IBM Focusing on i5 Account Sales, Not i5 Sales

May 7, 2007 Timothy Prickett Morgan

Mark Shearer, the general manager of IBM‘s System i server division, gave the keynote address at the annual COMMON OS/400 and i5/OS user group meeting, which was hosted in Anaheim, California, last week. The fact that he attended his fifth COMMON event since taking over the division in January 2005–COMMON used to be held twice a year until 2007–and is architecting a stabilization of and maybe someday a recovery in System i5 sales have both been reassuring the OS/400 and i5/OS faithful. The AS/400, iSeries, and i5 line has seen some pretty big revenue declines and a revolving door of general managers in the 2000s.

Long before IBM ever talked about this publicly, I was saying that half of Big Blue’s customer accounts come from the OS/400 and i5/OS base, and that this is an important fact that anyone analyzing the health of that platform’s ecosystem has to take into account. (See Server Ecosystems: Take a Ride on a Slide for more details on that, which is by no means the first time I have done the math on who IBM’s customers are.) IBM cannot and will not walk away from these more than 200,000 OS/400 and i5/OS accounts, but it is safe to say that the company has been struggling with a means to preserve investments on IBM hardware and software in these accounts since the advent of RISC/Unix platforms and cheap NetWare servers in the late 1980s and Windows NT servers in the middle 1990s.

The other thing I always remind people of is that IBM will have a machine supporting RPG and COBOL applications compiled for the Power architecture as long as customers have a demand for it. That doesn’t necessarily mean that IBM will emphasize RPG, COBOL, i5/OS, DB2/400, and the other features of the i5 platform. But it does mean that customers will have a platform on which to run their applications. The odds favor that IBM will continue to invest in the Power family of processors well into 2015, but it could turn out that the company moves to an emulated environment on X64 processors at some point if, for instance, shipments of AIX and i5/OS boxes slip for some reason or all of the game console makers ditch the Power architecture. I am not saying there is a high probability of either of those happening. But if it does, you can bet IBM will use technology similar to if not the same as the QuickTransit emulation environment from Transitive to support AIX, i5/OS, and Linux on Power applications on another hardware architecture, or it will simply do a true operating system port to the X64 architecture if it comes to that.

Shearer has listened to untold customers, business partners, and industry smart-aleks like myself for more than two years, and the user-priced i5 515 and 525 entry servers are one of the results of his actually hearing what people are saying. Shearer understands the competitive pressures, as each prior AS/400, iSeries, and AS/400 general manager has before him, but he is actually doing something substantial and maybe a bit risky about it, as his predecessor, Bill Zeitler, did in developing the AS/400 “Invader” Model 170 entry servers back in 1997; these machines were launched in February 1998 after Tom Jarosh took the helm of the division a few months before they came to market, but Zeitler, who is now in charge of IBM’s Systems and Technology Group, of which the System i division is a part, deserves credit for the move. The Invader machines offered competitive price/performance compared to Wintel boxes, and they sold well.

With all of this running around my head, I sat down with Shearer at COMMON last week and talked about the System i business. I also listened in on the opening session, where he talked a bit about the business, and ran into him on the expo floor, where we chatted a bit.

Which brings me to a point I like to bring up from time to time. The AS/400, iSeries, and System i executive team is by far the most approachable of the server companies or server divisions in the entire IT market. In the more than 18 years I have been watching the server space, none of the top brass within other IBM server divisions, nor any of the execs among the dominant players in the server market outside of IBM, have ever been as approachable to customers and pains in the neck like myself. It has always been this way, and it is a testament to the Rochester, Minnesota, mentality that it continues to be this way. So, kudos to all of the Rochester and Somers people associated with the System i line. Again.

In the keynote address, Shearer said that since he has taken the helm of the System i division, IBM has invested over $1 billion in processors, operating system enhancements, systems software, and application and certification for the i5/OS platform. (Some of that money is, of course, going to prop up the IBM’s System p AIX and Linux server line, which shares a common Power server platform. So don’t misunderstand and think IBM’s System i division is getting more than $500 million a year in research, development, and application porting budget.) “We are really going to capitalize on this investments we have made,” Shearer told COMMON attendees.”

