When you wish upon I-Star Makes no diff’rence who you are. Anything your heart desires Will come to you. If your heart is in your dream No request is too extreme (how about lower prices?). When you wish upon I-Star As dreamers (and Business Partners) do. Like a bolt out of the blue Fate steps in and steps on you. When we wished upon I-Star IBM said buy 7XXs until June. Or later.
OK, so it hasn’t exactly the same words as the Disney classic, but it is reasonably close (the “bolt out of the blue” part is really in the lyrics), and my name sounds enough like Jiminy Cricket that I feel that I can get away with that little bit of silliness, despite the bad news that IBM’s difficulties with Y2K budget lockdowns and enterprise resource planning (ERP) software sales slowdowns have forced it to push the much-rumored AS/400 I-Star announcements from February 2000 to sometime in the second half of the year. (Yes, that was a long sentence, and I had to fend off my copy editors with a sharpened pencil to get them to leave it alone.)
Jennifer Clarke, IBM America’s Technology Team manager, put it succinctly: “There will be no refresh of the 7XX family in the first half of 2000. There is no February announcement.” When pressed as to why IBM had killed the February announcements, she laid out the situation within IBM from her viewpoint. “Why would we announce a new product when folks are just coming through Y2K?” she asked rhetorically. “Plus, we just announced the 7XX line this year, and it is going strong. We are not going to throw a new product in the street in three months and put customers in a frenzy,” she added.
“Customers can feel comfortable investing in 7XX servers today because there will not be a refresh announcement.”
While I am surprised that IBM would push off the I-Star announcements until June, given the situation, the delay makes sense if you are a vendor trying to encourage customers to buy right now rather than wait until February. IBM can’t afford to have AS/400 customers wait with sales down by 30 percent in the third quarter of 1999 and probably off by 45 percent to 50 percent in the fourth quarter, which puts AS/400 server sales for all of 1999 down about 25 percent to $2.5 billion. The news of delays is not exactly a surprise. The backchat at the COMMON trade show in early October was that IBM might be pushed into moving out the I-Star announcement, but we couldn’t confirm this at any high level. A few weeks later, we heard from an AS/400 Business Partner who heard from a vice president in the AS/400 Division that the new AS/400s would come out in May 2000. Odds are, IBM is shooting for the AS/400’s 12th birthday, June 21, 2000, as announcement day for the I-Stars, but no one within IBM is saying for sure. For all we know, the AS/400 announcements could end up being in September, when IBM is expected to announce new S/390 mainframe servers, code-named “Freeway”.
The message from IBM last week was pretty clear: The AS/400 I-Stars are being held back because announcing would just confuse customers. Given the fact that IBM always cuts prices when it announces a new line and the fact that IBM has said explicitly that it does not anticipate making any price cuts now or in the first half of 2000, holding back the I-Stars means IBM can try to charge what are essentially February 1999 prices for equipment peddled in early 2000. But just because this is IBM’s story doesn’t mean that IBM doesn’t have other problems. For instance, for all we know, the silicon-on-insulator (SOI) chip process that IBM is using on the I-Star chips may not be getting sufficient yields. Or the CMOS-8S copper process used in making copper chips the size of the Pulsar is running into trouble-getting yields. IBM isn’t planning to use SOI in the S/390 Freeway processors, which are due next September, and the RS/6000 Division’s plans for the I-Star chip have always been a big question mark. So, everything running full speed ahead in the S/390 and RS/6000 lines doesn’t necessarily mean much even if the AS/400, S/390, and RS/6000 lines share plenty of technology.
IBM could have announced Pulsar-based AS/400 servers in September 1999 if it wanted to (provided Big Blue is getting yields on Pulsars) since the high-end AS/400e servers are virtually identical to the high-end RS/6000 servers. The new RS/6000 S80
“Condor” servers, which offer twice the uniprocessor performance and three times the scalability of the Northstar-based S7A servers they replace, can easily be equipped with OS/400 and its SPD (rather than PCI) peripherals. For whatever reason, IBM decided not to sell the 450 MHz Pulsar, IBM’s first midrange copper-based processor that uses the company’s much-touted CMOS-8S chip fabrication process within AS/400s. Pulsar is essentially the same as the existing 262 MHz Northstar chip, except that CMOS-8S allows IBM to crank up the clock speed to 450 MHz. And I-Star will be almost identical to Pulsar, except IBM was going to boost clock speeds to 560 MHz in early 2000 and to 800 MHz in late 2000. It is hard to say what IBM is actually going to do now, especially if there are problems with SOI. If IBM can, it would be smart to go right to the faster 800 MHz I-Star in June or July 2000. If SOI is in trouble, IBM may be forced to drop back to a more modestly powerful Pulsar chip, perhaps running at 500 MHz.
