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An OPEN Client Edition
Updated 11/24/04, 10:30am MST (adds "IBM, Dell Gain Market Share")
Analysis of IBM Server Group’s Business Performance
zSeries: From Dinosaur to Springbok; xSeries: Thriving; pSeries: Squeezed; iSeries: Needs Facelift
PHOENIX, Nov 22
– The Big Blue servers are experiencing a renaissance.
That’s the take-home message from a two-day conference IBM staged
for consultants last week in Austin, Texas.
Not all servers are being equally successful, though.
But the top and the bottom lines are thriving.
From a product standpoint, “we’re in as
good a shape as we have been in a long time,” declared Bill
Zeitler, the senior vice president who heads up the IBM Systems group.
“It’s been the most active year we’ve ever had” in terms of
Zeitler pointed out that, as a result, IBM has been gaining share of the server and storage markets, along with Dell. In the server market, IBM’s share is up about 15 points since 2001, the trough year for IBM servers (see the chart).
The main reason is IBM’s openness and
willingness to embrace within the Big Blue architectures the “not
invented here”-products and ideas.
And then drive hard to differentiate itself from the competition by
innovation and best-of-breed technology.
In other words, IBM finally accepted and welcomed the multivendor
world in which its customers live.
The process started about four years ago with the top-of-the-line zSeries mainframe servers. It spread across other product lines when IBM put all of its servers under one roof, and appointed Zeitler to head up the groups. Big Blue never looked back. The company has been reaping the benefits ever since.
“When we were doing it the old (proprietary)
way, we lost market share for 10 years,” Zeitler said.
“Now, we’ve regained it all in four years.”
zSeries: From Dinosaur to Springbok
The greatest turnaround story belongs to the
zSeries. Dubbed “z” for
its “zero defects” virtue, the mainframe descendent showed its new
resilience earlier this year when the former dinosaur suddenly exhibited
the virtues of a springbok (“swift and agile”).
Here’s an excerpt from our April 2004 Annex Bulletin on the
upsurge of the zSeries’s revenues and profits, “Going
Retro with Mainframes:”
PHOENIX, April 15
– Big Blue customers seem to be “going retro.”
They are once again gaga over mainframes. That’s as if “Beatlemania” were back, and “I Wanna Be
Your Man” were once again climbing the pop charts.
At least that’s the impression
one would get from a 34% surge in IBM’s first quarter mainframe
revenues. The zSeries business, as the mainframes are called nowadays,
was up 28% in constant currency. Not
bad for a 40-year old (see “Mainframe
at 40!”, Apr 2).
Retro with Mainframes, Apr 2004)
Since then, the zSeries has gone on to grow by 44% in the second quarter, and by 12% in the third. That’s five quarters in a row of double-digit growth, after 12 years (!) of declining revenues.
We estimate that by the end of 2004, zSeries will be once again approaching $6 billion, having grown 17% compounded annually (2003-2004). That’s the highest level the 40-year old has achieved since 1996 (see chart, Table 1).
zSeries did it by opening up - 20% of zSeries mainframes are running Linux
now. And also by listening to
know 50% to 60% of my business
– personally!” stressed Erich Clementi, the zSeries general
manager, speaking at the IBM conference.
That’s because customers are giving Big Blue an earful.
They call Poughkeepsie now when they have a problem.
Unlike the IBM of the old, this new IBM likes it.
In fact, loves it. Instead of pontificating, the Big Blue is lapping up customer
ideas. And turning them into
is good for mainframe business,” mused Clementi.
It gives the zSeries a chance to shine.
And nothing is more complex than integrating thousands of disparate
servers and tens of thousands of applications that IBM’s biggest
customers run on them.
Marianelli, Fidelity Investments’ executive vice president, knows it
firsthand. Two years ago, the
CEO Don Haile put him in charge of the server consolidation project, after
the CEO found out that the company that spends $2 billion annually on IT
had over 8,400 servers with an average utilization of only about 20%.
the actual number grew to about 10,500 servers.
As Marianelli dug into the problem, he discovered many more servers
that had been acquired by various departments without the IT function’s
knowledge. Now he is integrating them all.
With IBM’s help, of course.
That’s no small feat. Fidelity has 24 to 25 million customers from whom it gets over 250,000. Every day! These customers also execute over 140,000 trades on an average day. And they all have to be accounted for. Accurately and in real time.
wonder the customers like Fidelity are spending on people and IT systems
maintenance three times as much money as on new servers (see the chart).
Which, in turn, is
creating new opportunities for vendors to create integrated solutions that
help customers reduce such costs.
system technology and integration are profoundly more important than chip
technology or operating systems,” the key differentiators and vendor
control levers in
the past, said IBM’s Zeitler.
Now we are into a “system on a chip”-type of integration, he
has been also aggressive with pricing of the new zSeries.
Which helped generate a huge increase in demand.
for example, a big Saudi Arabian oil company that exports three billion
barrels of crude oil per year, saw a 390-fold increase in systems capacity
in recent years! And it is
till thirsting for more computing power as it replaces the legacy systems
with new SAP-powered servers.
company's CEO, Abdallah S. Jum'ah, highlighted the importance of IT to
Saudi Aramco's business.
teams are using the new information and communication technologies to peer
deep into the earth, pinpointing new hydrocarbon reservoirs and managing
existing ones,” Jum'ah is quoted as saying at the company’s web site.
