IBM Aims for Server Expansion in 2008, Including System i Reincarnation

January 21, 2008 Timothy Prickett Morgan

For the past several years, I have ended each work year by attending a server technology conference hosted by UBS, which typically draws the top brass from the major server divisions of the tier one server makers. This year, because of the high cost of putting on the event, UBS decided to not do it. But some of the server makers did attend the Global Technology Conference in San Francisco hosted by Lehman Brothers in December. One of them was IBM, and Bill Zeitler, the senior vice president in charge of Systems and Technology Group, had some interesting things to say.

I am not big on public speaking, but at the UBS event I did sit on a panel to talk about server-related issues with the vendors and with the IT staff at the Swiss bank. It gave me a chance to remind everyone listening that in the future, there would be a virtualization blowback on server shipments and revenues, much as hit IBM’s mainframe 15 years ago and which started to hit the AS/400 line a decade ago; the Unix market suffered a similar contraction starting in the late 1990s. And at some point, when the X64 market is saturated with 64-bit and virtualization-capable boxes, the X64 server market gets its crunch time. Particularly once virtualized I/O is part of the virtualization technology. At that point, no customer is going to be buying the 200 percent or 300 percent typically needed server capacity to deal with week-end, month-end, and year-end processing peaks. And at that point–mark my words–server sales are going to contract, bigtime. And with the entire server business predicated on the inefficient use of servers to generate profits, this is going to put tremendous pressure on server makers to try to justify their platforms with integrated software and services. That will, in turn, put margin pressure on the companies as a whole, which means vendors will jack up support prices on legacy iron and make it very painful for companies to stay with existing iron and software.

There. I got to say it any way. I feel better now.

Knowing what I know about IBM’s fourth quarter sales–and what Zeitler was aware of when he gave the ending keynote at the Lehman tech conference on December 5–than IBM must be feeling better than it did in the third quarter, when server sales slumped in part to a slowdown in the financial services sector and, as it turns out, to a change in IBM’s sales cycle from four quarters to two six-month cycles for servers, storage, and software.

The slowdown in the financial services sector (which is where IBM does about half of its mainframe business and a lot of Unix and Windows server sales, too), has been discussed at length. But IBM didn’t say anything about the shift in sales cycle when it reported its financial results for the third quarter, nor did it say bupkis about this change in its call with Wall Street analysts last week. And as it turns out, this may have been a big factor in IBM’s sales bumpiness in 2007. According to Zeitler, IBM’s sales cycles used to end at every quarter, but the company shifted to two six-month cycles in 2007. That gave sales reps and channel partners pushing servers, storage, and software the room they needed to cope with the inherently longer sales cycle in the data centers of the world these days. It also allows IBM to get half way through a year and make a shift in tactics, if necessary. Doing that four times a year is just too disruptive. But making the change the first time also had another effect, which Zeitler expressed with his usual dry wit. “We had a goal to create two fourth quarters,” he said, referring to the annual bump in sales that usually comes at the end of the year, “and what we did is create two first quarters.” With a new year comes new budgets, new uncertainties, and data centers full of new gear bought in the fourth quarter, so first quarter sales tend to be weakest of the fourth quarters in the IT space.

Every year for the past 25 years, IBM Research has put together an internal report called the Global Technology Outlook, and this is the roadmap that IBM’s product groups and divisions use to steer by as they chase IT budgets. IBM had just completed the 2008 edition of this report as Zeitler was giving his speech, and he said that there were four major areas that IBM would be concentrating on as its Systems and Technology Group continued to evolve. (As an aside before going into the outlook report, Zeitler said that the reorganization of STG into client-facing divisions overlaying product development divisions would allow 40 percent more of the STG staff to have jobs interacting with customers–not other IBMers or the channel–to help Big Blue kick start market share gains in servers, which have slackened after 2006.)

