Here’s a question for you: If you call a tail a leg, how many legs does a healthy dog have? If you say four, you are right, because calling a tail a leg doesn’t actually make it a leg. If you say five, you might have a promising career in computer marketing.

Here’s another question for you: How much does OS/400 V4R4 cost? If you think the answer is nothing because IBM bundles it for “free” on AS/400s, you are wrong. Calling an operating and database management system free doesn’t actually make it free. The new Northstar 170 and 7XX servers make this point abundantly clear. Much of the cost of AS/400 processors, regardless of what IBM says, is actually represented by the underlying cost of providing OS/400 and DB2/400 for these processors. This simple fact has important implications for AS/400 customers as they plan their budgets. It also has important implications for IBM’s Business Partners (BPs), who are trying to sell AS/400s, and for the company’s investors, who are trying to understand how well IBM is doing compared to others in the midrange industry. Neither customers, BPs, nor investors are likely aware that what IBM often sells as hardware performance in the AS/400 line is actually nothing more than the keys to let software run as fast as it ought to given the power—and, in the case of the Apache and Northstar PowerPC processors, the formidable power—of the AS/400 hardware on which it runs. The underlying hardware in many AS/400 configurations is virtually identical in many of the new 7XX servers. Nevertheless, these configurations have widely divergent prices and performance characteristics because IBM continues to tweak OS/400 software, notably its 5250 green-screen terminal protocol, to make it run differently on the same hardware.

A decade ago, and even five years ago, figuring out what OS/400 really cost was relatively easy. If you bought a B10 system in 1988, the base machine cost $19,000 and a basic one-time license for OS/400 V1R1 cost $5,500, or about 22 percent of the total base system cost. Through the C, D, E, and F generations, the price of a P10 license for OS/400 for a machine in the same P10 software tier as the model B10 gradually increased over time until it represented about a third of the overall system cost, which ranged from a high of $25,350 with a C10 to a low of $21,950 with a D10. (For a graphical depiction of this trend, I’ve provided a table and charts depicting the cost of hardware and software over time on small system-style AS/400 configurations on our Web site at www.midrangecomputing. com/mc/99/05.) With V3 machines, IBM went to a mixture of user-based and tier-based pricing, but the net effect was the same for a typical number of

users on a P10-class machine. The CISC-based 200-2031 and the RISC-based 400-2131 each cost $15,000, and their V3 licenses each cost $10,100 for 25 or more users—$25,100 in total. OS/400 represented 40 percent of the total system cost on these machines, almost double that of the original B10’s OS/400 license. With the Apache and Northstar machines and their V4 software, IBM not only dropped user-based pricing and went back to tiered pricing but also started bundling OS/400 on the machines as part of the base hardware. But that doesn’t make OS/400 free. In fact, OS/400 V4 certainly does have a list price, as anyone with a first generation 4XX or 5XX RISC AS/400 who wants to run V4 can tell you. Here’s what OS/400 V4 costs according to IBM’s own price lists:

• On P05 machines, it costs $2,250.
• On P10s, it’s $9,000.
• On P20s, it’s $26,000.
• On P30s, it’s $70,000.
• On P40s, it’s $160,000.
• On P50s, there is no list price, because 530 systems don’t reach up into the P50 power class, but based on the P05 through P40 prices, it should cost around $310,000.

While IBM doesn’t explicitly charge for OS/400 V4, the software nevertheless represents 35 percent of the $26,000 price tag of a model 600-2134 Apache system and about 33 percent of the $27,000 cost of a new (announced in February) 720-2061 Northstar server. To IBM’s credit, each successive AS/400 generation it has launched has offered significant performance improvements, but then again, modern operating systems and client/server, groupware, and e-business applications eat more processing power per user.

The pricing pattern for OS/400 on small AS/400s holds more or less true on bigger AS/400s, too. Here are two more examples just to give you a feel for the pattern. In the belly of the AS/400 market, starting with the B40 in 1988 up through the B45, D45, E45, F45, 300-2042, and 530-2142, a new OS/400 license represented 29 to 36 percent of the total system cost of these machines, which ranged from a low of $87,500 on the B40 to a high of $111,580 on the F45. With the 600-2179 in late 1997, OS/400 V4 represented 31 percent of the $85,000 system cost. The 720-2061 with interactive feature 1502 is in the same price class and software tier as all these machines, and its V4 license represents about 24 percent of its $107,000 acquisition cost.