Drew Flaada, one of the main AS/400 engineers in the Rochester Labs, says IBM has only officially committed to doubling the processing capacity of the AS/400 line in
2000. IBM could meet this requirement with the existing Pulsar-based RS/6000 S80 server if it offered them running OS/400 instead of AIX. Obviously, IBM is in pretty good shape for meeting this promise with the Pulsar as a fallback, given the fact that a Pulsar processor is more engine than most AS/400 customers need to run their legacy applications and play around with e-business extensions. Pulsar-based AS/400s using 450 MHz chips would offer about 60 percent more power than today’s current AS/400 Northstar servers, engine for engine. And AS/400 customers at the high end, pushing the ceilings of the 12-way Northstars, can certainly make a good case for IBM to offer a special bid on a 24-way S80 running OS/400 if they can’t wait until the second half of 2000 for a new I-Star. This box,
when equipped with enough memory (such as 80 GB or 96 GB), would offer about twice the aggregate processing capacity of the current high-end AS/400 Northstar 740. Faster 500 MHz Pulsar processors, if IBM could get yields on them, would boost throughput by 10 percent or so.
Getting Down to E-business—Maybe
IBM is obviously keen on switching the conversation away from technology and toward e- business. IBM says that less than 30 percent of the AS/400-installed base is involved in e- business, a category in which IBM lumps Java, Domino, Web serving, and real e- business. IBM’s Clarke says that she would love to get that percentage up to 50 percent by year-end.
To that end, in October, IBM revamped a special e-business rebate promotion that gives customers rebates worth between 2 and 3.5 percent of the list price for 170 Invader and 7XX servers. IBM is giving slightly bigger rebates on the 170 Bumblebees, which range from 2.4 percent on the 170-2407 to 11.1 percent on the 170-2409, the biggest 170 Bumblebee. (Rebates are not available on all model 170s, by the way. All Apache 170 Invader machines, as well as the smaller 170 Northstar Invaders, are not included in the promotion.) This same promotion offers rebates to customers buying AS/400s to support high availability (HA) software from Lakeview Technology, Vision Solutions, and DataMirror. Under the past deal, IBM offered customers setting up HA networks twice the rebates that were available under the e-business promotion. Under the old deal, the rebates amounted to 4 to 7 percent of list price for new servers—not a very big deal, to be honest. This time around, IBM is offering a flat 15 percent rebate to customers who buy new iron to support HA software, regardless of the size of the 7XX model. The rebates range from $11,250 on a 720-2062 with interactive feature 1501 to $255,000 on a 740-2070 with interactive feature 1513. This is real money. That said, given IBM’s fervent desire to sell AS/400 hardware between now and March 2000, customers in the market for some capacity should still consider this an opening position for real bargaining. Moreover, those buying under the e-business promotion should demand a rebate equal to the HA rebate—a flat 15 percent. In days gone by, a 15 percent discount this late in an AS/400’s product cycle, especially under such arduous conditions, was perfectly normal. There’s no reason that IBM cannot and should not give a bit more if customers are moving up their AS/400 hardware buying plans.
IBM also announced a new 7XX high availability promotion (which IBM says cannot be used in conjunction with the HA promotion described above, but which will turn out to be an optimistic wish on IBM’s part, given the sorry state of AS/400 sales) that gives AS/400 customers who are buying a new 7XX server to support HA software a 50 percent discount on prepaid Software Subscription software maintenance services for OS/400 and related V4R4 systems software. Customers have until December 23 to place their 7XX server orders under this promotion, and they have to install their equipment by January 17. The deal is available in the United States, Canada, and the Caribbean. To take part in the deal, you have to buy connectivity hardware (LAN, OptiConnect fiber optics, etc.) and HA software from Lakeview, Vision, or DataMirror. The 7XX has to be a hot standby application-mirroring server that is in production use, with database journaling and switching hardware and software as part of the mirroring. In other words, you can’t buy the HA software and ignore it just to get a price break on Software Subscription for a machine that you really intend to use for a completely different purpose. (Considering the price of HA software, it seems unlikely that this would make economic sense.) Anyway, cutting the cost of Software Subscription in half is a good thing if you fit IBM’s deal. For a single year of prepaid Software Subscription services, prices range from $468 on a P05 machine to $26,330 on a P50 machine. Five years of prepaid Software Subscription services runs from $2,104 on a P05 box to $118,322 on a P50 machine. While cutting
those prices in half won’t change the overall cost of a new AS/400 by more than a few points, every little bit helps.
