State of the System i: First-Hand Reports from Second-Hand Dealers

October 22, 2007 Timothy Prickett Morgan

While few people think about it, much less talk about it, some of the things that make any data center-class computer system worth the extra money that companies shell out for them include the fact that they last for a long time without breaking and their components hold economic value for a lot longer than cheaper commodity iron. It is not unheard of for a mainframe or midrange server to run without any problems for a decade, particularly among companies with steady or only modestly growing workloads.

It is not so easy to find commodity X86 servers that last so long in the field, but that may be a function more of the rapidly changing software, which often requires new hardware. Windows, whether on a PC or a server, has always taken more of the processing power enabled by Moore’s Law than it gives back to end users for increasing the speed of their applications. This has not been true to the same extent for mainframe operating systems like z/OS and VSE, Unix platforms like AIX, Solaris, and HP-UX, or proprietary midrange platforms such as OS/400-i5/OS or OpenVMS. And that is another reason why older iron that runs these operating systems persists.

Wherever there is economic and technical value still locked up inside a computer system, there will always be a second-hand dealer to do the job of wholesale broker or retail seller to end users, or both. And since the early days of the System/38 nearly three decades ago, there have been dealers who buy and sell second-hand machinery. The explosion of successive generations of AS/400s and iSeries machines may have crashed used equipment prices and made it that much tougher for used dealers to stay in business, and IBM‘s Global Financing unit may have cornered the market and become the unofficial price setter for used gear in the iSeries and System i space, but there are still hundreds of dealers in North America and across Europe that buy and sell processors, memory cards, disk drives, and other peripherals for the iSeries and System i line, providing an affordable alternative to customers looking to add capacity and not necessarily have to move to the latest-greatest–and usually the most expensive in terms of cash outlay–equipment from IBM.

In the i5/OS and OS/400, there are clusters of used equipment dealers located in Atlanta, where the AS/400 Division had its application software development units and other software providers followed suit. There are also a large number of dealers in the vicinity of Rochester, Minnesota, with Minneapolis being a popular place because it is a large city and it is close to the System i factories. There are also dealers located around Chicago, in Texas and Oklahoma, and near every major urban center in the country. Location used to matter more than it does today, and most of these dealers can and do ship gear all over the country and all over the world. The machines are more compact, can be preconfigured and pretested by a third party (which many dealers use rather than have refurbishing centers themselves), and shipped to customers, who just plug the machines in and go.

Barry Tucker, vice president of sales at Mint Computer, a dealer based in Santa Cruz, California, has been in the IBM midrange trading business for 19 years and he says that the installed base still has a lot of vintage AS/400 and iSeries gear in it–which gives him an opportunity to serve these customers and to make a living as well. “There are still so many legacy machines out there,” Tucker says. “I have a customer who is still on an AS/400 F95, and there are loads of AS/400 170s and 270s, too, and a lot of AS/400 250s as well.”

Just to give you some perspective, that F95 is a four-way machine that was launched in the first quarter of 1993, and it is rated at 111.5 CPWs of total processing power. It originally cost $1.24 million just for the base server complex and an OS/400. The Model 170s date from 1998 and 1999, and were among the most popular AS/400s that IBM ever produced–and it is not a coincidence that they offered great bang for the buck that was competitive with the Windows and NetWare platforms of the time. The Model 270s date from 2000 and 2001, and they offered a lot more oomph, but the price/performance compared to Windows platforms started to slip.

“If you called me 10 years ago, I would have said that about 80 percent of my business was selling used equipment,” says Tucker. “But today the split is about 50-50. I still do a lot of memory and disk drives for older boxes where IBM can’t get customers to move, and I do the occasional processor upgrade, too. But often, when you pencil out the new box, with its lower software tiers and lower maintenance costs, it just doesn’t make sense to get a machine that is too old.”

After one to three generations pass an AS/400, iSeries, or System i machine by, that machine loses most or all of its value. But so long as there is an installed base, the features that plug into the machine retain value. For instance, 4 GB and 8 GB disk drives, which IBM has not supported in a long time, are hot commodities on these older machines. Of course, as IBM is integrating more components into the system and removing the need for I/O Processor (IOP) adapter cards, this will presumably be less and less the case. This has happened with other peripherals associated with minicomputers and mainframes. A decade ago, refurbished remote twinax controllers, twinax adapters, and twinax terminals were a big part of where used equipment dealers made their money, even if they did sell used systems and more expensive components. But today, most people use PCs and Internet technology to link to their i5/OS and OS/400 systems, so terminals are less important. To fill in the gaps, many AS/400 and iSeries dealers turned to selling second-hand X86-based iron, and others added RS/6000 and pSeries iron, too.