For growth areas on a strategic time scale, aside from the usual emerging markets where what we would call traditional computing is not yet pervasive, the outlook report says that embedded supercomputing, Internet-scale data centers, the Web as an application platform, and real-time or real-world computing are going to be key. By embedded supercomputing, IBM means applications like putting Cell Power processors into radiology equipment (as it is doing with a partnership with the Mayo Clinic) or a hybrid mainframe-Cell platform for online gaming (as it is doing with a Brazilian company called Hoplon International). The Web as a platform area is being attacked through cloud computing partnerships like the one that IBM has formed with Google, which is teaching massively parallel, Web-style programming on clusters of machines to students. The real-world, real-time computing effort, which has so many applications in financial services, homeland security, and any other area where information from multiple sources and data types has to be synthesized in real-time, is being attacked with a experimental project called System S. (I have tried to get more information on System S, which is short for stream processor, out of IBM, but have thus far been given the cold shoulder. All I know is that one financial services company is testing it now, and I have no problem believing that Uncle Sam actually got an even earlier edition of whatever this box is.)

The Lehman Global Technology Conference is full of analysts and stock buyers who are paid to think tactically maybe one to three quarters into the future, so a lot of what Zeitler had to say dealt with more short-term issues than he outlined. In the near term, the main issues for IBM seem to be getting revamped Power and z6 products to market, and for customers it seems to be wrestling with complexity.

On the product front, Zeitler said that by the beginning of the second quarter, IBM would have “more new products than we have had in a decade.” We already know from last week’s financial results, announced by Mark Loughridge, IBM’s chief financial officer, that the z6 mainframes are coming at the end of February, and that new entry Power6 servers are coming with System p labels in the first quarter. The System x and BladeCenter products have already been updated with everything new except Advanced Micro Devices‘ “Barcelona” quad-core Opteron processors. So that leaves midrange and high-end System p boxes using Power6 chips and entry, midrange, and high-end System i boxes using Power6 chips to come out some time before the end of February and whatever “the beginning of the second quarter” means–it could be April or maybe early May. You have to figure that IBM wants to get everything done and selling before Memorial Day, the unofficial beginning of summer–especially considering that it is on a six-month sales cycle now. Every week later it takes to launch new products is another week closer to the June 30 end of the six-month period.

In the near-term, what IBM is keen on leveraging is the woe customers have in dealing with complexity, power issues, and the ongoing desire to build out their IT infrastructure even as they are limited by power and cooling in many cases.

“Many of the customers that we are talking to are facing a crisis of complexity,” explained Zeitler, reiterating a message IBM has been hammering on–particularly with the iSeries and System i product line–for many years now. “Because of the build out they have had in their environments in the last decade, they are faced with an enormous proliferation of servers, switches, fabrics, and storage. Many of them are at the point that they have to rationalize this. Virtualization plays a role. Energy efficiency plays a role. But I think it is going to drive spending in the near term. That said, we really believe that 2008 is going to be a time when cost-effective kinds of solutions are going to be important.”

Like, no kidding. IBM took advantage of the massive downturn in the economy to rip Unix business away from Hewlett-Packard and Sun Microsystems starting in 2001, and was lucky that the downturn in IT spending coincided with the launch of the world’s first dual-core processors, the Power4 chips. IBM sold these machines for anywhere from half to one-third the cost of competitive Unix boxes, and ate market share like crazy while at the same time increasing its revenue share. However, IBM helped the Unix market collapse, and could either do nothing or decided to do nothing to help prop up its iSeries and zSeries businesses beyond some tinkering here and there. It is not clear, from a profit perspective, that this strategy made a lot of sense, but if you were angling for account control and customer share, as IBM clearly was and its executive bonuses were clearly tuned to, then it made perfect sense.

IBM is not sitting so pretty if 2008 turns out to be 2001 redux, but then again, neither are other server makers. This time, a downturn could compel customers away from having boxes at all and renting capacity on utilities. And IBM knows this, and is trying in recent months to position itself for this through collaboration and partnerships.

“Most people would not have thought that Amazon as a seller of servers and storage,” said Zeitler, referring to the online retailing giant’s server and storage utility offering, called EC2. “But in the macro sense, they are. Any time you have a period of clear discontinuity, like we are going through with this build out of the Internet, networked world, you are going to have new entrants and innovation. Breakthroughs are going to come through collaborating with others.”

That is not the IBM of the 1960s and 1970s talking–that’s for sure.

What IBM is counting on is that its Global Services group, which runs the largest data center collection in the world, can learn new technologies as they come along, from IBM as well as others, and implement them as a service as corporations and governments decide to use them. Ditto for energy efficient computing, which may not be high on everyone’s list, but sure is rating high in the economic centers of the world that tend to hug the coasts. To make his point, Zeitler told a funny story.

