Wheeling and Dealing to Move System i Iron

Published: April 16, 2007

by Timothy Prickett Morgan

Last week was IBM's semi-annual i5/OS and OS/400 platform announcement, and that means it is time to tell a new story about the platform with a new set of products, which Big Blue did with its new user-priced System i 515 and 525 servers. It also means, as Yogi Barra once said, déjà vu all over again, as the company trotted out its traditional two-step rebate deal to try to encourage customers to buy an i5 520 or i5 550 machine now rather than wait until later.

The AS/400 and iSeries to System i5 Trade-In Promotion is an oldie, and considering that IBM brings this kind of rebate deal back nearly every year, it is also presumably a goodie. The concept behind the trade-in rebate deal is simple enough. Customers who have a vintage box can get a rebate of X dollars if they buy a new current IBM midrange box within the current fiscal quarter, and if they wait to do it in the next quarter, they are told ahead of time that they will get a rebate that is substantially smaller than X. The rebate is based on the fair market value of the vintage server plus an additional incentive, but considering that IBM's Global Financing unit very nearly sets the market rate for used gear these days because it is the volume player and IBM's System i division sets the upgrade prices from old machines to new ones (and therefore controls how far used equipment prices get pushed down," the words "fair" and "market" are, in my opinion, used a bit loosely.

The idea behind this graduated scale rebate is that customers get the message to buy now or pay more later. And because it is a rebate, IBM gets to book the sale at a higher revenue, and the rebate is booked as a cost of doing a sale. This is not a discount or a price cut, on paper, as far as revenue recognition goes, which means IBM can stimulate demand without substantially curtailing its System i revenues.

The designated replaced machines in the trade-in promotion announced last week include the AS/400e 6XX, SXX, and 7XX servers from the late 1990s as well as the AS/400 50S or 53S Advanced Servers or the AS/400 500, 510, and 530 Advanced Systems that preceded them to market in the summer of 1995 as the first Power-based AS/400s. Customers with first-generation iSeries 250, 270, 820, 830, or 840 machines (these used the Northstar, Pulsar, and S-Star 64-bit, single-core Power processors and bore the "eServer" moniker, you will remember) can also participate in the rebate promotion.

This trade-in promotion is not, incidentally, available to customers buying the new user-priced System i 515 and 525 servers. Customers have only four configurations to choose from. They also have a discount that varies depending on how much they spend and when they spend it. The promotion applies to the following four setups, and the rebates are explained as follows:

• The i5 520 with i5/OS V5R4 Enterprise Edition (feature 7734); this is a 1,200 CPW box with a single 1.9 GHz Power5+ core that lists for $50,500.
• The i5 520 with i5/OS V5R4 Enterprise Edition (feature 7735); this is a 2,800 CPW box with a single 1.9 GHz Power5+ core that lists for $92,900.
• The i5 520 with i5/OS V5R4 Enterprise Edition (feature 7736); this is a 3,800 CPW box with a single 1.9 GHz Power5+ core activated that lists for $129,900; the second core on this box can be turned on, for a fee, boosting performance to 7,100 CPWs.
• The i5 550 with i5/OS V5R4 Enterprise Edition (feature 7155); this is a 3,800 CPW box with a single 1.9 GHz Power5+ core activated that lists for $220,000; there are three more cores that can be activated on this box.

Here's the way the trade-in rebates work out for customers who buy before the end of the second quarter:

The base discount that I calculated in the table above is the amount of the trade-in rebate credit on the vintage gear divided by the list price of the i5 520 or i5 550 server that customers have to buy. You have to remember that these are bare-bones machines with no memory or disk, so that is not really the effective discount that customers are getting, because this deal has set spending limits. The approximate discount shown in the table is how you game this deal: You spend the bare minimum to get the higher rebate amount, and in this case, I divided the cusp spending limit amount by the higher discount. Any dollar you spend beyond this point does not in any way increase the rebate, and once you are kissing up against this cusp spending limit, you might as well go over by $1 and get the higher rebate.

Here's how the rebates look if you wait until the third quarter:

As you can see, if you wait, you won't save as much.

The deal that was announced on April 10 is almost exactly the same in structure as one that IBM announced almost precisely a year ago. The big differences in this deal over last year's are that the i5 550 was added this time around (this was only available for i5 520 Enterprise Edition machines a year ago), the rebate amounts are a lot lower than they were a year ago, and the spending amounts have gone up considerably. The spending limits went up by 10 percent, 18 percent, and 36 percent on the three i5 520s in the deal. The rebate amounts are less than half what they were on the smaller i5 520 and are a fifth of what they were on the larger i5 520. This is just not as good of a deal as IBM was giving a year ago, and if I were an i5 customer buying an Enterprise Edition machine, I would print out the story on last year's deal and say that this was the starting negotiating position, not the April 10 deal.

All I can figure is that after sales fell 22 percent in the first quarter of 2006, IBM must have been plenty scared to give the generous rebates that it did. In 2007, IBM does not seem to be as scared or it believes it left a lot of money on the table in last year's deal.

RELATED STORIES

A Closer Look at IBM's Current System i5 Deals

IBM Gives Rebates and Trade Ins to Push the i5 520 in Q4

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