a machine that could replace a 5250 dumb terminal and at the same time give a limited amount of PC functionality for running, for example, rudimentary word processors. They wanted these and other features six years ago, and many of them are now finally available--just as PC prices have plummeted to make thin clients, in some respects, less attractive.

IBM has handed off its thin client business to Neoware Systems, a terminal and thin client vendor that used to be known as Human Design Systems. Neoware has a global presence, but it does not have a particularly strong reputation in the IBM-hosted midrange and mainframe markets, where things are a little more clubby. Neoware's reputation in the general purpose, emulator-based thin client market will, no doubt, carry some weight, but several of the smaller companies that have established themselves with terminal emulation suites for IBM hosts are in a more favorable position. At the top of these third-party vendors are companies like Affirmative Computer Products, Computer Lab International, and, to a lesser degree, companies like Decision Data's NLynx Systems and Praim.

With Big Blue pulling out, companies with a focus on IBM midrange and mainframe environments are anticipating healthy growth. Charles Winslow, president and CEO at Affirmative, says his company had an annual revenue increase of 75 percent in 2001, and so far in 2002 the revenues are running 80 percent higher than in the same months in 2001."Some very large companies that we had lost in the past to IBM are now coming back," Winslow says. "Originally they thought IBM had the staying power and a small company didn't, but we're still here."

Companies in the thin client arena are bullish on the future. It is generally believed thin clients will eventually take over a major share of the PC environment. "The overhead of a PC is astronomical," says Al Wilson, director of sales at Computer Lab International. Wilson says studies indicate that PC overhead is $4,000 per year, which includes the large staffs to maintain them and the costs of dealing with viruses and other security issues. "With thin client, you don't get any of that," Wilson says. "It comes with management software that allows constant upgrading, has no moving parts, and everything is coming through the server, which avoids viruses." Wilson says industry after industry is changing from PCs to thin clients. The larger the company, the larger the migration from PCs. "Look at what the Fortune 500 companies are doing," he says.

In the Neoware/IBM deal, announced in January, Neoware became "the preferred provider" of thin client appliance products to IBM and its customers. Neoware's thin client appliances are available through Options by IBM, IBM's premier third-party marketing and distribution program. IBM swapped thin client software technology as well as terminal emulation and systems management intellectual property in return for Neoware stock. The financial terms of the deal were not disclosed.

Howie Hunger, formerly the worldwide marketing manager for thin clients at IBM, and now in a similar role with Neoware, says IBM customers represent a very significant opportunity, in terms of growth and qualified leads, and in terms of selling software upgrades to the IBM install base. Sources at Neoware say the company intends to offer new thin client software for IBM's NetVista 2200, 2800, and N70 products. Neoware will also apparently unite a new version of its ezRemote Manager software with IBM's thin client management software.

Hunger developed the thin client strategy at IBM that continues at Neoware. That approach is to transition the underlying operating system on the thin clients from what had been called V2R1 to a Linux-based offering. At IBM, the focus was on porting the 5250 and 3270 emulators from V2R1 base to Linux. Customers were told that Linux was the sole path for transitioning. Neoware is continuing the implementation of those emulators on its Linux offering. "Users don't know it's Linux," Hunger says. "This is very much an appliance piece of hardware. It just happens to use Linux as an underlying operating system." Linux is one of the operating systems available for Neoware and other thin clients. The most popular environment right now is Windows CE implementation with Internet Explorer. Just about every thin client supplier uses the same chipset, but internal power supplies and other features differ and are generally used for differentiation.

The customer requirements for thin clients have changed over the years. Neoware's Hunger recalls that better than 60 percent of the thin clients IBM was selling in the 1996-1999 time frame were green-screen replacements. "A very high percentage of those devices, although they were doing emulation, were ordered by customers wanting to get at Windows applications. Those thin clients were providing access to multiuser Windows applications [through Citrix Systems' Metaframe and then later, Microsoft's Terminal Server]. What has changed, in the IBM marketplace, is an increasing number of customers want a browser in addition to emulation. From 1999 to the current time frame, it has gone--I am guessing--from a 20 percent rate of using a browser to a 40 percent to 50 percent customer requirement."

"IBM helped by introducing the thin client concept into the market," says Pierre Hernicot, director of European Operations for NLynx. "Now that it has dropped that business, it has been a door-opener for us. The demand for thin clients is increasing. We have increased our business by about 25 percent in the past three months, and the momentum is still increasing." He says that, before the IBM announcement, NLynx's business was increasing by 5 to 10 percent per quarter.