Will New Rebates on Standard Edition i5s Boost Sales?
October 23, 2006 Timothy Prickett Morgan
Last week, on the same day that IBM announced that sales of System i5 servers were down 22 percent in the third quarter, the company also announced a rebate deal that gives significant cash back to customers with older iSeries gear as well as newer i5 gear running i5/OS Enterprise Edition if they move to a new System i5 machine running i5/OS V5R4 Standard Edition. The two events are almost certainly connected.
There was a lot of concern about the drop in iSeries sales in the quarter. We have gone over the numbers in detail in the IBM financial coverage elsewhere in this issue, and drill down a bit further in a follow-on analysis based on a financial model from Merrill Lynch.
While I am not inclined to make excuses for IBM, I think it is important to remember that Big Blue pumped up iSeries sales in the third quarter of 2005, boosting sales by 25 percent. This was a pretty tough compare. While we had all hoped that the Q3 2005 sales level might set a floor from which iSeries and then System i5 sales might grow further, it has been an up and down affair for the past two years. Even on an annual basis, sales have been up and down–but not on the order of 20 percent. The trend has been down, to be sure. But if IBM is willing to make changes, there is hope that it can kick-start the System i5 line. Mainframe sales, for instance, dropped by nearly as much in 2005 as the System i5 line probably will in 2006, but the mainframe is now surging. This is somewhat of a byproduct of comparing good years to bad and bad years to good, but the point is that product cycles are normal, and sales are choppy for product lines with relatively skinny shipments, as is the case for mainframe and System i5 servers. It would be better if the i5 line was a volume product, like X64 servers are, where there are several million customers buying many million machines each year. But even Intel and Microsoft have their ups and downs.
I am encouraged that IBM is willing to experiment a little, announcing i5 520 Solution Edition machines for SAP mySAP and Oracle JDE EnterpriseOne workloads that are at least competitive with Windows boxes. The user-capped i5 520 Solution Edition machines that were announced two weeks ago–see this story for our detailed coverage–are also encouraging. But as I said last week, these machines are targeted at customers who are buying specific ISV solutions. They are not applicable to that portion of the OS/400 and i5/OS installed base that have homegrown and usually green-screen programs written in RPG and COBOL.
Hence, the i5 Standard Edition rebate deal IBM announced last week. There is, as always, a catch, and the catch with this rebate offering is that it is only applied to customers with iSeries 8XX, iSeries i5, or System i5 machines running i5/OS Enterprise Edition who move to System i5 Standard Edition machines. Well, why would anyone do that? Because they are modernizing their applications. And specifically, they would do this if they are modernizing their applications using tools that get around the 5250 governors but nonetheless use the 5250 green-screen protocol. The deal could also be used by customers who are using other legacy modernization methods, such as deploying .NET, Java, or other types of front ends that access legacy databases but which re-implement application logic on Windows or Linux servers or within Linux or AIX logical partitions on an i5 box.
The rebates that IBM is offering are substantial, but they also require customers to pony up a pretty sizeable bag of cash, too. The amount of the rebates, which are being offered in the United States and Canada, depends on the i5 520, 550, or 570 configuration you buy. There is one configuration of the i5 520, one of the i5 550, and three of the i5 570 that customers can choose. And for the final configured i5 machine, IBM has a single unit purchase price (SUPP, in the IBM lingo) that customers have to meet for the deal to get the rebate. Customers have to buy specific processor features and activate specific numbers of cores with i5/OS V5R4.
All of the details on the machines you need to buy and the rebates you can get are outlined in this table. All of the details on the machines you must have already installed in your data center or department are outlined in this other table.
As you can see from the first table, IBM is asking customers in the United States to make a commitment to spend between $110,000 and $880,000 to take part in this deal. Customers in Canada are being asked to spend a lot more money for some reason. When you convert the Canada SUPP to U.S. dollars using the current exchange rate of 88.6 Canadian cents to the U.S. dollar, then the amount that Canadians are being asked to spend, in U.S. dollars, is between 30 percent and 33 percent more than U.S. customers are being asked to spend. I do not have a Canadian price list for the 9406 product line, but I am sure hoping that IBM is not trying to charge Canadian customers a 30 percent premium for the same gear. (Ever hear of NAFTA, IBM? You probably lobbied for it, in fact.) If this difference in SUPP is reflective of the difference in list prices between the U.S. and Canada, I am ready to buy a plot of land near the Canadian border in upstate New York and start an i5 import-export business.
The rebates work out to about a 9.5 percent discount off the SUPP price on the i5 520 setup. On the i5 550 machine, IBM is giving back 29.3 percent. The first i5 570 setup has a 14.5 percent discount, but the middle one has 16 percent, and the largest one works out to 24.4 percent. Remember: the way these rebate deals are supposed to work is that IBM calls them a rebate, but according to sources I have talked to, it is the reseller that gets the rebate–you are supposed to get a discount as part of your deal. I know that is not what the announcement letter says. But, the people who write these deals told me earlier this year that this is actually how it works in the field. This way, IBM gets to book a sale to the reseller at list price, you get the discount you want, and IBM can charge the discount as a cost of sales. (Isn’t bookkeeping interesting?)
The iSeries 8XX customers are probably going to be most interested in this rebate. These are companies with first-generation iSeries machines–the 820, 830, and 840 servers. These machines, you will remember, were announced in early 2000 with the AS/400 label and then had their name switched to the iSeries. They also came with interactive feature cards that ran OS/400 V4R4, not OS/400 licenses that were differentiated by Standard Edition (no 5250 capacity) and Enterprise Edition (full 5250 capacity). If you have an iSeries 820 server model, which had no 5250 capacity, you can’t take part in this rebate deal. Kicker machines in this first-generation 8XX line, which were launched in the second quarter of 2001 running OS/400 V5R1, can take part in the deal–again excepting for machines that had no 5250 capacity. Companies with iSeries 810, 825, 870, and 890 servers that are running OS/400 V5R2 Enterprise Edition (or later releases) can take part in the deal, as can companies that installed first-generation iSeries i5 boxes with OS/400 V5R3 Enterprise Edition; these machines were launched in January 2003.
One more thing: What this rebate deal does not say is what happens to the machine you replace. If I were doing this deal, I might consider two options. First, keep the machine for a hot spare, and get some disaster recovery/high availability software. Second, if that doesn’t sound appealing, keep it and use it for something else. Or, third, sell it into the second-hand AS/400 and i5 equipment market and get an even bigger “rebate.”
Will This Rebate Boost Sales?
Is this deal enough for IBM to boost System i5 sales in the fourth quarter and going forward? This is a question many of us are asking right now. IBM has another tough compare coming up in the fourth quarter, so it is clear that the company had to do something to boost sales. A product refresh this past January and pricing tweaks during the summer did not do the job.
Something has to give, and, as it turns out, that something is IBM.