Tucker says that he is just starting to see used i5 520 machines hit the market, although there are always a few used machines that come into the market from beta testers and from IBM itself in the wake of new product announcements. These machines are several years old now, and customers that have to be on the front edge of performance–perhaps because they are using WebSphere middleware to Web-enable their applications–are moving to more modern boxes. “By next year, there will be plenty of 520s on the market,” he says, adding that there are already plenty of iSeries 8XX machines–particularly 800s, 810s, 820s, and 825s–on the market, and that the 7XX line is pretty much dead with the exception of the Model 270, which sometimes still trade. As i5 520s come into the market, they will put pressure on prices of 8XX models, and the user-based System i 515 and 525s will also depress prices on all previous entry machines, too. If IBM revamps the entry System i line in February or March with Power6-based offerings, the pressure on prices for used gear will be even more intense. But, brokers will figure out a way to connect people who want to get rid of a machine with those who are willing to buy it. That has not changed in three decades of the IBM midrange, even if the amount of money and margin has decreased along the Moore’s Law curve.

Ann Dayton, president of DataTech Computer Services of Alpharetta, Georgia, says that the new user-price System i 515 and 525 machines are right now forcing dealers to take a look at their inventories and the prices they can charge for used gear. “A lot of used equipment is not attractive unless it is in the P05 or P10 software group,” Dayton says. “Any 7XX machine is only good for parts–we can’t offer anything for the servers themselves. The older 2XX, 3XX, and 5XX machines are long dead, too. The Model 800 is very attractive to some buyers because it is rated at 300 CPWs and is in the P05 tier. But Model 820 and 830 machines, forget it, there’s no value in these machines because they are in the P20 tier.”

While Model 170s still sell, they can’t run i5/OS V5R4, but Model 270s can, so they still trade, according to Dayton. There are not a lot of i5 520s on the market yet, and it is tough to compete against the System i 515 until the i5 520s start building up in the channel, which allows dealers to lower their takeout and street prices to compete. Still, Dayton is figuring that DataTech can participate in the market with i5 520s against the System i 515s once pricing corrects itself, lowering by maybe 10 percent or so.

Dayton points out that one move that IBM made with V5R3 really made it tough for used equipment dealers. Starting with OS/400 V4R5, customers were allowed to sell their OS/400 license if they were exiting the platform. The operating system that was bundled on the iSeries became a tradable commodity, so long as customers could find that little gray envelope that came with their systems that said “Proof Of Entitlement.” IBM allowed OS/400 V5R1 and V5R2 to be traded, but killed it with V5R3 for obvious reasons.

“We were selling all kinds of machines back then,” says Dayton. “Our used hardware was about the same price for new hardware, but we were winning deals on software because of the substantial savings. We could deliver a machine for 35 percent to 50 percent off IBM list for equivalent performance compared to a reseller pushing new gear for 10 percent to 15 percent off list.”

Ever since there was a high-end AS/400 business, IBM and its key reseller partners have been very keen on controlling accounts where the biggest iron ends up. This is, after all, where the most profits are and the biggest piece of the revenue has come from in the AS/400, iSeries, and System i family. Jamming more performance in a box has not changed that in any way.

Dave Alrick, who manages AS/400, iSeries, and System i sales for World Data Products, which is based in Minnetonka, Minnesota, doesn’t get invited to the System i 570 party that IBM has been throwing, just as none of his peers in the used equipment market do not. “With the 570, IBM is still doing whatever it takes to get all the deals,” says Alrick. “On any big machine, IBM will drop prices, add services, or do whatever it takes to match anything we can do.”

Which means, of course, you should always bring a second-hand equipment dealer in on your acquisitions, of course. World Data has other angles they can use to be competitive, such as taking care of the disposal of vintage equipment (which is loaded with toxic stuff, as all computers are) or providing third-party maintenance through DecisionOne, Northrop Grumman, or other suppliers of maintenance services that support the i5/OS and OS/400 platform.

According to Alrick, World Data is still trading AS/400 7XX and iSeries 8XX iron, and is seeing some activity with i5 520 machines as well. Like other dealers, World Data is also able to resell OS/400 V5R2 when it can get its hands on the entitlements, and when paired with a P05 or P10 class machine, this can be a competitive offering for many OS/400 shops. “There’s always some customers who want the latest-greatest thing from IBM, or they need the biggest disks or more memory capacity,” says Alrick. “But for the average customer, an older version of OS/400 is just fine.”

Generally speaking, Alrick says that he can put together an i5 520 deal with more CPWs of processing capacity than an i5 515 or 525 for about half the cost. Like other dealers, World Data has a much harder time peddling older and equally powerful 8XX boxes because of the software tier issue. An 8XX in the P40 or P50 software tier with the equivalent performance of an i5 550 in the P10 or P20 software tier only makes sense for customers with homegrown code who are also not planning on using a lot of IBM programs that are priced based on software tiers.

Like many other used equipment dealers, World Data is not an IBM business partner, so it cannot sell new System i equipment. But the company has been around for 20 years, has more than 100 employees, has over 5,000 customers worldwide, and has generated $70 million in sales in 2006. That’s a lot better than a lot of new equipment resellers do.

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