Is the iSeries Really on an Upward Trend?

by Mary Lou Roberts

Merkin's Maxim states: "When in doubt, predict that the present trend will continue." That's clearly what a lot of iSeries fans and IBM employees in Rochester are hoping. At the COMMON midrange user group meeting last March, Mark Shearer, general manager for the iSeries line, predicted that this would be the year for the iSeries turnaround. And IBM has clearly been doing its best to make Shearer's prediction come true. After a long run of declining sales for the platform, in the first quarter of 2005, the iSeries finally moved back into the black.

To be fair, it was only up 1 percent up over the previous year (which had been pretty dismal), but black is black, and this was the first glimmer of hope that has been seen on the iSeries landscape for many moons. Then, in the second quarter of the year July, the iSeries again moved upward, this time 10 percent over the previous year. Could this be the start of a trend? Is it possible that Shearer's turnaround prediction will materialize?

Shearer isn't the only one who predicted the imminent rise of the iSeries. Bob Djurdjevic, president of Annex Research, reminded me recently that he predicted at the end of 2004 that this would happen, and indeed, it did. "And I expect it to continue," he says. "My prediction last year was that the iSeries would end this year in upper single-digit growth, and I still believe that." In fact, Djurdjevic has put together a 37-page report called "An iSeries Revival," which you can read by clicking here.

"It's tough to argue a trend on two quarters worth of data," cautions Charles King, principal analyst for Pund-IT Research, "but it's certainly good news for the iSeries. Overall, I believe 2004 was a rebuilding year for the group, with end-to-end product upgrades (onto the Power5 platform) and the introduction of discrete new solutions. These revenue figures suggest that the iSeries market is getting comfortable with what IBM is doing."

When asked the same question--"Is this the start of a trend?"--Wayne Kernochen, president of Infostructure Associates, quips: "Go not to the analysts for answers, for they will surely give you both a yes and a no." Indeed. "It's the beginning of a short-term trend," he says. "But there is no evidence yet that this is the beginning of any long-term trend." Still a bit of a cynic on the subject, Kernochen predicts that, "It will be hard to believe the iSeries will be attracting large numbers of new customers. Unless IBM can convince customers that it doesn't matter what the price tag on the box is and that all that matters is compatibility and reliability."

How much of this welcomed iSeries revenue growth is coming from the existing installed base versus new customers? IBM has certainly been promising (for years actually) that they intended to grow the platform with net new business.

Djurdjevic does not know the answer to that question, but he suggests that the number of new customers is not the indicator he's watching anyway. "It's much more important," he posits, "to see how much is coming from new applications." He estimates from his conversations with Blue Suits and other insiders that about 50 percent of the increase in the first half of the year is coming from these new applications and virtualized servers.

Kernochen isn't sure either how many new customers IBM has truly brought onto the platform. "I couldn't get a strong feeling about this from Mark Shearer, and that was surprising to me," he says, suggesting that if the net new business numbers had really been strong, IBM would have been touting that for all to hear. "I'd like to see clear indications that new customers are at 10 percent or above in the yearly figure. I think if that had been the case, Mark Shearer would have reported it."

What factors should we be looking at as indicators of a true turnaround? Revenue dollars? Number of boxes? Net new customers?

All three, says King. "At the end of the day, revenues are revenues no matter where they come from. But I also believe that IBM is focusing a great deal of attention and energy on driving iSeries sales among new customers." There are two drivers that will lead to success for the iSeries, says King. First, big companies that can use the iSeries to consolidate large numbers of lower-end Wintel and Unix servers; second, smaller companies that will try to bring order and central management to their IT environments, for which iSeries Express solutions are well positioned.

The product life cycle of the machines out there in the installed base is the primary reason for the recent upswing, according to Kernochen. "Last year, all of the people who had bought the new models the year before were taking a rest." So this year's numbers are the accumulations of last year's downswing, he believes. But he also credits IBM with "finally getting a handle on its customer base."

Again, Djurdjevic stresses virtualization as the number one driver of iSeries growth. "Virtualization on the iSeries is the first real on-demand solution that IBM has delivered." He ranks Linux second in importance as a driver. And finally, he credits IBM's renewed SMB effort. "The work that had been done earlier to approach the SMBs is now beginning to pay off for the iSeries," he says, adding that the high-end models will be most successful. "That's where you get the power of the virtualization capabilities."

