IBM Pilots Aggressive Middleware Pricing on i5 520s

by Timothy Prickett Morgan

Back in the summer of 2002, some renegades within IBM proposed a different kind of packaging and pricing for the entry iSeries line, and this was eventually productized as the "Green Streak" promotion. The success of that promotion in boosting sales resulted in the revamping of the iSeries line in January 2003; a similar iSeries pilot program based on pricing was used in Europe prior to the i5 launch last summer. Now the marketeers at Big Blue are running their tests again, with cut-throat pricing on various middleware on the i5 520 entry server.

Kelly Schmotzer, the marketing manager for the SMB software portfolio at IBM's Software Group and a former iSeries executive who loves the iSeries, has two goals with the pricing actions: to drive iSeries server volumes and to drive software sales on the iSeries platform down in the SMB space. Like many of you, I have explained to IBM time and again that the ease-of-use, integration, and other benefits of the OS/400 platform are preaching to the choir in the iSeries and AS/400 installed base (we know) and largely falls on deaf ears among SMB shops who have never heard of the iSeries or, more accurately, use Windows on their desktops and who decided, in a knee-jerk fashion, to use Windows on their servers. What both of sets of customers have in common is that they care about the price--in actual dollars, not in theoretical savings from integration and other aspects of the iSeries boxes--of their systems.

If the vast computer market has demonstrated anything in the past three decades, it is the elastic relationship between consumption of computing and the price of that computing--from individual components of a system on up to full systems. This price elasticity is one of the reasons the X86 server platform, which was a joke 15 years ago, now represents north of 90 percent of the shipments in the server market. Because the iSeries and pSeries lines are low-volume boxes that are made in American factories with relatively high-cost components, IBM has not been able to be a volume producer of Power-based servers. More precisely, IBM's bean counters and factory managers seem to have decided it is more profitable to have a low-volume business of high-margin, high-end servers than go for a high-volume, low-margin approach. They are probably right.

But, then again, the AS/400 server business used to account for anywhere from $5 billion to $6 billion a year in processor and disk array sales back in the early 1990s, and that number has dropped to about $1.5 billion in 2004 with server shipments in the range of 20,000 to 25,000 units, which is one-third to one-half of the volumes IBM had in the heyday of the AS/400 back in the 1990s. Dell, on the other hand, didn't have a server business back in the 1990s, and, if you remember history, it almost went broke trying to enter the notebook business, which it withdrew from for a while as it licked its wounds. (Dell is not invincible; it just has an arrogance that comes from success, just like every other IT vendor.) Dell, by the end of the 1990s, was shipping over 400,000 units a year and raking in $2.6 billion; in 2004, Dell sold some 1.4 million servers, accounting for $4.8 billion. You tell me what strategy sells servers: arguments about long-term TCO or a combination of low initial sticker price and a large application base? The iSeries may be IBM's largest server customer base, but it is hard to imagine that Dell and HP do not have equally large customer bases of SMB customers on X86 iron. The economics of the IT market are such that might makes right, that high volume wins. I obviously don't think this should be the case, but it clearly is the case. Many a technically excellent IT solution has been driven out of the market by economic forces. (Don't get me started, or we'll be here all day.)

So, any time I see IBM testing the price elasticity of the iSeries line, I feel compelled to encourage this behavior on behalf of the many OS/400 shops that want to see the iSeries not only survive and adapt, but also thrive.

As we all agree, IBM has to do a better job of pushing the iSeries into the mom and pop shops that used to be the hallmark of the IBM midrange platform. To that end, Schmotzer and her colleagues in the iSeries division have cooked up a special pricing bundle for the company's middleware on eServer i5 520 machines. Specifically, the special pricing, which cuts the cost of five IBM middleware products by 25 to 67 percent, is available on i5 520s that meet the following three criteria: They can only have a single processor; they have to be running i5/OS V5R3; and they have to be in the P05 or P10 software tiers. That means you cannot get the middleware and run it on AIX or Linux partitions on the iSeries; these programs are i5/OS-specific and are intended to drive sales of machines to support i5/OS, says Schmotzer. She says IBM will roll out the programs for electronic distribution on i5 520s on June 10, and distribution on physical media will begin on July 1. The pricing promotion will remain in effect until March 31, 2006, and at that time IBM will examine how successful such pricing has been in pushing more hardware and software.

