State of the System i: Other Software Makers Weigh In
December 10, 2007 Timothy Prickett Morgan
As we wind down 2007 and get ready to take on 2008, now is a good time to take stock of the state of the i5/OS and OS/400 ecosystem. So for the past several months I have been talking to companies large and small in the ecosystem who peddle hardware, software, or a mix of the two to see how business has been in 2007, what they are hearing from i5/OS and OS/400 shops in terms of products and budgets, and what they expect their own businesses to do in 2008.
The good news, at least as far as the information from my thoroughly unscientific poll of hardware and software partners is concerned, is that business seems to be going pretty well regardless of IBM‘s own issues with slumping System i sales. The top executives now in charge of the System i line, which has been broken into Business Systems at the low end and Power Systems at the high end, know what they have to do to reinvigorate their respective products and engage with customers in 2008, so I remain hopeful that Big Blue can get some traction with the new approach to pricing and packaging that is exemplified with the user-priced System i 515 and 525 servers and the Power6-based System i 570. With a new product launch–which started in July with that single Power6 machine and which will roll out through 2008 as IBM refreshes the i5/OS server line and more fully explains what a Business System is and how it differs from a Power System–there is always a chance to capture the imagination and the budget dollars of the more than 200,000 AS/400, iSeries, and System i customers out there. And there is a good chance to attract new customers to the i5/OS and OS/400 ecosystem, too. There are many who are cynical about such prospects. But I think that IBM will be able to show very good sales for the Power6-based System i 570 and very good shipment growth for the user-priced 515 and 525 machines, too, in the fourth quarter. Of course, we won’t know that happened until the end of January 2008. And I think that as IBM gets i5/OS V6R1 out the door (perhaps for delivery in March) and revamps the line with Power6 processors, other updated peripherals (like small form factor SAS drives), and rejiggered and more aggressive hardware and software pricing, IBM will be able to get this System i business stabilized. It might even grow a little.
Generally speaking, the view I expressed above echoes what the hardware and software makers I have spoken to for this “State of the System i” article series have been telling me. We all believe this independently, based on our own revenue streams and analysis of what IBM has done in 2007 and rumors about what it will likely do in 2008. Quite frankly, I expected a lot more doom and gloom than I actually encountered. If we are all in denial, we are all drinking from the same river.
Privately held software conglomerate Infor, with the largest installed base of classical ERP customers on the i5/OS and OS/400 platform, is probably as good a bellwether for how the System i is doing in the software space as there is. Infor has about 16,000 customers who have deployed one of the myriad software stacks that Infor now controls. The BPCS suite from SSA, now known as ERP LX, and the MAPICS suite from the former company of the same name, now called ERP XA, have about the same number of customers and together comprise the largest part of Infor’s i5/OS and OS/400 customer base.
“A lot of our customers are seeing the benefits of a hybrid approach, and we are getting a lot of good feedback from our System i customers, who are moving ahead,” explains Mike Frichol, vice president of global industry and product marketing at Infor. “We are seeing a significant amount of additional license revenue coming from the existing base, but we are also seeing quite a few new customers–not a vast amount–but nonetheless some.” Frichol says that the depth and maturity of the LX suite is attractive to process manufacturers, and that the A+ suite for distributors (formerly known as Daly & Wolcott) is also able to attract new customers when paired with the System i 515 and 525 machines. “The XA customer base is also very energized. MAPICS had really put that product on the back burner and we have starting improving it again, and now customers are adding modules.”
Infor has made no secret that is has been shooting for double-digit revenue growth for 2007 for the company as a whole, and Frichol says that it is making those numbers. While System i growth is somewhat lower than this, the company expects to continue to grow revenue in this area. “2007 has shaped up pretty well for us on many fronts, and our strategies have panned out well, particularly our extend approach for our software,” Frichol says. “In the System i marketplace, these customers feel a lot more comfortable with the applications that they have installed, our product strategy to evolve them, and our SOA strategy to connect them to each other and to other applications.” Infor is looking for a similar growth pattern in 2008 as it saw in 2007. And it is also expecting a bump thanks to the Power6 upgrade cycle. “The product cycle from IBM will definitely help in 2008,” says Frichol. “We still have customers out there on AS/400-branded gear. New servers compel customers to also examine expanding the software that they are using.”
