Will the iSeries Biz Grow in 2004? That Depends

by Dan Burger

If the iSeries business is going to maintain and even build on the growth it achieved in 2003, many people would say it has to do better--much better--in its battles with Intel boxes at the low end of the small and midsized business (SMB) market. This battleground is more than just an iSeries concern. It's an IBM concern when Microsoft comes in and picks some very nice fruit in what used to be exclusively IBM's orchard.

It is clear to those who know the iSeries well that it should be regarded as best-in-class in an SMB. The total cost of ownership of the platform is very attractive, when you can get someone to listen to the statistics. But when decisions are being based on price/performance, and the conversation abruptly ends there, the iSeries gets handed its walking papers. It's no secret. And I believe the iSeries executive team wants to fix this. With the advent of Power5, I give them better-than-even odds of doing something to strengthen the iSeries at the low end of the server price range.

Officially, sources inside IBM said late last year that the company cannot leapfrog X86 machines in the price/performance game until the Power6 generation comes to the entry server market, mainly because the company, foolishly, cannot support OS/400 on its very attractive PowerPC 970 and kicker PowerPC 980 processors. But all IBM needs to do to fix this is to cut prices on the Power5. If IBM wants to sell the Power5 iron and make the OS/400 sale (which is nearly all profit), then all it has to do is stop charging $30,000 for a Power processor in a market where an X86 processor with 64-bit support costs only a few grand.

It's not that the iSeries team hasn't been doing anything about the SMB problem. It's got the sales channel thinking SMB, with lots of incentives. It's also perked up the independent software vendors through a decent incentive program. These are some of the necessary steps in an overall plan. The most important aspect, of course, is the hardware that will make customers happy. Don't forget that these are loyal customers, who want to remain loyal if given a way that makes dollars and cents. These aren't huge companies with IT departments the size of small towns. "What does it cost out of the box?" is a legitimate question, and the deal likely swings on the answer. If the answer is $25,000 for a configured server, then the iSeries loses.

In 2003, sales for the iSeries were up 7 percent, to about $1.7 billion, compared with 2002. To be sure, the revenue growth for the iSeries was not huge, but there was growth after several years of decline. Those positive numbers were in no small measure attributable to high-end iSeries machines, particularly 16-way Model 870 and 32-way Model 890 machines.

Richard Allan, director of iSeries marketing for KeyLink Systems Group, of Agilysys, told me that "revenue from the upper-end 870 and 890 models was a standout factor" at Agilysys, and he cited server consolidation of first-generation iSeries 8XX and older models as an important ingredient in this success. He also noted that server consolidation of smaller AS/400 Model 2XX, 7XX and older 8XX models on new iSeries Model 825s was a similar revenue engine in 2003.

However, based on the amount of hardware that Agilysys moved in 2003, the boxes that provided the biggest contribution to overall iSeries growth were the Models 810 and 825. It is safe to categorize these two boxes as the most important in the iSeries lineup. They sell in volume and handle substantial workloads. While the top end creates a great deal of revenue with a relatively small number of units, and the low end has taken its biggest hit since 1999, when AS/400 and then iSeries revenues started their tumble, which didn't end until 2003. This is no surprise to anyone who has followed the AS/400. Throughout the history of the OS/400 server line, the largest desk-side boxes and the smallest rack-mounted boxes (yes, we used to have industry-standard racks before they were fashionable) were always the belly of the market. That's the B25, B35, and B45 from the late 1980s, and similar 25, 35, and 45 series machines in the years that followed. The bell curve hasn't changed shape all that much because OS/400 servers are still used by companies with between $10 million and $100 million in sales. These are the boxes that can run their applications and support a few hundred to a thousand users.

If the iSeries has a little momentum going for it at the high end, and the mid-tier boxes are selling well, it becomes a matter of at least sustaining those trends and, unless all the incentives have been used, of finding the market to grow them further.

For the moment, let's assume the high-end and midrange iSeries boxes do well throughout 2004. That could easily happen, because server consolidation will continue to be on the minds of chief information officers at OS/400 shops, and IBM will continue to provide incentives for Linux and for adding workloads to the iSeries.

"Receptiveness to Linux is on the increase," says Allan, Agilysys' iSeries sales honcho. "Thanks in a large part, I suspect, to IBM's constistent drumbeat promotion, customers are employing Linux for off-the-shelf firewall, Web-serving, and e-mail applications. Home-grown applications in a Linux logical partition also appear to be more prevalent as customers investigate the iSeries' role in this expanding operating system."

Although Agilysys is unwilling to reveal specific numbers, Allan says solutions revenue attributable to Linux in 2003 more than doubled, compared with 2002. He calls IBM's "new workloads" program "critical to our ability to promote the broader capabilities of the iSeries."

When I spoke with Tom Bittman, vice president and research director at Gartner, a few weeks ago at the Gartner Expo in San Diego, he predicted that 2004 would be a declining year for the iSeries. It would be a slight decline, he said. One of the reasons 2003 was good for the iSeries was that big price cuts were in effect all year. "That big price cut is not likely to happen again, and I think a lot of the pent up demand has been eaten up," he said. "Power5 models will provide a boost, but it won't be huge."

I'm willing to give the iSeries team the benefit of the doubt. The Power5 will become the key to reversing the fortunes--in a good way--of the iSeries in price-conscientious small businesses. I can't predict how it will be packaged--a big consideration for iSeries executives is preventing the effect of cannibalizing mid-tier customers--but the Power5 Squadron servers could yield the best price/performance story that IBM has ever had in this market. You may laugh and call that the equivalent of introducing the best can of spinach--it's still not enough to make it sell well--but I believe the price/performance impact will be real. And I think companies that would have left the IBM fold because the Model 250, Model 270, and Model 800 were not competitively priced will see this as a fair-price opportunity to get much more than what Intel iron claims to offer. On an X86 box, you cannot, for instance, get logical partitioning that is anywhere near as sophisticated as what the iSeries offers, even if you install GSX Server or ESX Server from EMC's newly acquired VMware unit, and if you do go that route, the software costs thousands of dollars per processor.

The problem is, the speed with which the Power5 servers arrive in 2004 will shape the impact it has on the iSeries in 2004. If IBM runs late, sales on older machines will stall, and IBM will have to cut prices on existing iron to keep sales humming along. This will eat into potential Power5 sales, since these customers, having bought Power4 or S-Star gear, will sit out the Power5 generation, at least during 2004 and probably 2005. What IBM does in the coming months will determine how well the iSeries will do for the year.

That said, there are always things that IBM can do to push sales, even if it adversely impacts the commissions that its sales reps and partners can get. If IBM really wanted to move the iSeries, it would be very aggressive, as it has been with its RS/6000 and pSeries Unix servers in the past five years. "If 2004 is a growth year," Bittman told me, "it will be extremely positive for the iSeries. It will prove the programs for incentives are really working." It also will show that the iSeries can still put together back-to-back winning seasons.