IBM Cuts Some System i5 Prices to Boost Sales

As we all know, IBM had a relatively weak first quarter in 2005, two very good quarters in the middle, and then two weak ones at the end of 2005 and in early 2006. In addition to its desire to reinvigorate the technology and marketing of the OS/400 platform, IBM made a commitment last year to not only bolster sales of the iSeries–now the System i5–platform, but to get more regular, consistent sales in addition to growth. It is safe to say that this has not happened.

iSeries and System i5 sales have been choppy for the past five quarters, and on average, they have been trending down. IBM has blamed the choppiness on product transitions, with customers at the end of last year apparently expecting a revamping of the iSeries platform in early 2006, which apparently slowed down sales. I think this might be a bit disingenuous. The OS/400 platform has four main resellers that generate revenues for the box–IBM and its three master resellers, Arrow Electronics, Agilysys, and Avnet. I have a hard time believing that these four didn’t know that new iSeries machines–to be dubbed the System i5 line–were not coming at the end of January 2006. So, if you knew machines were coming, would you stock up your resellers with older boxes? If you were a reseller, wouldn’t you be bugging your master reseller for some sort of guidance on when new machines were coming?

Of course you would.

And this, of course, is the problem with the AS/400, the iSeries, and now the System i5. When the pricing for your integrated solution is very high–I know all the arguments for why this is a valuable way to sell a server–and it is bundled such that customers have to go through a complex budgeting process to do a new sale or an upgrade, then companies take a long time to make a decision. They often put off orders until the rumored announcement, because announcements often have price cuts associated with them as well as price/performance improvements. The choppiness in iSeries and System i5 sales, then, is due to the pricing and packaging as much as the transition from one product line to another. People do not seem to understand that.

In the X86 and X64 server markets, you don’t see a massive decline in sales as Intel and AMD roll out new chips. Even the transition to dual-core processors this year and last is going relatively smoothly, if you add Intel’s and AMD’s sales together. Intel’s OEMs are sitting on a pile of Xeon chips not just because the future Xeon Core chips, which are due in the third quarter, are so much better than Xeons with the P4 core–which they certainly are–but because AMD’s Opterons are so much better and the Opterons can be had today. And if companies have hundreds or thousands of X64 servers sitting around with processors in them that will soon be made obsolete, they do this very old-fashioned thing: They cut the price and move the box. This is part of the game. They move on, getting the new stuff and selling that at a premium.

I think that IBM’s declining iSeries and System i5 sales are caused very simply by the mismatch between what SMB customers expect in terms of pricing and packaging and what IBM is delivering. Windows and Linux platforms are essentially neutral on the processor core count, which means a fast X64 processor now has a substantially lower software bill for operating system and middleware software than a Power-based System i5 OS/400 machine or System p5 AIX machine from Big Blue. As very efficient, low-cost, dual-core X64 chips become more commonplace, the gap between the System i5 and the X64 platforms will only widen. Which is why I am someone disappointed that IBM has not, with its May 2 price cuts, done anything to lower the cost of the i5 520 platform. But, perhaps someday, when IBM realizes the threat, we will see an i5 510 that doesn’t charge extra for the core and has a wickedly competitive price on i5/OS.

That hasn’t happened yet. But, IBM has cut some prices, and that is always good news if you believe in the elasticity of the OS/400 market and have a desire to see IBM sell more aggressively into its vast installed base of machines, which numbers about 400,000 machines at some 200,000-plus unique customer sites. I am not so sure it is good news for System i resellers, who will make less money on each sale and can only make their numbers by selling more boxes.

Specifically, customers buying i5 550 and i5 570 machines running i5/OS Enterprise Edition as well as those buying i5 595 machines running i5/OS Standard or Enterprise Edition, can now get new machines or upgrades to them for a substantially lower price. IBM has also cut the prices on a number of High Availability (HA) and Capacity BackUp (CBU) machines. If you want to see all the price changes, I have extracted the information from the announcement and put it into a table. To make this information a little more digestible, I have also made a table that describes what these different machines are and what prices have changed.

As these tables show, IBM has cut prices on the base i5 550 machines running i5/OS Enterprise and Solution Edition prices by 19 percent, and cut the price on the i5 550 HA Edition by 21 percent. Prices on the base i5 570 Enterprise Edition machine were cut by $100,000, a 22 percent decrease, while larger i5 570 machines saw more modest cuts. Why is IBM doing this? I think that customers who were looking at base i5 550s and i5 570s were turned off by the higher price tags, and they started squeezing into fatter i5 520 and i5 550 machines, respectively. This is the dreaded “model mix” problem in the server business, which server makers are always having to contend with. They want to charge a premium for scalability, but the scalability they create is often larger than customers can consume. With over 95 percent of sales in 2005 for the iSeries being for i5 520 boxes, one thing is certain: IBM wants more customers to buy bigger boxes, which they can use to consolidate lots and lots of workloads on.

“People who were considering an i5 520 can now move up to a more scalable i5 550,” explains Ian Jarman, product manager of the System i product line at IBM. Ditto for the i5 570 relative to the i5 550. “We are always trying to rebalance price and value,” he says, adding that this pricing action was based on feedback from customers who wanted to get the bigger boxes, but didn’t want to pay as much to make the initial jump. As for why IBM didn’t cut prices on the entry machines, Jarman indicated that this is not what the market wants. “We’ve had a lot of good feedback on the restructured i5 520 with the Accelerator,” he explained. “ISVs were also very happy about the fact that we supported both i5?SO V5R3 and V5R4 on the machines. And customers liked the restructuring of the i5 570 last year.”

As for the price changes on the i5 595, these seem to be driven more by IBM’s delays in getting the Power5+ processors into its high-end i5 595 and p5 590 and p5 595 machines. IBM was expected to have the Power5+ chips in its bigger Power boxes late last year, but now it says they will not be available until the third quarter of this year. So, it has cut prices on the existing Power5 boards in the p5 line and has somewhat mysteriously rolled out a new 16-core server board using the existing Power5 processors. (See Power5+ Delays Force IBM to Cut High-End System p Prices from The Unix Guardian for details on the System p5 price changes and my ruminations about the future Power5+ announcements.) IBM cut the price on the existing 16-core Power5 board, and the System i5 line seems to be getting the benefit of that price change as well.

It is important to note that, with the exception of the i5 595 price cut, no machine running i5/OS Standard Edition saw a price cut. These price changes were mostly about making it cheaper to run machines with 5250 green-screen workloads. This is good, because green-screen capacity is still way too expensive, and I think is a limiting factor in System i5 sales. In terms of bang for the buck, Jarman says that the price cuts on the i5 550 result in a price/performance improvement of about 29 percent compared to last year’s box, and on a 2/4-way i5 570, the price/performance has improved by about 39 percent for the base machine. The i5 595 has a more modest 4 to 8 percent improvement in bang for the buck. Of course, when you load up memory, disk, and other peripherals, these percents start going down. But, every price cut helps. So I am not complaining as much as I would if IBM saw sales decline, knew about the model mix problem, and did nothing about it.

Now that I think IBM will not be making product line or price changes for a while, I will set about to making my usual OS/400 server to Windows, Linux, and Unix server comparisons. Brace yourself.