At its Inforum user conference in Las Vegas in September, Infor polled attendees about their 2008 budget plans. Frichol says that about half of the IT shops polled said they expected to increase their IT budgets, and that a large portion of their spending will be on additional software. About a third of those polled said they were going to keep their budgets flat, but even these companies said they were looking at the budgets to rejigger them to get operational cost savings to pay for additional software capability to drive business. Only about 15 percent of those polled by Infor said they expected to have a slight decrease in their budgets, and no one said they were going to make deep cuts.
The Summer Rollercoaster Ride
Of course, just because a year is good doesn’t mean every month or every quarter is as good as the others in the year. The summer months are always a bit tough in the IT space, and in this regard, the System i platform is by no means exceptional. And when the economy started looking a little weak thanks to the subprime mortgage crisis in the United States and then the ensuing credit crunch that spanned the globe, it was natural enough for any software vendor to be watching very carefully for any signs of distress in the current and future customer base.
Over at security software maker Bytware, it has been business as usual in 2007. “I think that in general, we have already seen the low, which comes in the summer months,” says Christine Grant, the company’s president. “We are now seeing an upswing in sales volume and enthusiasm among customers. As far as we can tell, the state of the economy in recent months just made the summer just a bit more of a rollercoaster than is usual.” The pipeline of deals for Bytware didn’t dip, but people held off closing deals, and the slowness, as you might expect, was most pronounced for the company in the financial services sector.
But that seems to be over now, and companies are spending down their 2007 budgets and gearing up for 2008 spending. “I just don’t see people holding off in 2008, or hemming and hawing about business,” says Grant. “We are now seeing a lot more optimism about buying in 2008. I think 2008 is going to be a little better than 2007 for us, and this is not just a gut feeling, but rather has to do with our particular situation. We help customers get security, save money, and streamline operations, so I think we are positioned well.”
Like many software companies in the System i space, Grant is particularly proud of the fact that Bytware’s business continues to grow even as IBM’s System i business has stalled, and part of the reason Bytware can do this is because its software pricing went virtual as IBM’s OS/400 servers did. “We are growing in a market that has fewer machines being sold. If you are not charging for software for partitioned systems, you have not positioned for the actual market. Partition pricing is the fairest way to price in this market, so the customer only pays for what they need.” Many companies are still pricing their software based on traditional OS/400 tiers, which can be an inhibitor to installing new software at companies that have consolidated workloads on a relatively large machine with a high software tier.
This was not a typical year for New Generation Software, a company that started out 25 years ago making accounting software for the System/38 and then gradually moved over to decision support, query tools, and now business intelligence products.
While IBM’s Query/400 is ubiquitous, it has so many issues that it is actually something that Four Hundred Gurus mock as they wrestle with its quirks and limitations, which have spawned a number of businesses who do a better job extracting and presenting the information inside DB2/400 databases so businesses can make intelligent decisions. For New Generation, IBM’s decision to partner with Information Builders to create a kicker to Query/400 called DB2 Web Query at first presented a problem and now is presenting an opportunity.
When IBM divulged its plans for DB2 Web Query in March, it caused a lot of OS/400 and i5/OS shops to take a look at their business intelligence software plans. By necessity, some deals that were on the table get stalled, and it didn’t help New Generation’s cause–nor that of its competitors, such as Help/Systems–that some people were under the mistaken impression that DB2 Web Query was somehow going to be a free product from IBM. But by August, it became clear that DB2 Web Query was going to cost from $1,600 on a P05 machine to $48,000 on a P60 machine, with reporting and OLAP modules costing extra and developer workbenches also not being free.
“At first, we had a lot of people doing their homework on the various business intelligence tools available, but because of the new product from IBM, new business was a little bit harder to come by,” explains Bill Langston, vice president of marketing at the New Generation. “But once there was an official announcement, including terms and pricing, now IBM’s announcement has turned out to be a positive for us. So we are seeing a pickup in the market now.”
The other challenge that New Generation faces is that for many of the typical i5/OS and OS/400 shops, Microsoft‘s Excel spreadsheet is the primary business intelligence tool. And where there have historically been large AS/400, iSeries, or System i machines, they tend to be part of a heterogeneous data center where business intelligence workloads are often run on other machinery. “We have always been working between these two margins,” says Langston.
