Annex Bulletin 2005-20                        November 15, 2005

An OPEN Client Edition

Updated 11/16/05, 9:30am MST (adds pSeries Shines)

IBM CORPORATE

Analysis of IBM’s Hardware Businesses: From Good to Better…

Hardware Revival

Third Consecutive Year of Growth; iSeries, pSeries – Growth Leaders Among Servers; Sale of PC Business Boosts Hardware Profitability

SCOTTSDALE, Nov 15 – Things seem to be going from good to better in the IBM hardware business.  Last year, we noted that a Big Blue “server renaissance” was under way.  But not all servers were firing on all cylinders a year ago (see “IBM Server Renaissance,” Nov 2004).  This year, however, nearly all are.  And so are several other IBM hardware businesses.  Which makes the turnaround that started four years ago a full-fledged “hardware revival”– the third consecutive year of organic growth.

iSeries.  The greatest and the swiftest turnaround took place in the iSeries market. Last year’s “problem child” has become the new IBM “poster child,” a star performer with a 25% revenue surge in the third quarter.  No wonder Mark Shearer, the iSeries GM, was this time the “leadoff batter” among the hardware GM’s.

“We’re getting the hearts of our business partners back into the iSeries game,” Shearer told the consultants assembled in early November at the home of “IBM brainiacs” – as one executive referred to the residents of the 60-year old Yorktown Heights research center.  The wooded site was aglow in beautiful fall colors just as IBM was basking in renewed hardware and research glory.

“It (iSeries) is the single largest IBM hardware franchise,” Shearer added.  He pointed out that 58% of IBM server customers have at least one iSeries installed, as do 98% of Fortune 100 companies.

Of course, IBM did not do it alone.  The iSeries business partners drive 85% of its sales.  In many countries, they make more money on this IBM product than on any other server platform.  We estimate that every iSeries system dollar generates two dollars for IBM business partners.  No wonder they are flocking to it again, especially after IBM spent $1 billion in the last two years on iSeries innovation.

Within IBM, the iSeries is also more than meets the eye (“i” – pun intended).  Every dollar of an iSeries system sale drags another dollar in various IBM hardware, software or services revenue (see above chart).

With the demonstrable track record behind him, no one doubted Shearer this time.  But when Mike Borman, the former iSeries GM, promised a turnaround a year ago saying more or less the same thing, there were plenty of doubters among the handful of consultants that filled the chairs in an iSeries breakout session:

“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, 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.”

(Borman quote from “Server Renaissance”)

Well, the iSeries “got there” indeed.  Thanks to a relentless drive by Shearer and his marketing team that raised the public awareness by an unprecedented 20%, the iSeries is once again widely regarded as a “premiere solutions box in the entire industry.” (Shearer alone has visited 55 cities in 20 countries in the last 10 months, pressing flesh of both IBM business partners and customers; he spends 80% to 90% of his time on the road, he said).

As a result, the iSeries is now once again winning hearts within IBM, too, as other product lines are trying to emulate its formula for success.  Enter the Systems Agenda[1]… an Big Blue development blueprint for the next five years. 

“Rest assured that we are trying to completely hijack the Systems Agenda,” Shearer proclaimed only partially tongue-in-cheek.  “The iSeries is its poster child… it’s at the very center of it.”

Looking ahead to 2006, the bulk of the iSeries growth will come from SMB (small and medium size business) and new clients, according to Bill Donohue, the head of worldwide sales.  The iSeries team also intends to get “very aggressive” in developing markets, such as Russia and China, for example, where “incubator programs” are being set up. 

Glad to see that somebody is paying attention… (see New "Drang Nach Osten" - global investment strategies, and Big Blue Thinks Small - IBM's SMB strategy).

There will be “no ISV left behind,” declared boldly Joyce Bordash, head of the iSeries ISV (Independent Software Vendor) marketing, whose programs have already attracted some 2,600 ISV to the IBM solutions platform.

As a result, about 46% of the iSeries 2006 revenues is expected to come from SMB customers, and some 10% from new clients (also see “An iSeries Revival” special report).

pSeries.  The pSeries was the second best-performing IBM hardware product line in the third quarter, growing 15% over the same period a year ago (13% in constant currency).  What is the reason for such a stellar performance in an otherwise fairly flat (Unix) market?  Big Blue is eating its competitors’ lunch, it seems.