Of course, if IBM really wanted to move AS/400 equipment in the fourth quarter of 1999 and the first half of 2000, it would do something dramatic. Here’s a simple example of the kind of deals I would like to see: Buy a Northstar 170 or 7XX server between now and the new year and get a free I-Star server with twice the processing, memory, and storage capacity this time next year. Or maybe IBM could try this: Buy a new AS/400, and you don’t have to pay for Software Subscription at all for two years. Or it could try this: Buy one new AS/400e server between now and December 31 and get a second identical AS/400 free, provided you agree to run at least half the processing capacity in the auxiliary machine as a mirror for production systems. The latter deal would give customers hot backup to support e-business applications, as well as some extra capacity to handle e- business program development. Here’s another one that might help stimulate hardware sales: Buy any AS/400 during 1999, and IBM will charge all software in the P05 group, regardless of the actual software tier that AS/400 processor is in. This deal wouldn’t lower third-party software costs, but it would make it cheaper for AS/400 customers to get big iron to support big ERP jobs or extend their legacy applications to the Web. Here’s one more, and then I’ll shut up: If you are a small company (say with under 25 employees) and you demonstrate to IBM that you are growing revenues fast and that you will use an AS/400 to do e-business, you get a puppy model 170 Invader or 170 Bumblebee for free, including all of IBM’s tools and basic support services. This one wouldn’t help sales this year, but it would go a long way toward making sure there were new customers buying lots of iron next year.
The kind of deals I am suggesting require guts. But they would also get revenue and shipment numbers back up where they belong, even though they would have a devastating effect on average selling prices. That would mean Business Partners (BPs) and IBM sales reps would have to do a lot more walking. I suggest buying them comfortable sneakers, laptops, cell phones, and cough drops so they can keep talking fast even when their mouths are dry and their voices hoarse. Be creative, IBM, instead of being afraid. It will work. And BPs, it might be worth it for you to take it hard on the chin this year by essentially giving AS/400s away to build a customer base for next year. Of course, only IBM has such deep pockets, and it is far too busy buying back its own stock to actually do something that will pay off further down the road.
What seems clear from IBM’s marketing efforts, which I think are totally insufficient for the task, is that Big Blue thinks there is pent-up demand for AS/400 hardware and that once we get to March 2000, all the sales it has lost in 1999 will be added on top of normal sales projected for 2000. This could be right, but it is probably not. Just when the AS/400 Division should be beating the tar out of Windows NT, it is pulling its punches. Maybe IBM thinks Windows 2000 delays give it some breathing space. This is folly. IBM has to be proactive—hell, downright crazy, with prices that are so low it is practically giving AS/400 hardware away—if it wants a vibrant AS/400 business base by the time the I-Stars get here in June 2000 or so and the Power4 servers get here in 2001.
Server Group Layoffs Looming
In the midst of all this strife, there’s more. Now that Sam Palmisano has taken charge of IBM’s Server Group, which is responsible for building and selling AS/400 and RS/6000 midrange and S/390 mainframe servers, the first action he is going to take is to fire 3 to 6 percent of the Server Group’s employees in order to bring costs more in line with revenues. If IBM didn’t have to prop up its dismal PC desktop business, it would throw Netfinity servers in with the rest of its servers and could show much better growth in the Server Group than it does. But it can’t do that, and hence, the boom is going to fall on Server Group employees who haven’t done as good a job as IBM had hoped selling its non-Intel servers. IBM seems to want to have it both ways, selling Windows NT, SCO
UNIX, and Linux servers like crazy but not impacting its proprietary AS/400 and S/390 lines or its open systems RS/6000 line.
None of that matters, of course, because Palmisano is charged with getting the Server Group’s top and bottom lines in order (in short order, at that) without the Netfinity line’s help. To that end, the Server Group has notified its employees (IBM refuses to supply the exact number in the group) that 3 to 6 percent of them will be cut from the payroll over the next several weeks. Sources in Rochester say that Palmisano and his team have not made any decisions as to where the cuts will be made, what lines will be most affected, or whether the jobs will be focused on factory workers, middle managers, or both. There is speculation that the Rochester facilities will be hit hard, with 10 to 15 percent of its employees affected by the cut. But people forget that the S/390 business is in worse shape than the AS/400 business and will likely bear the brunt.
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