Despite the challenges presented by IBM’s new query product, New Generation is still growing in 2007. “Revenue growth was modest in 2007, and we were able to sustain our profitability,” says Langston. “We did a lot of work with our partners, which is what drove our revenue growth, in fact.” In recent years, New Generation has been creating strong partnerships with software providers in various industries to get in on the sale cycle for these customers, who all need to do business intelligence. “A lot of System i customers do not read the trade press, they don’t read IBM announcements. What they really do is listen to their primary ISV.” The company is focusing heavily on healthcare because hospitals and clinics still love the platform and the applications they have chosen to run on it, making them ripe for BI tools tailored for the i5/OS and OS/400 platform.
As for 2008, New Generation is expecting a bit of an easier year. “Our revenues in 2008 should be better than in 2007 since we will not be competing against a product that has not been clearly defined,” says Langston with a laugh. “We have also put a lot of work into developing packaged solutions for vertical markets, and that is going to be the way for us to have a good year.” But it is never as simple as asking a company to buy a product. “I don’t see any real change, in terms of a downturn, for IT spending in 2008,” says Langston. “But you still have to earn the business. People are very sensitive.”
Focusing on Business Problems, Not on Business News
The best way to sell software, apparently, is to not think about selling software at all, but about solving specific business problems in each individual customer account. It is more like an engineering problem than a persuasion problem, and that is why so many companies that have been selling software successfully for decade after decade are still making their numbers in the System i space.
“We have a business message, and we are not a platform vendor,” explains Richard Schoen, president and chief technology officer at RJS Software, which sells document management, reporting, data integration, and business process management software that runs on the System i platform as well as on other boxes. “Our System i business is still pretty healthy, but we are in a new area, selling business document workflow. So we started out many years ago as a tool vendor, and now we sell business solutions and we are expanding into Windows and Linux. We have changed our selling model from putting a neat tool out there to helping companies save money and make more money.”
This clearly works. The System i platform still represents between 80 percent and 90 percent of RJS Software’s business and has grown at 20 percent or more every year for many years. And thus far, sales at RJS have been unaffected by any of the financial news out there in the world. “There has not really been any effect at all,” says Schoen. “We can show a return on investment, so we haven’t had a problem. You can get companies to spend money because they can attain even more savings. So all of the doom and gloom hasn’t really touched us–knock on wood.”
Being a strong player on the System i platform and diversifying onto distributed platforms has been the strategy at application lifecycle management software maker MKS for a long time. Given the nature of large organizations, which span the globe, and the applications that they create, which span multiple platforms and many tiers, it is getting more difficult to draw the line between a System i sale and a distributed platform sale. The good news is that it is a vibrant market, even if it is a little more blurry.
“In the System i space, we are certainly seeing a continuing trend for application modernization, but we are seeing very little of the market consolidating around one, two, or three technologies,” says Marty Acks, product manager for System i ALM products at MKS. “If anything, there seems to be more options out there in the market for modernization. And it is good for our business that we can do ALM on distributed systems as well as on System i machines.”
MKS, which is based in Canada, is seeing demand pick up outside of the North American market, too, as multinational companies–particularly application software vendors–deploy software labs in Asia. Country boundaries are not as meaningful as they once were.
Like other application and systems software makers, MKS is broadening out beyond its initial tool marketing method. “Checking out and deploying code used to be the marketing box that MKS was put in,” explains Acks. “But people now see what we do as a piece of solution to a much larger issue.”
And Acks has not seen any effect on sales at MKS in relation to the larger macroeconomic picture in the United States and elsewhere. “As the stock market goes up and down, it doesn’t affect the transactions that I see. When a company looking at our software has a bad quarter, spending might be put on hold for a short period of time. But, then again, we have significant footprints inside some of the companies that have been most affected by the subprime mortgage issues, and we haven’t see a big effect.”
Looking ahead, Acks says that the core business of managing source code will be a solid business for MKS, but that growth will come from other areas of the application lifecycle, such as managing developers that span multiple platforms or reporting on development projects that span different development teams and different platforms, allowing large organizations to do comparisons of their teams to better manage them.
John Keyes, the owner of tool maker Computer Keyes, has what might seem like an unconventional and relaxed approach to marketing software to the System i community. “We do not market heavily,” says Keyes. “Instead, we launch a product and we then slowly build up business for it, relying on word of mouth.”