Schmotzer has high hopes for the pricing pilot, and so should any iSeries fan because driving more iSeries shipments and getting shops with vintage AS/400 and iSeries boxes to move to the i5 is priority one--just like move to the first generation AS/400 RISC machines from the ancient (and beloved) System/3X machines was a decade ago. "I have no plans to kill the promotion, and I only have plans to enhance it," says Schmotzer in her usual chipper tone. "I would like to see more software products added to this pilot, and I would like to see it on more iSeries software tiers, too." I could not agree more. If IBM wants to sell cheap iron and expensive software on the xSeries, that's fine. But if it wants to sell a relatively expensive iSeries box, it has to cut the software price to compete without getting into the whole total cost of ownership argument that, as a marketing tactic, requires more energy and time than just getting the price right and giving the lower TCO as a bonus to extremely happy customers, who spread the word through their own viral marketing campaigns as they brag about the i5.

Here are the programs that are covered under the pilot pricing program and their product numbers through IBM's Passport Advantage sales channel:

• Host Access Transformation Services iSeries for eServer i5 520: P05 tier, number D552VLL, $5,000; P10 tier, number D552SLL, $10,000. HATS costs $195 per concurrent user or $120 per registered user on the iSeries now, but with this promotion, IBM is pricing it based on a single processor with an unlimited number of users. Basically, if you have more than 26 users on a P05 machine or 51 users on a P10 machine, this promotional pricing is better. And if you plan to add a lot of users over the next few years, it might be better in the long run.
• WebSphere Business Integration Server Express for eServer i5 520: P05 tier, number D552QLL, $2,000; P10 tier, number D552XLL, $3,000. WBI costs $5,999 per processor on the iSeries under regular pricing. WBI includes all the tools necessary for integrating applications, including WebSphere MQ and three technology adapters.
• WebSphere Business Integration Server Express Plus for eServer i5 520: P05 tier, number D5530LL, $5,000; P10 tier, number D5532LL, $10,000. The Plus version of WBI adds WBI Connect Express, the Process Designer Express tool, and five technology adapters for hooking into applications. While WBI Express is aimed at end-user customers, WBI Express Plus is aimed more at ISVs who are trying to modernize their code.
• WebSphere Portal Express Server for eServer i5 520: no P05 tier; P10 tier, number D552ELL, $16,550. Portal Express for Multiplatforms costs $1,700 for every 20 users, so the crossover point on this product is 195 users. There is no P05 tier offering for this because Portal Express requires about 1,000 CPWs minimum to run.
• WebSphere Commerce Express Server for eServer i5 520: no P05 tier; P10 tier, number D5535LL, $15,000. This software costs $20,000 per processor normally across the eServer product line. There is no P05 tier because Commerce Express needs a minimum of 750 CPWs to run.

If you buy software under this promotion, you can upgrade from the P05 tier to the P10 tier using a net-cost upgrade; similarly, you can move from the P10 tier to the full cross-platform version (which IBM is selling on the rest of the iSeries line) as well using a net-cost upgrade. And if you are worried that IBM might not continue to support the software acquired under this pilot program, even if IBM discontinues it in March 2006, the company has committed to support this software for at least two years after that point.

Because some of those vintage AS/400s sitting out there in the OS/400 server installed base are running applications that have not been modernized and cannot be moved to the latest i5/OS--there is a lot of third-party and custom code that cannot run on the machines without a lot of work--IBM expects many customers will buy an i5 520 with this middleware and use it as a front-end for their vintage AS/400 or iSeries box. But the intent of this promotion is to get as many customers as possible off that old iron and on to a new i5.