The IBM i Market Is Not Economics 101

August 10, 2015 Timothy Prickett Morgan

It is a time of transition for the Power Systems line, and that is one of the reasons why sales have been picking up in recent quarters. The full Power8 product line has been rounded out and is shipping in volume, from the smallest single-socket box up to the biggest, baddest 16-socket server. The Power7+ processors have been in midrange machines since October 2012 and came to entry machines in February 2013 and are winding down in the channel. With IBM i 5.4 sunsetted and IBM i 6.1 saddling up for its ride to the west, this is when we would expect a lot of customers to start moving up to new iron and systems software.

This, say the resellers that we have talked to, is precisely what is happening, and that is good news for the IBM i community. While the Power8 machines are not the universal choice for customers running IBM i, at least not for the dealers we spoke with, they are becoming the mainstream choice for those companies who can move their applications up to IBM i 7.1 or 7.2.

The market for new and second-hand machines is radically different from the AS/400 and iSeries market that we all grew up with 15, 20, and 25 years ago. For one thing, back in the early days, there was an installed base of System/3X and AS/400 customers that was about twice that of the base we have today–something on the order of 125,000 unique customers. (The AS/400 peaked at about 275,000 customers in 1998, as far as I know, and the peak System/3X plus AS/400 base in the late 1980s was around 250,000 customers.) Moreover, the machines that do the data processing work are a lot smaller. Something that would have taken racks and racks of machines and perhaps more than $1 million can now be done with a machine that doesn’t fill a rack and that costs 1/10th or 1/20th as much. Back in the early days, hardware comprised 80 percent of the cost, and today, hardware might be maybe 20 percent to 40 percent of the cost, depending on how much main memory and flash storage is in a machine to raise the hardware bill. Finally, the idea that there is a secondhand market that customers can and do depend on is pretty much gone. Customers only buy used machines because they need an old box to support an old OS/400, i5/OS, or IBM i release. So the interplay of old and new, playing dealers and resellers against one another to maximize the price/performance of a system and to stretch the budget is the stuff of history.

Personally, I find this shocking, more because it was fun to run the numbers when hardware was much more expensive and a bigger part of the budget. But the workloads on OS/400 and IBM i systems, with some exceptions of course, have not grown at anywhere near the Moore’s Law rates that IBM delivers in processor performance. So it takes a lot less machine to do the OLTP work than it used to, relative to the capacity of machines that IBM can build. This, coupled with logical partitioning and other efficiency gains in systems software, are key factors in why the revenue stream for the IBM i platform is substantially less than we might expect.

The upshot, I have learned from talking to dealers, is that customers with Power5, Power5+, Power6, and even Power7 systems can move to a new Power7+ or Power8 machine and radically goose their performance and cut their operational costs on hardware and software maintenance. Pete Massiello, owner of iTech Solutions Group, which is based in Danbury, Connecticut, tells The Four Hundred that his company has not sold a Power7 or Power7+ machine for quite some time and is still selling Power8 iron exclusively. “We have been selling these like IBM is given them away free,” quips Massiello, who is projecting that, based on the business he is doing, that IBM will have a good third quarter at least as far as IBM i on Power Systems is concerned. (IBM does not break these figures out, so it will be hard to tell if this come to pass or not, even if we all do hope for it to happen.)

Here’s how the math works, according to Massiello. If you have a Power6 or Power7 system, and you fully burden the costs of Software Maintenance, hardware support, environmentals, and other economic factors into the equation, you can get a Power8 system with somewhere between 2X and 3X the aggregate Commercial Performance Workload (CPW) rating on OLTP jobs for the same money. There are a “few straggler Power5 and Power5+ machines” that iTech is doing upgrade deals on here and there, and these customers can see 3X to 4X in performance increases and still be spending the same or less money on the lease on the new gear as they were spending to support and operate the old gear.

The most popular machine that all resellers are selling is the Power S814 single socket machine, which comes with up to four cores that can be equipped with IBM i 7.1 or 7.2. This machine is capped at 64 GB of main memory, which seems pretty puny by modern operating system standards, but OS/400 was always smart with its memory management and this machine, with only one core fired up with somewhere around 9,000 CPWs of capacity, has plenty of oomph. The four-core variant of this machine, which IBM announced last June after being pushed hard by resellers and customers to do so, comes in the low-end P05 software tier. Massiello says that most customers only fire up one core for IBM i on this machine. On the six-core variant of this box, which is in the P10 software tier and which was the original entry point for the IBM i line, about 70 percent only have one core and the remaining 30 percent have two, three, and sometimes more cores. Companies are not buying the six-core machine for more cores, but to have more main memory addressable in the system, which can scale up to 512 GB. (Those extra cores can be used on a utility basis or to run Linux or AIX partitions, however.)

A reasonably configured four-core variant using internal disks and having no flash-based SSDs will run about $40,000, according to Massiello, and a fatter six-core configuration with a couple of cores fired up to support IBM i will cost anywhere from $80,000 to $150,000, and these deals usually have SSDs for some of the storage to speed up I/O operations on the hottest datasets in the system. Interestingly, iTech is pushing mostly internal disk arrays on the Power8 boxes it sells, because as Massiello put it, internal arrays are “are cheaper and more easily managed” than using outboard Storwize V3700, V5000, or V7000 disk arrays. These arrays have a different set of skills that system admins need to learn, and many shops don’t want to do it.