Kernochen disagrees to some extent. "Yes, customers are looking at virtualization, but at the application level, not at the hardware level. The things that people want on demand are data and information, and this involves enterprise application integration."

Much more focused attention on the part of IBM to marketing the platform is certainly one of the contributors (perhaps the biggest one) to the good start in 2005, and the analysts applaud IBM's newfound focus on what customers have been saying about its lack of iSeries marketing for years. "The company has moved forward very methodically," says King. "Mark Shearer was a brilliant choice for GM, and the executive team he's building--Peter Bingaman as marketing VP and Bill Donohue as VP of sales--is exactly what the iSeries needed."

Kernochen also gives IBM "very high marks for finally focusing on SMBs, vertical markets, and independent software vendors. The SMB market is growing faster than the large-systems market, and I credit IBM with finally giving the iSeries a push." But--and there is always a but--he is still not convinced that in the long term IBM will be successful in attracting new customers. "They have to get people to the point where they won't care that it's an iSeries. Until IBM can do that, I'm not convinced that this is a long-term turnaround."

If all of the indicators are that the short-term is promising, what is the outlook for the long-haul?

Djurdjevic is quite optimistic that 2005 and 2006 will both be high single-digit growth years for the iSeries. His iSeries report shows that he estimated that iSeries server sales were just under $2 billion in 2004 and will sneak above $2 billion in 2005 and then increase a few hundred million dollars in 2006. But Djurdjevic points out that, to IBM, the impact of success of the platform is even greater. "These figures reported by IBM represent only the hardware. But the iSeries drives a lot more revenue than that in software and services." Looking at the second quarter numbers (a 10 percent increase), he says that, "If the iSeries were reported as a total business, you'd see 14-15 percent growth for the quarter because you'd be counting both software and services in with hardware. This shows the significance of the platform to IBM."

"I feel very positive about the iSeries' prospects, primarily because it has been here before," says King. "The platform was originally designed for companies that wanted to better or more efficiently manage IT environments that were becoming uncontrollable. Now, after a sleepy lull in X86 Lotus Land, increasing numbers of businesses seem to be waking up to the value of IT consolidation and centralized management--a trend reflected in booming sales for X86-based virtualization solutions such as those from VMware. For the iSeries, it's literally a matter of 'Been there, still there, still doing that.' I believe that is a pretty good place to be right now."

The answer to the question of a long-term trend upwards, says Kernochen, depends less on how the iSeries looks to Shearer, to existing customers, or to analysts. "You have to wonder what the iSeries looks like now to [IBM CEO] Sam Palmisano. He's moved the strategy from selling IT services to selling business services. It's moving farther and farther away from hardware in general. To Palmisano, the iSeries over time is less and less important because of this new emphasis on business services."

Kernochen's point is that the iSeries will have less and less leverage as time goes by as Palmisano redirects the focus of Big Blue away from hardware and IT solutions and towards business process integration, outsourcing, and other services. Can the iSeries become established as platform of excellence and of choice for the seamless and flexible flow of business information and process throughout the enterprise and the business partner channel? It will not be sufficient to be a component in that process, housing the manufacturing application or the financial application, Kernochen suggests. The iSeries will have to become the platform that drives the integration. If that can happen, Kernochen believes that Palmisano (and, consequently the rest of IBM) will emphasize the iSeries and the trend will be up, up, up. If not, we may just be looking at a very welcome but very short-term "trend."

Correction: This story has been edited since it originally ran. In the first paragraph, we stupidly said that the iSeries had experienced a long time of "red ink," when what we meant to say was "declining sales." While there is no proof of this in IBM's financials, it is obvious to most iSeries observers that the iSeries platform continues to be very profitable, even with sales that are significantly lower than from years gone by. Not only does IT Jungle apologize for this error, we are deeply embarassed that this mistake was not edited out.

Mary Lou Roberts, a 35-year veteran of the information systems industry, is a new contributor to IT Jungle. In addition to her work as a reporter in the iSeries space, she has spent her career as a marketing and communications professional working exclusively with information technology publications and companies. She can be reached at WriterNewf@aol.com.