As if AS/400 customers didn’t have enough to worry about, having survived (we hope) the Y2K turnover and being forced to rejigger their capacity planning schedules thanks to
IBM’s decision to put off the I-Star announcements until the second half of 2000, IBM threw AS/400 customers another curve ball on December 7 by raising AS/400 upgrade prices. Yes, that was the day Japan bombed Pearl Harbor, but the fact that this announcement occured on this date is a mere coincidence. IBM had planned for quite some time to increase upgrade charges from vintage AS/400s to newer Northstar 7XX AS/400e series servers. December 7 just happened to fall on the right Tuesday, though many AS/400 Business Partners (BPs) and customers believe it is the wrong announcement to be making just when IBM is trying to stimulate sales and attract new customers to the AS/400.
Here’s the deal. If you are an AS/400 shop using a 4XX, 5XX, 6XX, or SXX machine and you intend to upgrade to a 7XX model, you had better hurry because upgrade prices are going to go up by an average of 26 percent before the end of the month. In many cases, the cost of an upgrade to a 7XX model is going to more than double. Moreover, customers who want to add processing capacity within the 6XX system or SXX server lines will also see prices go up by a similar amount. IBM is also jacking up prices on Software Subscription maintenance services for OS/400 V4 system software. Initially, IBM told BPs and customers that it was raising prices for Software Subscription for AS/400s only in the P05 and P10 software tiers, but as it turns out, it is raising them in all tiers. IBM provided an overview of the upcoming price changes to BPs on November 29, and more than a few of them explained that this was going to make their customers very unhappy, even if it does, in the end, line their own pockets and IBM’s with more silver. IBM said that the upgrade price change was actually planned for the 1Q 2000 to coincide with the I-Star announcements.
Such upgrade price hikes have been instituted before: IBM raised all hardware and software prices by 3 percent and 10 percent, respectively, in 1990 when the mainframe market was imploding; it increased upgrade prices to the then-new E95 in February 1992, and in the same month, hiked prices on upgrades from B- and C-series AS/400s to then- replaced D-series machines; and it raised prices from F and CISC Advanced Series machines to Cobra and Muskie models in August 1997, sometimes more than doubling prices. (Sound familiar?) Most of these price increases were designed to make upgrades between old machines unattractive. When the first-generation Cobra and Muskie RISC
AS/400s were running late in 1995, IBM decreased upgrade prices to 2XX and 3XX CISC models with the intent of raising these prices again when the RISC AS/400s starting shipping. This seemed fair enough. If conditions were different in the AS/400
market—meaning if Y2K overcapacity and enterprise resource planning (ERP) slowdowns weren’t crippling AS/400 sales—IBM might have done the same in December 1999 and actually cut upgrades to 7XX models. But to do so would be detrimental to overall AS/400 sales, which, as I show in this month’s “Midrange Insights,” were not so hot in late 1999.
IBM says that it is increasing upgrade charges to 7XX models because values for Cobra and Muskie (4XX and 5XX) machines and Apache (6XX and SXX) machines have dropped so dramatically in the wake of the 7XX Northstar announcements that current 7XX upgrade prices are unrealistic and unsustainable. Theoretically, the cost of an upgrade should be about equal to the cost of the new 7XX machine (minus the takeout price of the old AS/400) plus the value of the hardware’s technological enhancements that are not available in the old machine. IBM says that with 5XX and 6XX prices dropping so rapidly, it is, essentially, losing money on its upgrades. The reality seems to be that IBM and its BPs, both of which are hurting badly for AS/400 sales, feel that they are leaving money on the table, given the low prices of 5XX and 6XX equipment. Also, IBM hoped to boost AS/400 sales in Q4 1999 and early 2000, and the threat of a price hike on February 1, 2000, is probably the best way to motivate customers who might have put off upgrading their Cobra, Muskie, and Apache servers to Northstar servers until March or later.
IBM does have a point. According to one used AS/400 equipment dealer, 530-2153 Muskie systems configured with V4R2 sell for about $45,000, or 7 percent of list. High- end 640-class Apache systems with V4R3 sell for 20 to 25 percent of list.
Nonetheless, buying a used 5XX or 6XX box might make more economical sense in the short term than buying a 7XX upgrade either before or after February 1, 2000. Adding power is only going to get more expensive after February 1, 2000, because IBM’s increased 7XX and 6XX upgrade prices will pull up used 5XX and 6XX values. Either way, buying before the month is out is going to be your best economical option.
Over the long haul, December 7, 1999, won’t live in infamy, but rather as the day that ticked off many people who already had enough troubles, including sales reps trying to push AS/400 equipment in one of the toughest environments the AS/400 has seen in years. And while IBM’s price changes may not have directly affected customers buying new 7XX machines, but rather only existing customers, Big Blue’s pricing moves, which run counter to the ever-declining midrange price/performance curve, will be noticed by customers thinking about joining the AS/400 community.
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