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An OPEN Client Edition

IBM CORPORATE

Updated 11/24/04, 10:30am MST (adds "IBM, Dell Gain Market Share")

Analysis of IBM Server Group’s Business Performance

Server Renaissance

zSeries: From Dinosaur to Springbok; xSeries: Thriving; pSeries: Squeezed; iSeries: Needs Facelift

PHOENIX, Nov 22 – The Big Blue servers are experiencing a renaissance.  That’s the take-home message from a two-day conference IBM staged for consultants last week in Austin, Texas.   Not all servers are being equally successful, though.  But the top and the bottom lines are thriving. 

From a product standpoint, “we’re in as good a shape as we have been in a long time,” declared Bill Zeitler, the senior vice president who heads up the IBM Systems group.  “It’s been the most active year we’ve ever had” in terms of technology advancements. 

Zeitler pointed out that, as a result, IBM has been gaining share of the server and storage markets, along with Dell.  In the server market, IBM’s share is up about 15 points since 2001, the trough year for IBM servers (see the chart). 

The main reason is IBM’s openness and willingness to embrace within the Big Blue architectures the “not invented here”-products and ideas.  And then drive hard to differentiate itself from the competition by innovation and best-of-breed technology.  In other words, IBM finally accepted and welcomed the multivendor world in which its customers live.

The process started about four years ago with the top-of-the-line zSeries mainframe servers.  It spread across other product lines when IBM put all of its servers under one roof, and appointed Zeitler to head up the groups.  Big Blue never looked back.  The company has been reaping the benefits ever since.

“When we were doing it the old (proprietary) way, we lost market share for 10 years,” Zeitler said.  “Now, we’ve regained it all in four years.”

zSeries: From Dinosaur to Springbok

The greatest turnaround story belongs to the zSeries.  Dubbed “z” for its “zero defects” virtue, the mainframe descendent showed its new resilience earlier this year when the former dinosaur suddenly exhibited the virtues of a springbok (“swift and agile”).  Here’s an excerpt from our April 2004 Annex Bulletin on the upsurge of the zSeries’s revenues and profits, “Going Retro with Mainframes:”

PHOENIX, April 15 – Big Blue customers seem to be “going retro.”  They are once again gaga over mainframes.  That’s as if “Beatlemania” were back, and “I Wanna Be Your Man” were once again climbing the pop charts.

At least that’s the impression one would get from a 34% surge in IBM’s first quarter mainframe revenues.  The zSeries business, as the mainframes are called nowadays, was up 28% in constant currency.  Not bad for a 40-year old (see “Mainframe at 40!”, Apr 2).

(Excerpt from Going Retro with Mainframes, Apr 2004)

Since then, the zSeries has gone on to grow by 44% in the second quarter, and by 12% in the third.  That’s five quarters in a row of double-digit growth, after 12 years (!) of declining revenues. 

We estimate that by the end of 2004, zSeries will be once again approaching $6 billion, having grown 17% compounded annually (2003-2004).  That’s the highest level the 40-year old has achieved since 1996 (see chart, Table 1).

The zSeries did it by opening up - 20% of zSeries mainframes are running Linux now.  And also by listening to its customers. 

“I know 50% to 60% of my business – personally!” stressed Erich Clementi, the zSeries general manager, speaking at the IBM conference.  That’s because customers are giving Big Blue an earful.  They call Poughkeepsie now when they have a problem.  Unlike the IBM of the old, this new IBM likes it.  In fact, loves it.  Instead of pontificating, the Big Blue is lapping up customer ideas.  And turning them into cash.

“Complexity is good for mainframe business,” mused Clementi.  It gives the zSeries a chance to shine.  And nothing is more complex than integrating thousands of disparate servers and tens of thousands of applications that IBM’s biggest customers run on them.

Emilio Marianelli, Fidelity Investments’ executive vice president, knows it firsthand.  Two years ago, the CEO Don Haile put him in charge of the server consolidation project, after the CEO found out that the company that spends $2 billion annually on IT had over 8,400 servers with an average utilization of only about 20%. 

But the actual number grew to about 10,500 servers.  As Marianelli dug into the problem, he discovered many more servers that had been acquired by various departments without the IT function’s knowledge.  Now he is integrating them all.  With IBM’s help, of course.

