The Four Hundred

The 50 percent discount IBM is giving on certain entry-level iSeries boxes, as part of its Green Streak promotion, will considerably reduce the profit resellers make on each box. Despite the cuts, however, the consensus among resellers and distributors in the iSeries market is that IBM's aggressive discounting--with the Green Streak deal, and with the discounts announced in April--as positive moves that will boost volume in the short term and make the platform more competitive against Intel-based servers in the long run.

"We're very excited about it," says Tony Madden, vice president of the IBM business unit at Avnet Hall-Mark. Phoenix, Arizona, based Avnet Hall-Mark is the largest iSeries distributor and provides a range of IBM products to more than 700 value added resellers around the country. "This action reinforces to the market, and to us, that IBM is very interested in the low end."

On July 17, IBM announced it was cutting the price of two entry-level iSeries boxes--the iSeries Model 270 and the iSeries Model 820--that are equipped with a certain interactive card for green-screen applications. Green Streak drops the price of the Model 270 from $67,000 to about $34,000, and of the Model 820 from about $105,000 to about $53,000, and it provides less aggressive, but still considerable, discounts on some system software as well. (For information on what specific server configurations are available under Green Streak, see "That iSeries Green Streak Deal Revealed.")

Before Green Streak, the cost of an iSeries server was about twice the cost of an equivalent Intel server, Madden says. Now, according to an Avnet Hall-Mark analysis, the price of an entry-level iSeries is roughly on par with that of the Intel boxes, which means the company won't have to rely as much on the widely publicized cost-of-ownership studies that show the iSeries is a bargain, when compared with Unix, Windows, and Linux servers, if the costs are spread out over a three-to-five-year period.

"To small business owners, that initial cash outlay is what they end up looking at most," Madden says. "Although you could argue the strengths of the iSeries, it was a tough sell. This action makes IBM extremely competitive against Intel servers."

Madden's sentiments were echoed at Sirius Computer Solutions, the San Antonio, Texas, value added reseller that buys much of its iSeries stock from Avnet Hall-Mark and which bills itself as the largest iSeries solutions provider. Muditha Karunatileka, Sirius' executive vice president of sales and marketing, says Green Streak is clearly aimed at improving the iSeries' position in head-to-head sales against Intel-based servers.

"It is a gutsy move, to put a 50 percent discount out there on the street. IBM doesn't do that very often," Karunatileka says. "The biggest obstacle the iSeries has is its initial price. You can justify it over three to four years, but when you go to write a check--$15,000 versus $75,000--it just took away all the excuses you have for not going with iSeries."

Over the last couple of weeks, Sirius has been busy training its sales people to make the most of the Green Streak promotion, which is set to end December 13, although it could be extended. Karunatileka says Sirius had an excellent second quarter for iSeries sales, doubling its first quarter sales in the second quarter. The iSeries continues to have very good traction at the high-end of the server spectrum, he says.

Jim Houston, Mainline's iSeries brand executive, uses the term "reactivation" to describe the effect he hopes Green Streak will have on the OS/400 server marketplace. "There are a lot of customers in this particular segment that, for whatever reason, have not upgraded," Houston says. "This promotion helps to eliminate some of the price barriers."

Mainline, like other resellers and distributors contacted for this story, reports phenomenal iSeries sales this year. The company has done more iSeries sales in the last two months than in all of 2001, Houston says, giving credence to Mainline's claim to being the fastest-growing iSeries reseller.

Across the board, resellers and distributors report server consolidation as one of the hottest tickets in the iSeries market, bolstered by the monster 32-processor Model 890 "Regatta-H" server that IBM will start shipping in volume at the end of August and which has been shipping to a limited number of customers since the end of June. Resellers didn't see much in IBM's April announcements to bolster the low end, but now, with Green Streak, they have a better story to tell their smaller customers. "IBM didn't do anything with the entry product line in April, and this is an answer to that," Houston says.

As far as upgrades go, the Green Streak promotion has definite possibilities, says Paul Johansen, a senior account executive at Key Information Systems, a value added reseller near Los Angeles. "This is a good deal for the customer," he says. "It will move a lot of boxes, especially for people on the fence, with AS/400 5XX, 6XX, and 7XX series boxes."

So far Johansen has closed three deals involving the Green Streak deal and is checking whether the boxes covered by the promotion will work for other customers. He says the deal is a basically a no-brainer for customers with less than 70 CPW of interactive capacity on their current machines who want to do a straight upgrade. The numbers fall apart when you figure them for a two-step upgrade with CPW levels higher than 70, however. "For the customer, it's a gold mine if they can do the interactive upgrade across [for an equivalent interactive CPW rating], or at least up. The only place it doesn't make sense is if you have to go down."

Asked if IBM should make permanent the price cuts on the entry boxes, resellers and distributors hedged their answers. It's too early to tell if Green Streak will be effective in driving new people to the box and encouraging legacy AS/400 shops to upgrade to the newer technology, they say. However, Sirius' Karunatileka, for one, thinks the price cuts at the low end were a long time in coming and should remain at the low end indefinitely. Others want to wait three months, or at least a full sales cycle, to see what effect the price cuts have before forming an opinion on the matter.

Then there's the sensitive matter of profit margins. Resellers are required to provide the full 50 percent to the buyer of the box, which means their gross profit on the sale of the box drops. After Green Streak promotions are taken into account, resellers' profit margins will be about 4 to 8 percent per box, sources say, which means resellers are taking up to a 50 percent hit on their profits, sometimes more. That makes this promotion a double-edged sword for the channel and for IBM as well: Such significant price cuts can do much to boost volume, but they also reduce the profit on each box, and could end up cannibalizing future sales, resellers say. Some resellers may offer additional discounts on top of Green Streak so they can close a deal quickly, causing more competition and eroding the channel's profits. "It could get bloody out there," Johansen says.