“A lot of traditional HP and Sun (Microsystems) customers are moving over to the IBM platform,” asserted Adalio Sanchez, the head of the pSeries server line, enabling IBM to claim the market share leadership position in the second quarter of this year.

And the main reason for that is that IBM is continuing to invest heavily into the Unix platform and enhance it every 15 to 18 months. 

“We are completely committed to AIX (Unix),” Sanchez sought to reassure the audience.  “We are investing heavily in AIX.  We have (technological) road maps in place that will take us to 2014.  So the customers can have the piece of mind that we’ll be around for them” in the long haul. 

The unspoken implication being that maybe the competition won’t?

Another reason HP and Sun customers seem to be defecting in droves to IBM pSeries is its price/performance advantage, even in large commercial applications.  That has not been a traditional strength of the pSeries, but appears to have become one, thanks to its p5 technology running SAP, PeopleSoft and Oracle software.  In each of the three instances, the pSeries claims a substantial price/ performance advantage over HP and Sun, in that order (see the chart).

The pSeries is also trying to acquire “more of the mainframe-type capabilities,” Sanchez said.  And it is actively promoting “Linux on Power,” its open systems challenged to Microsoft and Intel (“Wintel”).

“We are offering a more robust Wintel environment but at (low) Wintel prices,” he summed it up.

As result, we expect the pSeries to continue to grow in double digits (13% this year), and finish up 2005 as one of IBM’s two brightest hardware stars.

pSeries Shines in Latest Benchmark Results

SCOTTSDALE, Nov 16 - IBM has just announced a new industry record benchmark result with the pSeries p5 570 16-core server, originally unveiled in July 2004.  The IBM server surpassed Sun's Fire E6900 32-core score with half as many "engines."  It also doubled Sun's 16-core Sun Fire V890 result (click here to view the results of the independent SPEC benchmarks).

IBM pSeries 64-core server has also shown a price/performance advantage of 47% over Sun's 72-core server, based on a performance 69% advantage.

The pSeries servers also top the list of the TPC-C benchmarks that measure simulated order-entry and distribution environment applications.

• A 4-way (4-core) IBM eServer p5 570 is the best-in-class 4-way system 
• An 8-way (8-core) IBM eServer p5 570 is the best-in-class 8-way system 
• A 16-way (16-core) IBM eServer p5 570 with IBM DB2 is the best-in-class 16-way system 
• A 32-way (32-core) IBM eServer p5 595 with Oracle 10g database is the best-in-class 32-way 
• A 64-way (64-core) IBM eServer p5 595 with IBM DB2 is the best overall system

Source: http://www.tpc.org

In short, the pSeries takes the cake no matter how you slice it.  IBM's POWER4 systems, introduced in 2001, were the industry's first dual-core systems.  The latest POWER5 and POWER5+ servers continue its performance and price/performance leadership.  IBM has introduced over 70 industry-leading benchmark results since the original eServer p5 announcement. 

xSeries.  The xSeries servers, IBM’s direct play in the Wintel market, continue to grow in double digits rates (up 11% in the third quarter) despite  “difficult comparisons” to 2004 (meaning last year was an excellent year for the xSeries).  And while traditional technology-driven servers, such as the pSeries, are gravitating more toward the business solutions market, the xSeries seems to be pushing its technological advantages over other vendors.

“Competitors are not publishing their performance data anymore because the gap (in IBM’s favor) has become so tremendous,” boasted Leo Suarez, a vice president of the zSeries product line.  He proceeded to push his box on a speeds and feeds basis, the way Unix vendors used to sell their wares.

“That’s because that (xSeries) business is getting commoditized,” explained one IBM executive to whom we had expressed our bewilderment with the xSeries marketing strategy. 

Nevertheless, even here, or maybe especially here - in a commoditized environment - IBM has been compelled to innovate.

“BladeCenter is our best success story, Suarez said.  It has come to symbolize infrastructure simplification through integration, he explained.  “Bank in a box,” an IBM financial industry solution based on BladeCenter, is a case in point.

zSeries.  Five years ago, the zSeries kicked off the Big Blue “server renaissance,” as the new IBM mainframes, dubbed zSeries, were launched.  Since that time, the “z” has morphed from a dinosaur into a springbok, as we noted in our report “IBM Server Renaissance” – much to everyone’s surprise.  Except for the two IBM leaders who engineered this amazing comeback story (see “IBM: Polaris Eclipses T-Rex,” July 2005).

