The System i Fourth Quarter Sales Strategy

November 26, 2007 Timothy Prickett Morgan

As I sit here at my desk writing this article, just about everyone–including myself–is gearing up for the Thanksgiving holiday in America. But the rest of the world does not take a break in late November. The month is just one thing standing between them and the close of another year of either buying or selling IT infrastructure. And right now is the last couple of weeks that IBM and its System i channel partners can possibly hope to peddle new gear to customers and boost sales with whatever budget money is left for 2007.

It is an interesting challenge that both IBM and its customers face. There is economic uncertainly, no matter how much the financial press and politicians want to wallpaper over the mortgage bubble that was concurrent with and extended beyond the dot-com bubble. The Dow Jones Industrial Average is holding, more or less, but the economic indicators are spinning around like a compass in a shifting magnetic field. First-, second-, and third-order derivatives and other financial shenanigans created by uber-smart quants produced lots of paper profits for all of us, but have directly coupled aspects of the economy, creating dependencies that are maintained by computers that people do not even understand all that well where there used to be more containment or isolation in the past. The economy goes up faster, which is great, but it also seems to crash more abruptly, too.

IBM’s System i marketeers have the tough job of making the case for the brand against this uncertainty and the expectation that new machines are on the way. It is no secret that IBM is expected to roll out the Power6 processor across the System i and System p lines in 2008, with the System i perhaps getting a revamp with a 615, 625, and 655 box in the late January to late February timeframe. But, the IBM marketing team, which has perhaps been maligned more than any other such organization within any IT vendor by its loyal customer base, has seen this movie more than once. They know what to do and say to try to pump up the product line.

According to sales documents received by IT Jungle put together by the top IBM marketing and sales people responsible for System i sales–and this document ignores the recent splitting of the System i division into two parts, Business Systems and Power Systems–the first tactic that IBM will employ to try to boost System i sales is to “create a sense of urgency.” i5/OS V6R1 is on the horizon, and that means OS/400 V5R3 is on the way out. To be precise, IBM is going to stop selling OS/400 V5R3 on January 4, 2008. No matter what, customers with AS/400 and iSeries 270s and 7XX machinery have to at the very least buy V5R3 before then because V5R3 is the final release to be supported on these machines. They could do a push-pull upgrade to a used 8XX machine, which supports V5R4, but it might make just as much economic sense to get a new V5R4 license and a System i 5XX machine instead. For any given amount of computing, the 5XX box will be in a lot lower software tier than the 7XX box, and a little lower than the 8XX box.

The important thing about dropping down a software tier, by the way, is not that a third-party application software provider will refund some of your licensing fees. Rather, it is that Software Maintenance prices from IBM are based on tiers, and over the course of three years, moving down a tier represents a big savings in support costs.

Here’s another lever IBM has in its toolbox to push sales. Upgrades from iSeries Model 810 and 825 servers to user-priced System i 515 and 525 servers or a 550 Enterprise Edition are being withdrawn on December 1. In general, it is far cheaper to upgrade to a new box than it will be to buy a new one on December 2. The savings can be substantial. The cost of upgrading an 810 to a 525 with 30 users is $25,200, compared to the $34,900 price tag for the base 525 box, which works out to a 28 percent savings). Upgrading from an iSeries 825 running OS/400 Enterprise Edition to a 550 running i5/OS Enterprise Edition costs $137,800 compared to $220,000 to buy the new machine (that’s a 37 percent savings).

IBM is telling its sales reps and channel partners to sell lots of upgrades from iSeries 825 boxes, and to lead with the Power6-based 9406-MMA box because it yields the best price/performance for customers and the highest revenues to IBM. As a fall-back position, sales reps are being told to drop back to pushing the 550, and if that doesn’t work, skip the upgrade idea entirely and shoot for the sale of a new 525 box, which has lower monthly maintenance, support line, and power costs.

Upgrades to System i 5XX machines from iSeries 870 and 890 servers are still going to be available until April 8, 2008, and that is presumably because customers with these classes of machines need more planning time to figure out their upgrade path into the 9406-MMA 570 server that is a natural upgrade path for them. They already know what machine they are going to get, unless IBM plans to get a real System i 670 out the door in 2008.

Perhaps the most interesting sales tactic in the IBM presentation is the idea of using the new 525 Capacity BackUp (CBU) machine as a lever to get a primary machine upgraded. With high availability and disaster recovery now in economic reach for customers, thanks to the CBU machines and much lower pricing from HA software vendors, it stands to reason that customers would want to get secondary machines. The funny bit is that an iSeries 810 cannot be a primary machine backed up by a 525 CBU box, which is in roughly the same power class. And customers with an iSeries or System i 520 box who want to use a 525 CBU as their backup, which is permitted, will have to buy more user entitlements on the 525 to do so. The funny way the math works out–and this is of course no accident–it is cheaper to upgrade the 810 or 520 to a 525, which has user entitlements that can transfer to the 525 CBU, than it is to try to do HA another way.

Of course, customers with an 810 or 520 box could also shop on the second-hand equipment market to get an exact mirror of their existing machine–and perhaps for a lot less money than IBM’s scenario. The advent of the user-priced 515 and 525 machines has hammered the street prices of these used machines.

The main feature of IBM’s fourth quarter sales strategy seems to be to hold its breath until the rest of the Power6 line is out the door. The first quarter will not be a great one for the IT market, unless the economies of the world (aside from China, India, Brazil, Russia, and Middle East and Asian oil producing countries) perk up a bit. It’s all Big Blue can do, given the lateness of the Power6 machines and their software. Had the boxes and code been ready in early to mid 2007, IBM would probably be sitting pretty and looking at a pretty decent fourth quarter. But that’s life in the midrange.

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