On the high end of the AS/400 line, a base B60 in 1988 cost $229,700, and its OS/400 license cost $55,000, or about 19 percent of the $284,700 base system cost. With the B70, OS/400 V1R2 represented about 18 percent of the $379,000 price tag. As each successive AS/400 generation came out, the price of the model 70-class system and its OS/400 license gradually increased until, by the time the F70 was launched in 1993, OS/400 V2R3 represented 21 percent of the $504,700 total base system cost. With the 320- 2050, OS/400 V3 with a suitable number of user licenses cost $128,600, or 32 percent of the $402,100 cost of the base system, and with a 530-2151 in the same price class and software tier, OS/400 V3 represented a third of the total $529,600 system cost. On the 620- 2182, OS/400 V4 accounts for 33 percent of the machine’s $480,000 price, and on the 730-2067 with interactive feature 1509, which is in the same P40 software tier and approximate price class as the 320 and 530 machines, OS/400 V4 comes to about 29 percent of the $550,000 price tag.

The point is that you don’t get something for nothing in this world. OS/400 has consistently represented anywhere from a quarter to a third of the value of an AS/400 based on IBM’s one-time software license fees and, when it offered them, on user-based pricing schemes. But with the advent of server models in 1993 and recently with the AS/400e 7XX unified system/server line now shipping, the cost of OS/400 has actually come to represent a much larger piece of overall system or server costs than even these numbers suggest. When IBM and its BPs sell the machines, they don’t tell customers this detail of pricing, and it certainly is not the way that Big Blue prefers its customers to think about the hardware and software they buy. But the analysis I am about to present details how

customers should think about what they are buying when they acquire a new AS/400e 170 or 7XX server and OS/400 V4R4. It more accurately reflects what is really going on.

Since IBM first debuted the server line in September 1993, the difference between AS/400 systems and AS/400 servers has been simple, even if IBM has never come out and told customers directly what was going on. An AS/400 system is a machine that lets the 5250 green-screen terminal protocol run at full speed, while an AS/400 server uses the same hardware as the AS/400 system but has been “tuned” by IBM not to run the 5250 protocol very well. IBM wants customers to move to modern client/server and e-business software, and to get customers moving in that direction, it charges anywhere from two to five times as much for an AS/400 system that could handle anywhere from two to 40 times the green-screen work.

Here’s an example. The 12-way S40-2261 Apache server launched in 1997 cost $300,000, with OS/400 V4 representing $160,000 of that total cost (based on the list prices IBM charges for 5XX RISC servers in the P40 tier). That means the base hardware in a 12-way Apache server cost only $140,000. This is very inexpensive given the power that the Apache server has. But the 650-2243 system, using the same exact hardware as the S40-2261, could handle 37 times as many green-screens as that S40 and cost $1.25 million. The only difference between these two machines is how IBM lets OS/400 V4 operate. For the 650, which is in a higher P50 software bracket, the base OS/400 license comes to an estimated $310,000, and the base hardware is $140,000. (If the hardware costs only $140,000 with the S40 label on it, putting a 650 label on it should not change the price, regardless of what IBM says.) This leaves the remaining $800,000 to cover the cost of using the other 97 percent of the 5250 interactive processing capacity that is inherent in the hardware but is not accessible until customers buy a model 650 rather than an S40. In this case, OS/400 represents a staggering 89 percent of the cost of a base 650 system.

It comes as absolutely no surprise, then, that AS/400 customers have been outraged by IBM’s oppressive system prices and lenient server prices. It is equally obvious that IBM had to do something to make the AS/400 more palatable to customers using legacy 5250 software as well as to new customers who had little or no need for the 5250 protocol. Enter the new Northstar 7XX line, with its dial-an-interactive-performance features. However, rather than improving the OS/400 pricing situation with the Northstars, IBM has, in some cases, made matters worse.

First, let’s take a look at the Apache and Northstar Invaders. Before I get into numbers, let me give you a tidbit of history.