Jim Kandrac, president and owner at United Computer Group in Cleveland, Ohio, says that the combination of the Power S814 plus a Storwize V3700 is just the ticket and that such a configuration, with a mix of 15K RPM disks and SSDs, can be used to upgrade systems that have hundreds of disk drives spinning at much slower rates. As we all know, many AS/400 and iSeries shops bought disks more to increase the number of spindles riding over their data than for aggregate disk drive capacity, so having a number of disk drives compressed can save space, noise, and electricity. (Most of the resellers we talk to say that are using the Navigator tools from Midrange Performance Group to cull performance data from current workloads and model them on new machines to make sure they buy the right iron to meet their performance needs.)

Kandrac says that most of the deals he is doing are for the four-core Power S814 machine, too, and like many customers, he wishes that this machine had more memory capacity than its current 64 GB limit. We think 256 GB would be nice, 512 GB would be better, but IBM wants to push that six-core version, too, and that is why the cap is put on the four-core variant. A very small configuration of the Power S814 with 16 GB of memory and maybe 500 TB of disk will run around $35,000, according to Kandrac. UCG’s typical deals, which come with Solution Edition pricing thanks to the the company’s Vault400 service, run between $45,000 and $75,000; customers who active all four cores and buy a hefty machine get just under 40,000 CPWs and pay $100,000 or more, depending on the hardware and software configuration. Kandrac says that he is not selling Power7 or Power7+ machines, despite what some resellers tell us, because he thinks the numbers just don’t make sense.

One reseller we talked to, who requested anonymity, said that he was indeed selling Power 720+ and sometimes Power 740+ machines, and did so for a very good reason: The margins for his business were better on these machines and they better fit the workloads of his particular customers. In many cases, IBM i shops are not even close to CPW bound–they have more than enough compute. What they are is I/O bound, and they are looking for the cheapest way to get I/O and storage capacity in a small box that keeps them in the P05 software tier. Second hand machines do not make any sense because there is a $5,000 IBM i license transfer fee, which is a little more than twice as expense as just buying a new IBM i license for a core. (Whether it is Power7, Power7+, or Power8.)

“We are still selling a mix,” Doug Fulmer, systems architect at KS2 Technologies in Grapevine, Texas, tells The Four Hundred when asked if he is peddling both Power7+ and Power8 iron to IBM i shops. “We will lead with Power8 unless there is a reason to use Power7+.”

The KS2 customer base, Fulmer says, is typical of the overall IBM i base. About 95 percent of the customers are small, and about 5 percent of them are larger shops, so their compute needs, by modern standards, are fairly modest. “We don’t have any customers who need anything larger than a P20 tier system,” he adds. Somewhere around a quarter to a third of the deals that KS2 is doing are for four-core Power S814 machines, he estimates, and while he knows that IBM is trying to sell the combination of Storwize SANs paired with fatter two-socket Power S824 machines, he says “he is not excited about that.” In cases where companies need more I/O expansion than is possible with a Power S814, Fulmer will configure up a Power7+ variant of the Power 740+ system.

One of the issues Fulmer is wrestling with for its customers that they might want to have shiny new hardware with more performance and better economics, but in some cases ERP suites at a certain release level from third-party software developers like SAP or Oracle have only been certified for IBM i 6.1 and are not yet certified with IBM i 7.1 or 7.2. Customers may not want to do an application software upgrade at the same time as they do a hardware upgrade, and in those cases, all resellers have no choice but to gin up an older Power7+ system for the customer and hope IBM can deliver it. (IBM is expected to sell Power7+ machines through November of this year.)

The one thing that all resellers we spoke to universally agree on is that hardware margins downstream from Arrow Electronics and Avnet are not what they used to be in days gone by with earlier generations of AS/400 and iSeries gear. If you find a reseller pushing a Power7+ box, it might be because the margins are higher, as we were told they are compared to the Power8 machines. (This seems stupid to me, but there you go.)

The other interesting thing that shapes a deal is the $50,000 price tag on a deal. If a deal is quoted at $50,000 or more, it goes through a qualification process and that deal is not subject to outside competition from other resellers. This is IBM’s way of protecting its own margins as well as those of its reseller partners. But if a deal falls below $50,000, it is anything goes. Resellers that catch wind of a prospect can come in and fight to win it. In those situations, there is always one reseller who is willing to win a deal at cost and sacrifice its own margins–which is the only way to pay its own bills, mind you–but this is a bit suicidal. If you do it to someone else, they might do it to you.

What I observe is that competition is greatly diminished and while that is good in certain ways for the IBM i community, it is bad in others. For one thing, it keeps the IBM i platform from having a true market of buyers and sellers that are free to elicit intense competition. But maybe those days are gone for all servers, even those based on X86 iron.

“If I was a business partner relying just on hardware, I would be out of business,” says Kandrac emphatically. “Every business partner has to find its niches.” In the case of UCG, it is disaster recovery and IBM i hosting in addition to selling systems with ERP partners as well as raw upgrades for all kinds of customers.

Fulmer concurs that this competition for IBM i system deals under $50,000, and indeed any kind of competition relating to hardware and systems software, misses the point. The stakes are high no matter what, and resellers get that. “A lot of partners pay attention to their customers, and those customers therefore do not go out shopping deals anyway,” he says.

This all looks like a command economy to me, not free market capitalism. This may not be Economics 101, but this seems to be the IBM i reality. We leave it to customers to make their own value judgements.

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