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Issue Date: October 2007

MarketWatch: the System i market

October 2007
Timothy Prickett Morgan

The System i market has had to absorb a lot of changes in 2007 so far and is coping with other changes that are on the horizon.

IBM has announced user-based pricing on entry System i5 models, has introduced a Power6-based machine with a new pricing model, and i5/OS V6R1 and a more complete Power6 line including a blade server are on the way.
In addition, there is no System i division any more, with the line split into Business Systems at the low end and merged into the Unix business as Power Systems at the high end. The economy is also a bit skittish.
Given all of this, it is natural enough to wonder how business is going out there in i5/OS and OS/400 Land. Because of the substantial changes in the AS/400, iSeries, and System i market in the past decade, IBM's own ups and downs in i5/OS and OS/400 platform sales are not necessarily a good leading or lagging indicator of the health of the business ecosystem surrounding that platform. Many times in the past, as IBM's AS/400 and iSeries sales were heading south due to a product transition, some software business partners and hardware resellers nonetheless did brisk enough business to steal away some market share from competitors and grow, despite the environment. That said, when the economy in general catches a cold, IT budgets in general and spending on AS/400, iSeries, and System i machinery in particular can catch the flu and become bed-ridden for a quarter or two, and sometimes longer, as the decline in sales after the 2000-2002 recession demonstrated.
Despite all of this change, System i resellers are keeping their chins up, and they are doing deals. And they are, like everyone else, a little nervous about the strength of the global economy.
Reseller Sirius Computer Solutions is IBM's largest solution provider in the United States and which only sells servers and storage with the Big Blue brand on them. Sirius is based in San Antonio, Texas, but sells all over the United States. About a quarter of the company's sales each year come from the System i platform, and not including the company's recent acquisition of competitor SCS, which sells mostly in the eastern part of the United States, Joe Mertens, executive vice president at Sirius, expects Sirius to grow by 19% to hit around $735m in sales.
System i-related sales are also expected to grow by 18% at Sirius this year, again not including the SCS acquisition. Given how the i5/OS platform has been declining in the past couple of years, such growth, which is keeping pace with all of the Unix, Windows, Linux, and mainframe iron and related solutions that Sirius sells, is unexpected. But Mertens said it may not be indicative of the market at large. "This is more of a market share statement and a result of our success in specific solution areas, such as Voice over IP. We have so much System i skill depth that we continue to do well," he said.
When asked how the recent ups and down in the stock market, slackening home sales, the mortgage crisis, and other bad news in the economy was affecting the server market, he laughed. "It is interesting. I am getting asked that question a lot lately," he said. "The good news is we are not seeing a slowdown due to general economic conditions. That said, I think it is natural to worry if this is a blip, and I think it is too early to tell. We will have a better sense soon."
Tony Madden, who is senior vice president and general manager for the IBM Solutions Group at the Avnet Technology Solutions division of giant IT reseller Avnet, sits across town from Sirius in San Antonio, managing the IBM server and storage channel for Avnet. The company has 350 resellers downstream who buy System i and other servers from Avnet and then peddle the gear to their respective customers.
In the past few weeks, Madden said he has seen a bit of a softening in the market, but he is not overly concerned. "We are doing well with the other brands, but right now there seems to be some softness with the System i," Madden said. "But I expect it to bounce back. The trendline for System i sales for us over the past few years has been pretty encouraging."
The user-based System i 515 and 525 servers in April and the introduction of a new Power6-based System i 570 in July, an impending Power6 blade server announcement due before year end, and the expectation that IBM will flesh out the System i line fully with Power6 processors and the new i5/OS V6R1 software may all be causing customers to stop and take a hard look at their system purchasing and upgrade plans. As for the System i 515 and 525 machines, Madden is not sure quite yet what effect they are having on stimulating sales in the i5/OS market.
"This was the right thing to do," said Madden, referring to the System i 515 and 525 launch. "But it was done a little later than we would have liked. And like any announcement, these new machines take a while for resellers to digest. Small independent software vendors are excited about these boxes, and they like the new pricing.
But at an $8000 price point with not a lot of margin, they need to sell a lot of these machines." As for whether or not these user-based machines are revitalising the System i platform, Madden is not sure yet. "It is a little too early to determine if this packaging and pricing is working or not," he said. "I do not think one or two quarters set a trend."