That’s no small feat.  Fidelity has 24 to 25 million customers from whom it gets over 250,000.  Every day!  These customers also execute over 140,000 trades on an average day.  And they all have to be accounted for.  Accurately and in real time.

No wonder the customers like Fidelity are spending on people and IT systems maintenance three times as much money as on new servers (see the chart).  Which, in turn, is creating new opportunities for vendors to create integrated solutions that help customers reduce such costs.

“The system technology and integration are profoundly more important than chip technology or operating systems,” the key differentiators and vendor control levers in the past, said IBM’s Zeitler.  Now we are into a “system on a chip”-type of integration, he added.

IBM has been also aggressive with pricing of the new zSeries.  Which helped generate a huge increase in demand. 

Aramco, for example, a big Saudi Arabian oil company that exports three billion barrels of crude oil per year, saw a 390-fold increase in systems capacity in recent years!  And it is till thirsting for more computing power as it replaces the legacy systems with new SAP-powered servers.

The company's CEO, Abdallah S. Jum'ah, highlighted the importance of IT to Saudi Aramco's business.

“Integrated teams are using the new information and communication technologies to peer deep into the earth, pinpointing new hydrocarbon reservoirs and managing existing ones,” Jum'ah is quoted as saying at the company’s web site.  “Employees are working together through high-tech networks of all descriptions to bring new levels of cost efficiency to refineries, pipeline systems, utility operations and other facilities.”

The dependence of company business on IT will become even more pronounced over the next decade, Jum’ah opined.  Aramco's IT strategy seeks to create synergy between technology and human talent to excel and innovate in all company endeavors.

The resulting surge in installed systems capacity is, of course, music to IBM/zSeries ears.  In 2003, the total installed data storage at the company’s EXPEC computer center reached 1.2 Petabytes (i.e., about 1,200 Terabytes).  For the first time, Aramco was able to mirror general purpose data at a remote location for greater disaster recovery capability.

And that – a quest for increased security – is a new post 9/11 global trend that has also helped drive the demand for the zSeries servers, according to IBM’s Clementi.  With its single image approach and a highly scalable architecture, the zSeries has a unique advantage in the marketplace, he says. “At no point do the customer applications ever touch the hardware anymore,” he said.

xSeries: Thriving

IBM’s xSeries, a family of Intel-based systems, has been the second best performer this year among the IBM servers.  The xSeries grew its revenues by 28%, 18% and 26% respectively during the first three quarters of 2004.  Armed with its new 64-bit Intel Xeon processor line, it is poised for a strong finish in the fourth quarter (see “64 reasons to think about IBM’s new Intel processor-based servers”).

“It’s been three years now that we have been gaining market share,” said Susan Whitney, the xSeries general manager.  “Innovation is at the core of it (the success).  But you surround it with other values that IBM has to offer.” 

And voila!  Success follows… some $16 billion of it in the last six years (see the chart).

pSeries: Squeezed

Austin, Texas, is the birthplace of the pSeries, a successor line to the RS/6000 that premiered here in February 1990 (see 90-07, 2/15/90).  The pSeries, like the RS/6000, runs Unix (AIX in IBM lingo), and uses IBM’s proprietary Power technology, now in its fifth generation.  The small “p” in its name has always stood for “power” or (high) “performance,” never more than right now, as the product has just set a new record for speed in a TPC-C benchmark.

That’s nothing new.  “Speeds and feeds” feats have always enthralled the pSeries developers and their customers.  Here’s an excerpt from an Annex Bulletin 95-15 (3/04/95) story about the original RS/6000 announcement that illustrates that point:

The Slide Rule Story. "Shortly after the announcement of the RS/6000 (see Annex Bulletin 90-07, 2/15/90), (Jim) Cannavino (a former IBM executivea) was asked to address a group of government and business officials in Austin, Texas -- the city in which IBM's RISC-based workstation development took place.  In his speech, the IBM executive pointed out that the new RS/6000 was rated at 7.4 megaflops. 

‘That's 'something that, I am sure, the mayor of Austin will be particularly excited about,' Cannavino added in his 'tongue-in-cheek' style.  He then went on to explain that the same IBM machine clocks in at about 27 MIPS -- 'some­thing that undoubtedly will thrill the U.S. senators present here.'"