“The idea was to get to the next system idea first,” said Bill Zeitler, the head of IBM Systems & Technology (i.e., all IBM hardware).

“We’ve got to invent something,” Erich Clementi, the zSeries boss, impatiently urged on his research advisor. 

And so they did.  The result was the world’s most powerful mainframe – the z9 – which Clementi personally unveiled on a New York stage (see July 26 photo - right).

“It was a great action shot’,” Zeitler joked.  “It must have run in 500 newspapers.”  But more important action was yet to follow…

Ten of the brand new 54-way mainframes were delivered ahead of schedule in the third quarter due to strong customer demand, Clementi said.  And many more will be ringing the IBM cash registers in the fourth quarter, as the zSeries factories go on full throttle in a traditional big year-end push.

“What I tell our folks (end users) is to go back to the mainframe,” said Andy Geisse, the CIO of SBC, a telecom that has outgrown Verizon and become one of the largest consumers and dispenser of IT power in the country, backing up “z” strategy.

The reason? 

“It’s up practically 100% of the time,” Geisse answered his own rhetorical question.  “We never have any issues with it.  With midrange servers, we started out assuming they would cost less.  Now they are a huge headache and a big cost issue.” (also see “Poughkeepsie Spring” special report).

As a result of an increasing number of large customers coming to the same conclusions as SBC’s IT boss, we expect the zSeries to show modest growth in 2005, before surging in double digits next year. 

So 12 years of revenue erosion will be followed by four years of growth.  That’s no flash-in-a-pan turnaround story anymore.  That’s a springbok in action. 

From dinosaur to springbok… quite a metamorphosis.  Even Charles Darwin might have never thought it possible.  This writer certainly did not a few years ago…

Storage, Other Hardware.  “We believe storage spending will outpace other portions of IT by two to three times,” Andy Moonshaw, the head of IBM storage, quoted a Banc of America IT executive as saying in his presentation to consultants. 

Judging by the industry growth rate of 6%, which Moonshaw also cited, it would seem a stretch.  But IBM, if not everybody’s, storage is certainly growing at nearly double the industry rate (up 11% in the third quarter).  Once again, it is the SMB market and midrange storage that are providing the biggest impetus (also see “Big Blue Thinks Small”, Nov 2005 – our analysis of IBM's SMB strategy).

One factor that’s driving the demand for storage as well as mainframes is virtualization.  As other vendors rush to embrace an IBM idea that large customers find so appealing, Moonshaw warned, “virtualization is a very easy thing to talk about; (but) it is a very hard thing to do.”

“And IBM has been doing it a very long time,” the IBM storage chief added, cited over 1,400 clients that have installed the IBM solution.

The only areas with sub-par performance among the IBM hardware segments were the leftovers from IBM’s sale of its PC business to Lenovo (printers and retail store solutions – see the chart on page 4).  Not surprisingly, neither of them appeared on the Yorktown Heights stage.

Outsourcing R&D.  One of IBM’s latest and most profitable inventions is the invention business.  Turning an expense item (R&D) into a profit center (E&TS) has become an innovation in and of itself.

“I innovate; therefore, I am,” exclaimed Paul Horn, the head of IBM research, who hosted the two-day conference at Yorktown Heights, in conclusion of his presentation.  He was playing off René Descartes’ [1596-1650] famous quote, “I think, therefore, I am.”.

Horn’s line should become the new Big Blue motto. 

“It is absolutely critical not only to invent, but also to innovate,” Horn also asserted. 

What’s the difference?

Innovation is an invention that makes money, according to IBM.

IBM’s E&TS (Engineering & Technical Services) showed how it is done in the Big Blue world.  Its third quarter revenues were up 68%, the fastest growth rate of any IBM unit, and the eighth consecutive quarter of double-digit growth.  Try topping that!

Summary

The latest IBM results show that the “renaissance” we wrote about a year ago has spread well beyond the servers.  Not only are nearly all Big Blue hardware segments growing; they are becoming more profitable after the money-losing IBM PC exited the scene.  “Smaller and better” – is an apt summary of IBM hardware businesses’ “state of the union.”

Happy bargain hunting!

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