The bigger boxes in the System i line, the midrange i5 550 and the high-end i5 570, are plugging along among Avnet's reseller customers, according to Madden. These machines have the best traction in the market, according to Madden, and the i5 570 in particular is a sweet spot for resellers because it has lots of margin and can be used to host fairly large workloads. The machine has also been popular as a server consolidation platform, particularly after IBM has adjusted prices to make the i5 570 less expensive for hosting multiple workloads using so-called 'value-based' pricing, which was fully realised with the new Power6-based System i 570.
The good news from Avnet is that budgets at i5/OS and OS/400 shops are holding, but the bad news for resellers is that the sell cycle is more complex. "I have not seen budget plans changing out there," said Madden. "But partners do have to do more justification these days, and return on investment is key. The days of buying capacity for the sake of capacity are over."
A decade ago, companies would do a big upgrade, maybe doubling up their compute capacity, and then grow their workloads over the three to five years of the economic life of the machine. As processor performance jumped dramatically, the time between upgrades got further apart. This is one reason why iSeries and System i sales at IBM have dropped in the past seven years. IBM has also been pushing more machinery through the channel as opposed to selling directly, which also diminishes the amount of money IBM itself can book for iSeries and System i sales. Add in price/performance improvements and cuts on software pricing, and it is no surprise that IBM was seeing the declines it was.
"Our System i business is doing pretty well this year," said Pete Elliott, director of marketing at reseller Key Information Systems. "While there is a lot of upgrade activity going on, a lot of people are waiting to see what IBM does with Power6 processors and V6R1. As for upgrades, people were over capacity a few years ago, but now they have burned it off and they are upgrading again."
Some companies need to upgrade now, and they cannot wait. Which is one reason why IBM pushed the System i 570 with the Power6 chip out the door even though V6R1 was not yet ready. IBM did the same exact thing with AIX and the System p line. AIX V6 is not ready yet, either, and both AIX and i5/OS were patched to provide support for the raw processing power of the Power6 systems, even if all of the gadgetry in the chips was not available.
Elliott said the i5 550s and 570s are what its customers are really interested in buying, and it is not just for server consolidation, but for raw capacity to support new and bigger workloads. He said he is not sure how well the System i 515 is being received. "I do not think the 515 is doing as much business as everybody thought it would," he said. But even with that, he thinks Key will do alright on the System i front. "I think our business will be flat, but it will be a healthy flat," he said.
Key is also hoping to get some traction in the VoIP space after getting some big accounts to consider the IBM-3Com bundle. "The VoIP thing has been good," said Elliott. "We have a number of customers that we are talking to, but the sales cycle is long and there is a lot of analysis that needs to be done, both for technical and financial issues." Elliot is also trying to figure out how to pitch the System i 515 as a business intelligence box, taking advantage of its low price and the new DB2 Web Query tool, which is based on a set of code that IBM has OEMed from Information Builders. "This software makes the System i a real business intelligence server, and it really does work," he said.
The System i market is still driven by smaller resellers, of course.
DLB Associates is one of the many hundreds of resellers that are actually in customer accounts, trying to solve IT problems with System i technology.
Doug Bidwell, who is the systems engineering manager and owner of the firm, which is located in Valencia, California, has a lot of small accounts and a number of big ones, too.
"About half of my accounts are very, very interested in cross-site mirroring and how they can make use of this for disaster recovery and high availability," said Bidwell. "So in most of these accounts, I am looking at two-machine deals, or customers who get a new machine and keep the other one rather than upgrading one box for more capacity. The other thing I see if that my customers do not want to learn a lot of new stuff, and while they are happy with many of the changes IBM is making with i5/OS V6R1, they are even more happy that the pace of change in the operating system is slowing down."
As for how sales are going, Bidwell was not specific, but he offered some color. "Business is stable, but the installed base is shrinking," he said. "Companies are putting less and less on the System i platform and more and more on Windows. Upper management still views the System i as legacy, and when they want to add new software, they look to Windows first."
There are plenty of ways to counter this. That is why Google invented a good search engine and why Al Gore invented the internet. Hopefully, a user-based, integrated, hybrid i5/OS-Windows blade system aimed at SMB customers will do the trick.
Source: Computergram

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