"Cannavino offered to put these numbers in perspective for this distinguished Texan audience.  '25 years ago,' he said, 'the era of the slide rule ended.  The way these calculations were being performed then was by an army of technicians/engineers working their slide rules all day long.'  Cannavino then explained that by comparison, 'one RS/6000 can perform 50 to 100 'slide rule'-years per second!'  He paused.  'In other words, that's 50 to 100 human careers per second!'  He paused again.  'And you don't think that will change the way we think or work?'"

Yet the “7.4 megaflop” system that fascinated and stretched the imagination 12 years ago is now a tiny dot on the performance chart of the pSeries.  More importantly, the pSeries has actually been anything but a “megaflop.”  In the last 10 years, for example, we estimate that it has contributed about $43 billion in revenues to the corporate top line (see the above chart).

Like the other IBM servers, the pSeries has also opened up in recent years.  As a result, Linux is now integrated into its AIX (Unix) architecture, said Adalio Sanchez, the pSeries general manager.

One thing that has not changed about the pSeries is its developers’ thirst for speed and power.  The latest TPC-C benchmark record is a case in point.

“Every two to three years we try to do something radically different,” said Ravi Arimilli, the chief architect of the pSeries who has his name on over 200 U.S. patents.  “Why go for incremental improvements?  Why not go for four- or five-fold faster?  Or 10-fold?”

It’s setting lofty goals like that “that drives real, honest-to-God thinking (among IBM developers) that doesn’t happen elsewhere,” he added.  In turn, this opens the door to reality-altering price/performance improvements.  The new Power5 technology did just that when it premiered last July 13:

“IBM today changed forever UNIX® computing with the introduction of new eServer™ p5 systems, an advanced line of UNIX and Linux® servers that use POWER5™ microprocessors and Micro-Partitioning™, an IBM Virtualization Engine™ technology, to achieve unprecedented computing performance and reduced costs for a wide range of business and scientific applications,” IBM said in a release.

The new eServer p5 systems were the result of a three-year development effort at IBM that extended the traditional Unix servers with mainframe-inspired features. 

But while the pSeries responded aggressively and successfully to competitive challenges at the top of the line, it is still being squeezed from the bottom by Wintel-based servers (Dell, HP), Sanchez admitted.  As a result, the pSeries revenues grew by only 1% in the second quarter, after dropping 3% in the third.

iSeries: Needs Facelift

The 35-year old iSeries is IBM’s second oldest server line (second only to the 40-year old zSeries mainframes).  But the iSeries et. al. has always been the first among its IBM peers in terms profitability and charisma.  

The AS/400 and its S/3X predecessors were breaking both technological and cultural barriers well before that became fashionable at Armonk.  Here’s what we said about it in a 1995 Annex Bulletin:

PHOENIX, Aug 8, 1995 - It was the time of glasnost (“glasnost”= openness) and perestroyka (“perestroika” =restructuring) in the former Soviet Union, but also that of Cold War.  It was the time IBM was talking openness, but delivering proprietary systems.  It was the time the Big Blue still looked big and invincible almost everywhere except in its mid-section, where DEC was eating its lunch (the 9370).  It was the time after IBM’s “year of the customer” (1987).  It was the year of the Seoul Olympics and the last one of Reagan’s presidency.  It was the time before CNN changed forever the meaning of live news.

It was in such a time that on June 21, 1988, a new baby was born in the IBM Rochester manger.  “Silver-lake[1]”, as the expectant parents referred to the growing embryo during the two-year gestation period - a record low by the then IT industry standards - was christened “AS/400” at an extravaganza announcement held at the New York Hilton, and beamed around the world via satellite TV.  This was also a record of sorts.  It was the first time thousands of IBM customers, business partners and employees witnessed a live birth of a computer baby. 

“IBM will probably be very successful with the new AS/400 products,” we wrote in ANNEX BULLETIN 88-34, published the day the AS/400 was born (6/21/88).  And it was.  As it turned out, the AS/400’s birth was IBM’s best launch in almost a quarter century (since the birth of the S/360 in 1964).

Its success continued from there.  “The way we put it together is what sets (the) AS/400 apart,” said Bob Dies, then the general manager of the AS/400 division, speaking at an August 1995 preannouncement briefing in San Francisco.  What Dies meant was that the AS/400 harnesses the complexity within the product so as to deliver simplicity on the outside.

