Annex Bulletin 2005-17                      July 26, 2005

Excerpts from Confidential Client Edition

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IBM CORPORATE

Updated 7/26/05, 4:45 PM EDT (adds "Executive Quotes, Photos")

Analysis of IBM’s New “Z9” High End Servers: A $1.2 Billion-Mainframe Bet

Polaris Eclipses T-Rex

New Mainframe, New Strategy – Quantum Leaps from Just Two Years Ago

NEW YORK, July 26 – Just over two years ago, Big Blue took a swipe at its large systems strategy critics who compared mainframes to dinosaurs.  IBM chose an in-your-face code name “T-Rex” for its then new $1 billion-z990 server (after the fearsome 20-foot tall, 15-ton Tyrannosaurus Rex, the “king of dinosaurs”).

Less than a year later, on mainframe’s 40^th birthday (Apr 7, 2004), the T-Rex was followed by the “son of T-Rex” - the “z890.”  What ensued was the most successful IBM mainframe sales year in decades (see “IBM Servers to Grow Again,” Feb 2005 and “IBM Server Renaissance”, Nov 2004). 

But success can be a pain… next year, when you have to do it all over again, and scale new heights.  As you saw from IBM’s latest report, after rising 45% the year before, mainframe revenues declined 24% in the second quarter as the customers awaited Big Blue’s next “big bang.” 

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Why the Polaris code name?

Just like Polaris, the Northern Star that has been used for navigational purposes for centuries because all other stars appear to rotate around it, the new z9 intends to be the guiding light to safe harbors for wayward IT travelers in the 21^st century.  As such, it may become the new center of each customer’s IT universe.

That’s because the z9 is a lot more than just a bigger, faster mainframe.  It plays right into the sweet spot of four important industry trends that we identified earlier this year – recentralization, reintegration and virtualization, and corporate customers’ increased anxiety over security, both physical and intellectual (see “Poughkeepsie Spring” and “An iSeries Revival”). 

Strategy Triad

“There are three systems imperatives,” explained Irving Wladawsky-Berger, a veteran IBM vice president who is in charge of innovation at Big Blue, speaking in a pre-announcement briefing.  “Virtualize everything, commit to open and collaborate to innovate.”

He said that the demand for high-end systems has become global in nature.  And that requires that traditional transaction processing be augmented by a collaborative approach that more tightly and securely integrates technology, processes and personnel.

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Per Ardua Ad Astra

One of the challenges that IBM and large enterprises face is a relative dearth of mainframe skills. 

“The people who know those disciplines and understand the mainframe structures are in their 50s,” said Kevin Sharkie, Aviva Australia’s CIO (Aviva is the largest insurance and finance company in Britain).  “And that is a problem; that is a global problem.” 

Given the scope of the problem, “per ardua at astra” (“through hardships we reach the stars”), the Royal Air Force motto, aptly applies to this predicament.

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New Sources of Demand

And no wonder.  Besides the traditional legacy customers and applications, there is a whole new world of wealth out there waiting to be poured into the mainframe.

Peter Horowitz, for example, a Managing Director with BearingPoint, noted in a June 8 release that China’s banks are poised to potentially become some of the most influential financial institutions in the world over the next 10 years.  But they first need to know their customers and conduct better segmentation of the market.

“In many countries, servicing a client's assets and liabilities, simultaneously, is difficult given the integration needed for legacy systems and platforms.  China is positioned to leapfrog these platforms with an approach taking a complete view of a client's needs from the outset.”

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Summary

IBM’s new mainframe, the z9, as impressive as it is on a “speeds and feeds” basis, is merely a part of a much bigger picture.  Big Blue is on a quest to redefine the axioms of corporate computing.  Not for the first time.  Not for the last time.  But again for the long haul.

And IBM is putting its money where its mouth is.  Some $1.2 billion went into the latest turn of the wheel of progress - the Polaris eclipsing the T-Rex.  Clearly, IBM believes its 41-year old has a bright future.

Smart money should not bet against Big Blue’s strategy.  We all did it once before when we buried the mainframe in the early 1990s.  And smart people are supposed to learn from history, not repeat it.

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