“Green is well down on the list of priorities–until you have run out of power,” he said. “I was here in San Francisco a month and a half ago with Pacific Gas and Electric. So PG&E had 300 servers they consolidated down to six, and they saved 80 percent of the energy or something like that. But the reason they did the consolidation was because they could not get any more power into their facility on Market Street. They might be the power company, but the city of San Francisco had other thoughts about this.” Zeitler said that he knew of plenty of financial services customers who could not deploy the 2,000 servers they needed for new applications because they had run out of power. “I don’t think most observers have a sense of how critical this has become at large-scale data centers. These customers have not suddenly turned into tree huggers. They simply have no more cooling capacity and no more power.”

So IBM thinks that virtualization and green technology are going to drive sales in 2008, as well as the normal upgrade cycle for a revitalized set of products. And IBM believes that it can take more market share. “What I say to people is that we can worry about whether or not the server and storage markets are going to grow at 2 percent or 3 percent a year after we have a much higher share than we have today,” Zeitler said. “There’s plenty of room to take share in this current environment, and I think the market is kind of unsettled in this regard.” That’s why IBM is putting more STG faces in front of more customers, and presenting a unified front to them instead of talking to them divisionally about different products.

As for the virtualization downdraft, Zeitler did not say it was not going to happen, but he did make a case that IBM was well positioned to ride that downdraft and he explained why. “First of all, people are not doing it on the servers they have. They buy it on new ones because their old ones are not big enough.” He then went on to say that if you take a rolling four-quarter average of server data from IDC, broken down in volume ($25,000 and under), midrange (between $25,000 and $250,000), and high-end ($250,000 and higher) servers, IBM has a 52 percent revenue share of servers that cost $250,000 or more, and a 43 percent or 45 percent share of machines that cost more than $25,000 or more. But in the volume space, IBM has only a 17 percent share. Now, while IBM wants a bigger piece of that volume market, and is committing itself again to the small and medium business space to try to boost its sales down here where HP and Dell do so well, the virtualization shift might help IBM just because of the scalable X64, Power, and mainframe servers it designs and sells. “I think that what you are going to have is fewer small servers and more large servers,” Zeitler said. “It is not that there are not going to be dislocations in the market, but that we think this plays well to us.”

Zeitler came out of the IBM midrange organization that started with the System/3 and culminates in the current System i. And the analysts at the Lehman conference actually asked about the fate of the venerable minicomputer line, not embodied in a power set of Power machines running i5/OS software. Point blank, the host of the call asked if the iSeries (not the System i) was dead.

“It’s going to be reincarnated,” said Zeitler. “What happened with the iSeries is that it got too far away from its basic value proposition of solutions.”

He went on to explain the break up of the System i division into Business Systems for the low end and the merger of the System p product line with the high-end of the System i line to create the Power Systems division, which we have been over in this newsletter a lot. (Big AIX and i5/OS shops, which also run Linux, love it. We know, we know.) He did talk a little bit more specifically about what Business Systems is up to.

“At the low end, we’re going to announce a new family of products built off a combination of the i5/OS base and Linux capabilities,” Zeitler explained. “Think of what we did when we launched the AS/400–most people don’t remember it, but I was there–which was the combination of a very sophisticated architecture of the System/38 and the simplicity and ease of use of the System/36. That’s what we are going to do. The i5 people, software developers, and customers that we have presented this to are highly invigorated. They really think this is the right thing to do, and we have already signed up a large number of the legacy i5/OS software providers and a large number from the Linux world to provide solutions on the new products.”

Notice how Zeitler did not mention Windows?

He did say a little later that SMB customers want to run a mix of i5/OS, Linux, and Windows on a single platform, and the new BladeCenter S chassis was perfect for this now that the Power6-based JS22 will support i5/OS.

“We have to revitalize this thing,” Zeitler said, referring to the i5/OS platform. “The idea of keeping something simple–and we can come back a year from now and see if I was right–is the right idea. We just got away from it. We focused too much on the technology and not enough on the problems that customers had.”

I don’t entirely agree with the assessment, and I have some thoughts on this supposed i5/OS-Linux hybrid platform aimed at SMB customers, too. But that is another story, perhaps for next week.

In the meantime, if you want to listen to Zeitler’s full presentation, click here.

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