Those were the “good old days.”  The iSeries has not been exactly an IBM success story in the last 7-8 years.  Its revenues dropped from an estimated peak of about $4 billion in 1996, to only about half of that (see the chart).

The business erosion has been particularly precipitous this year.  In the first quarter of 2004, the iSeries revenues declined by 7%; in the second by 28%; in the third by 26%… That’s because the iSeries had acquired the image of being old and proprietary at a time the marketplace wanted new and open.

Adding insult to injury, the entire iSeries line was actually rejuvenated this year with the new Power5 technology that is burning the track inside the pSeries servers.  Like the other IBM servers, the iSeries also opened up to Linux and other non-IBM products.  Yet the old and proprietary image stuck.

By mid-summer, it was time for a typical “woe Nelly”-cry from Armonk.  Allowing IBM’s most profitable server line to continue to shrink was simply not acceptable to either Zeitler or Sam Palmisano, the IBM CEO.  So a new general manager was installed with the mandate to turn things around.  Quickly.  Yesterday.  Or else…

Enter Mike Borman, the iSeries general manager of three months, fresh from a job of running the IBM global business partner operations in the small and medium business (SMB) market.  In other words, Borman is a Big Blue executive who is used to delivering under pressure of a corporate gun pointing to his head.

“Our technology is fabulous, (customer and partner) loyalty is strong, satisfaction second to none,” Borman told the IBM conference attendees in Austin last week.

Indeed.  All key assets that had made the iSeries IBM’s, and maybe the IT industry’s, most successful franchise in history[2], are still in place.  What’s needed is a marketing facelift.  And Borman is determined to perform it.

“We will get there,” he assured some 500 or so Independent Software Vendors (ISVs) during a Nov 8 teleconference.  “We will get this thing on track where it should be… as the premiere solutions box in the entire industry.”

Fidelity’s Marianelli, perhaps unwittingly, gave Borman an assist in it.  The man who is in charge of consolidating the company’s 10,500 servers said he’d found out that two of them were untouchable.  He discovered that all Fidelity mutual fund trading goes through two AS/400s.  Which means that, 6% to 10% of all New York Stock Exchange volume runs on these two machines, he added.

Simple?  Yes.  Adaptable?  Yes.  Friendly?  Yes.  Easy to use?  Yes.  Those are all well-known iSeries’ attributes that have made it a SAFE choice for its 240,000 customers.  What is less well known is that the iSeries is also indispensable to some of them; even to the largest ones, like Fidelity.  And that’s one of the iOpeners we took home from Austin last week.

Summary

Another is the secret to the Big Blue server renaissance: IBM research lab has walked out into the street.  IBM customers are now a key part of the product development efforts.  No longer are the IBM scientists carrying on their experiments in the sanctity, secrecy and solitude of the hallowed halls of Big Blue labs before emerging to the customers what’s good for them.  That was the old IBM.  Now it’s the other way around.  The customers are telling IBM what they want.  And Big Blue is trying hard to provide it to them.

If “the world is your oyster,” then the IBM server folks are trying hard to pry open the ones with the pearl inside – before serving them up to customers as fine necklaces or bracelets.  That is why the Big Blue server product lines are once again a growing part of the business.

How long will the renaissance last?  As long as IBM server people keep running scared and take nothing for granted.  For, complacency is the root of many downfalls.  And, fear is a part of all triumphs.

Happy bargain hunting!

IBM, Dell Continue to Gain Market Share

PHOENIX, Nov 24 - No sooner had we gone to print with our "Server Renaissance" report, but IDC released its third quarter global market share survey data.  And the latest figures reconfirm the existing trends: IBM and Dell are gaining share in a growing global server market.  Revenues were up 5.5% in the third quarter to $11.5 billion.

Within that big picture, another sub-trend is discernible.  Top and the bottom of the global server market is gaining at the expense of the middle.  Just as with IBM servers, the high-end servers (over $500,000 in price) and small (Intel-based) servers (under $50,000 in price) are growing (at 2% and 18% respectively), while the midrange servers (between those prices) are shrinking (at 10%). 

But IBM zSeries revenues increased by 12% in the third quarter, as you saw from our above report, while the overall global high-end server market grew by only 2%.  Which means that other vendors' big server revenues must have declined, we estimate by about 7%, in the same period.  And that suggests that IBM market share gains were the biggest at the top of the global server market.