In August 1997, IBM told its major BPs that its plan for the Apache Invaders to be launched in February 1998 was for them to have as much as twice the 5250 green-screen processing power and the same client/server processing power as the equivalent SXX Apache servers that were announced in the summer of 1997. IBM didn’t make good on this plan, however, possibly because it realized that if it offered such machines to traditional AS/400 system customers at the low prices it charges for Invaders, customers would not shell out two or three times as much for a 610 or 620 plain vanilla system. As originally planned, the Invaders (with their impressive price/performance improvements on both client/server and green-screen applications and emphasis on bringing 5250-type performance more closely on par with plain vanilla systems) were exactly what the low end of the AS/400 base needed. Instead, IBM ann-ounced model 170 Apache Invaders with significantly better price/performance but with a catch: CPU for CPU, the Apache Invaders had poorer performance on green-screen jobs than equivalent SXX servers.

As it turned out, OS/400 V4 represented from 15 to 40 percent of the cost of a base Apache Invader. Similarly, on the Northstar Invaders, OS/400 V4 accounts for between 17 and 41 percent of the base cost. These machines offer excellent bang for the buck and are appropriate for a large percentage, perhaps even a majority, of the AS/400 installed base.

On the new 7XX servers, figuring out the actual cost of OS/400 is just as difficult as it was on SXX servers. And, not surprisingly, OS/400 V4 is a large component of the

actual cost of the 7XX machines, even though this is not what IBM tells its customers when it sells them these machines.

Here are two examples, one at the low end and one at the high end, to give you a feel for what OS/400 really costs if you do the math. On the low-end 720 boxes, IBM provides a processor with a basic client/server performance rating and an interactive rating that ranges from 4 to 69 percent of the theoretical maximum 5250 performance of the boxes. (On most 730s and 740s, by contrast, customers can keep adding interactive features that allow them to put the full weight of their hardware behind green-screen jobs.) A base model 720-2062 costs $47,000, with $9,000 of that amount being the cost of OS/400 and $38,000 being the cost of underlying hardware—in this case a 200-MHz Northstar chip, 4 MB of L2 cache, 256 MB of main memory, and 4.2 GB of disk capacity in a little black box. But to double the interactive performance of this machine from 35 to 70 CPWs (that’s short for Commercial Processing Workload, an IBM power metric for AS/400s that is roughly based on the TPC-C benchmark test) pushes the machine from a P10 to a P20 tier, raising the base OS/400 license cost to $26,000. Moreover, IBM charges another $11,000 to let customers use more 5250 green-screen bandwidth. On a 720-2062 with interactive feature 1503, 57 percent of the processing power of the machine is available to run green-screens at a cost of $202,000; $38,000 of that price tag is for the underlying hardware, which is unchanged except for the addition of the interactive feature 1503 (a key to turn an AS/400 engine on, not an engine itself); $26,000 is for an OS/400 V4 basic license; and the remainder, $138,000, is just to make more use of the 5250

terminal protocol. When you do the math, 81 percent of the cost for the 720-2062 with feature 1503 is really for software, not hardware.

The scenario is not much different on bigger 7XX models. A base 12-way 740- 2070 server costs $340,000, with $160,000 of that amount paying for a base OS/400 license and $180,000 paying for the server with a base 120 CPWs of interactive processing power. To buy a 740-2070 with interactive feature 1513, which allows the interactive processing power to max out at 4550 CPWs (the same as the CPW client/server rating for the box), costs $1.7 million. The hardware hasn’t changed one bit on this 740 and should still cost customers only $180,000. The OS/400 base license costs around $310,000 (again, this is my estimate, not an IBM price). When you do the math, the remaining $1.21 million really covers only access to the 5250 terminal protocol. In the case of a fully interactive 740-2070, OS/400 software really accounts for 89 percent of the total base system cost.

Obviously, such huge skewing of hardware and software costs has similarly huge implications for not only AS/400 customers but also the way IBM reports its financial figures to Wall Street and investors. Next month, I will explore the effects that IBM’s marketing plan for the AS/400 has had on its ability to show growth in the hardware business and examine the ethical implications of IBM’s ongoing practice of not exactly leveling with AS/400 customers about what hardware and software costs really are.