And he conceded that many i5/OS shops have told IBM that it charges too much for the i5, which has just about everything bundled in as well as integrated, and the new user-priced i5 515 and 525 systems were designed to address these concerns. “Many of you have said that you do not mind paying a fair premium for a System,” he said, but indicated that going forward, IBM has understood that technical integration does not have to be equated with bundled software and functions. (Many of us have been banging this drum for years.) Shearer explained that with the new i5 515 and 525 machines and the changes that IBM made software pricing on the existing i5 550, 570, and 595 machines–which can now have am i5/OS license for application serving that does not include DB2/400–were aimed at “pricing the i5 system to the value delivered.” Such an attitude is, of course, something that many of us welcome for the i5/OS platform. And Shearer hinted that this was just the beginning. “We will bring this across the line, but it is not going to happen over night.”

Shearer talked a bit about the i5/OS application catalog, which is important since historically since OS/400 and i5/OS server sales have been driven by applications, not any fealty to the operating system that runs them. Over 2,500 independent software vendors have ported over 5,800 applications to the System i platform, Shearer said. The i5 platform supports i5/OS, AIX, and Linux side-by-side in logical partitions, and some of those applications run on AIX and Linux. Shearer said that over 1,300 OS/400 applications have been modernized (meaning ported to i5/OS and given new Web front ends) and over 2,000 applications have moved over from AIX and Linux on X86 as part of an application modernization initiative that he started more than two years ago. He also said that the VIP marketing program, which IBM launched in February to target 80 specific industries in precise geographies was key to getting new customers to the i5/OS platform. These are niches where i5/OS applications are appealing to customers and where Windows, Unix, and Linux applications might be found wanting.

“What I learned was that enabling more than 3,000 applications was not enough,” Shearer said. “By having a more focused approach, we have been able to generate far more demand for the System i. We have found this to be a more effective approach compared to generic advertising and generic marketing.”

With about half of IBM’s customers having an OS/400 or i5/OS server on site, Shearer wanted to reassure COMMON attendees about the importance of the base–particularly since we all watched the revenue declines in recent years for the platform. He said that IBM is not focused on i5 sales as much as the total IBM relationship at these sites. “This is an extraordinarily important client base for IBM,” he said. “We’re aggressively going after new business in a way that we have not in the past six to eight years. We are aggressively focused on moving to a price-to-value approach, and I am as passionate about the product today as I was years ago.”

Which brings up the next point: Will Shearer have the top System i job for much longer? “I am full speed ahead, even after three years,” he said. And privately, he did not budge when I asked if IBM would be promoting him to another job soon.

Speaking to him later, Shearer explained why IBM was focused on the i5/OS and OS/400 accounts instead of on i5 system sales. He said that based on surveys of the customer base in the United States, IBM has calculated that for every $1 customers spend on i5 systems, they spend an additional $2.60 on Windows systems and another 40 cents on Unix systems and external storage arrays.

“We not going to push people to new technology–they’re already there,” Shearer admitted. “And we want to do a better job selling blade servers, SANs, and other technologies to System i customers. We still have some work to do to make the selling seamless.” Moreover, IBM’s Rochester technical support team, which is second to none in the IT world, is being asked by customers to support other IBM products with the same level of support they provide for the i5 servers and i5/OS systems software. So they want seamless support, too.

In days gone by, IBM had dominant market share in X86 servers and PCs at AS/400 shops as well as an AS/400 server business that, in terms of revenues, accounted for about 20 percent of worldwide server sales. This was, of course, when the server market was half its current size back in the early 1990s, and X86 servers were not in the data center yet, but used primarily as print and file servers in departments. According to Shearer, IBM’s share of the X86 and X64 servers installed at i5/OS and OS/400 sites today is around 30 percent–which means IBM wants to get as much of the non-Blue 70 percent as it can.

When pressed about the potential for getting real growth for the i5 systems themselves, Shearer did not want to get into any specifics. “It depends on how you look at the boundaries,” he said. “If you define it in a holistic way, I believe that can grow. I am thinking of the System i as a marketplace, not as a processor and an operating system. We need to make it easier to integrate these products and encourage companies to buy IBM’s products.”

That may not be the answer that many people want to hear, but it is an honest one.

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