The company currently has four key products (pun intended), including KeyesMail, a native mail server for i5/OS and OS/400; KeyesFax, a fax server for the system; KeyesArchive, a document archiving system; and KeyesOverlay, which converts SCS printer output into color PDF files. “These are our four products, and they are selling quite well,” says Keyes. “Our business is growing all the time. We have been in business since 1978, and we have been through many economic setbacks and recessions. All of these things hit, and we never felt a slowdown, and quite often, when the economy is bad, that is when customers turn to us.”
The one thing Keyes knows–and the one thing that anyone really needs to know to be happy–is that he is winning. So is it a good life, running a small software company in the System i space? “It sure is,” says Keyes, without any hesitation. “We create and sell our own products, and we give free technical support. We have had companies that regularly come to us and try to buy us out. And the reason we don’t do it is simple: This is our life.”
By contrast, I guess it shows that Windows is not Bill Gates’ life, eh?
High Availability Starts Going Mainstream
There has been a lot of change in the high availability software market for the System i platform in the last four years. For a long time, the established players–Vision Solutions, Lakeview Technology, and DataMirror–each had about a third of the market and served several thousand customers. Then, along came iTera and Maximum Availability, introducing new products and aggressive pricing, which forced the big three players to react with innovation and pricing actions that, coupled with low prices on Power5 and Power5+ servers, thankfully made high availability an economical option for many more companies than was possible in the past.
But beginning in late 2006, Vision Solutions, backed by private equity capital from Thoma Cressey Bravo, started acquiring competitors to consolidate the market, eating iTera and then Lakeview, and as 2007 was ending, IBM acquired DataMirror to get its hands on its database transformation software. That leaves Vision Solutions and Maximum Availability as the two main players in a System i market that tends to like at least three alternatives to any solution–and sometimes, more.
Although it is no longer a public company, Vision Solutions has not been shy about talking about how good business has been since the acquisitions and how it intends to expand down into the small and medium business space and radically expand the number of companies that use HA software in the i5/OS and OS/400 ecosystem. Only a few weeks ago, the company put out a statement saying that business was better in the wake of the Lakeview acquisition than it had anticipated.
“We feel pretty good,” says Nicolaas Vlok, chief executive officer at Vision Solutions. “Revenues are growing, and we are making our profit targets. We have not seen a significant slowdown, and even though the System i market itself is not growing, we are growing.”
The reason is simple. Depending on who you ask, between 6 percent and 8 percent of i5/OS and OS/400 shops are using high availability or disaster recovery software, and in the SMB sub-segment of that market, the penetration is even skinnier, at maybe 2 percent of accounts. Vlok says that in 2007, somewhere north of half of the footprints for HA software that Vision Solutions has sold were into SMB accounts, and this has represented approximately 40 percent of the company’s revenues.
“SMB is an opportunity that we are extremely excited about,” says Vlok. “As far as 2008 budgets go, we have not seen a significant impact or hesitation on the part of customers. The changes that IBM has made in the System i product line earlier in the year are settling in, and I think Q4 is going to be pretty good for everyone in the System i space. And I am excited about 2008, too. I think it is going to be a good year for us all.”
That is certainly what the folks down under at Maximum Availability are projecting, too, and they are unfazed by now being considerably smaller than Vision Solutions.
“It has been a solid year for us,” says Andrew Mansfield, vice president of global sales and marketing at Maximum Availability. “Consolidation is a common theme in the IT industry, and indeed across all industries. We have hit the things we wanted to knock off in 2007, and that is what matters. There certainly has been a lot of change in the System i HA software market, but we have been focusing on fundamentals and making sure that what we do, we do well. There are not many industries that have one dominant player, and we see Maximum Availability as having a significant role to play now.”
The company put out a major release, *noMAX Release 1, in early 2007, and is expecting to deliver a significantly enhanced update–Release 2, with user administration, auditing, and autonomics enhancements plus tighter integration with SAP environments–in the first quarter of 2008.
While not at liberty to be specific because Maximum Availability is a privately held company, Mansfield says that revenue growth has been steady in 2007, and that the company has built out its partner network and been more rigorous about getting partners deeply knowledgeable about the *noMAX products. The company has seen strong growth in Australia, New Zealand, and the United States in 2007, and sees the *noMAX suite aligning perfectly with the aggressively priced System i 515 and 525 servers.
While not making any projections for 2008, Mansfield expects Maximum Availability to do well. “In 2008, I think business will continue to open up for us,” he says. “People want choice, and we certainly are providing that.”