“Employees are working together through high-tech networks of all
descriptions to bring new levels of cost efficiency to refineries,
pipeline systems, utility operations and other facilities.”
dependence of company business on IT will become even more pronounced over
the next decade, Jum’ah opined. Aramco's
IT strategy seeks to create synergy between technology and human talent to
excel and innovate in all company endeavors.
resulting surge in installed systems capacity is, of course, music to
IBM/zSeries ears. In 2003, the total installed data storage at the
company’s EXPEC computer center reached 1.2 Petabytes (i.e., about 1,200
Terabytes). For the first
time, Aramco was able to mirror general purpose data at a remote location
for greater disaster recovery capability.
that – a quest for increased security – is a new post 9/11 global
trend that has also helped drive the demand for the zSeries servers,
according to IBM’s Clementi. With
its single image approach and a highly scalable architecture, the zSeries
has a unique advantage in the marketplace, he says. “At no point do the
customer applications ever touch the hardware anymore,” he said.
IBM’s xSeries, a family of Intel-based
systems, has been the second best performer this year among the IBM
servers. The xSeries grew its
revenues by 28%, 18% and 26% respectively during the first three quarters
of 2004. Armed with its new
64-bit Intel Xeon processor line, it is poised for a strong finish in the
fourth quarter (see “64
reasons to think about IBM’s new Intel processor-based servers”).
been three years now that we have been gaining market share,” said
Susan Whitney, the xSeries general manager.
“Innovation is at the core of it (the success).
But you surround it with other values that IBM has to offer.”
And voila! Success follows… some $16 billion of it in the last six years (see the chart).
Austin, Texas, is the birthplace of the
pSeries, a successor line to the RS/6000 that premiered here in February
1990 (see 90-07, 2/15/90). The
pSeries, like the RS/6000, runs Unix (AIX in IBM lingo), and uses IBM’s
proprietary Power technology, now in its fifth generation.
The small “p” in its name has always stood for “power” or
(high) “performance,” never more than right now, as the product has
just set a new record for speed in a TPC-C benchmark.
That’s nothing new. “Speeds and feeds” feats have always enthralled the
pSeries developers and their customers.
Here’s an excerpt from an Annex Bulletin 95-15 (3/04/95) story
about the original RS/6000 announcement that illustrates that point:
Yet the “7.4 megaflop” system that
fascinated and stretched the imagination 12 years ago is now a tiny dot on
the performance chart of the pSeries.
More importantly, the pSeries has actually been anything but a
“megaflop.” In the last
10 years, for example, we estimate that it has contributed about $43
billion in revenues to the corporate top line (see the above chart).
Like the other IBM servers, the pSeries has
also opened up in recent years. As
a result, Linux is now integrated into its AIX (Unix) architecture, said
Adalio Sanchez, the pSeries general manager.
One thing that has not changed about the
pSeries is its developers’ thirst for speed and power.
The latest TPC-C benchmark record is a case in point.
“Every two to three years we try to do
something radically different,” said Ravi Arimilli, the chief architect
of the pSeries who has his name on over 200 U.S. patents. “Why go for incremental improvements? Why not go for four- or five-fold faster?
It’s setting lofty goals like that “that
drives real, honest-to-God thinking (among IBM developers) that doesn’t
happen elsewhere,” he added. In
turn, this opens the door to reality-altering price/performance
improvements. The new Power5
technology did just that when it premiered last July 13:
“IBM today changed forever UNIX®
computing with the introduction of new eServer™
p5 systems, an advanced line of UNIX and Linux® servers that use
POWER5™ microprocessors and Micro-Partitioning™, an IBM Virtualization
Engine™ technology, to achieve unprecedented computing performance and
reduced costs for a wide range of business and scientific applications,”
IBM said in a release.
The new eServer p5 systems were the
result of a three-year development effort at IBM that extended the
traditional Unix servers with mainframe-inspired features.
But while the pSeries responded
aggressively and successfully to competitive challenges at the top of the
line, it is still being squeezed from the bottom by Wintel-based servers
(Dell, HP), Sanchez admitted. As
a result, the pSeries revenues grew by only 1% in the second quarter,
after dropping 3% in the third.
iSeries: Needs Facelift
The 35-year old iSeries is IBM’s second oldest server line (second only to the 40-year old zSeries mainframes). But the iSeries et. al. has always been the first among its IBM peers in terms profitability and charisma.
The AS/400 and its S/3X predecessors were
breaking both technological and cultural barriers well before that became
fashionable at Armonk. Here’s
what we said about it in a 1995 Annex Bulletin:
Its success continued from there.
“The way we put it together is what sets (the) AS/400 apart,”
said Bob Dies, then the general manager of the AS/400 division, speaking
at an August 1995 preannouncement briefing in San Francisco.
What Dies meant was that the AS/400 harnesses the complexity within
the product so as to deliver simplicity on the outside.
Those were the “good old days.” The iSeries has not been exactly an IBM success story in the last 7-8 years. Its revenues dropped from an estimated peak of about $4 billion in 1996, to only about half of that (see the chart).
The business erosion has been particularly
precipitous this year. In the
first quarter of 2004, the iSeries revenues declined by 7%; in the second
by 28%; in the third by 26%… That’s because the iSeries had acquired
the image of being old and proprietary at a time the marketplace wanted
new and open.
Adding insult to injury, the entire iSeries
line was actually rejuvenated this year with the new Power5 technology
that is burning the track inside the pSeries servers.
Like the other IBM servers, the iSeries also opened up to Linux and
other non-IBM products. Yet
the old and proprietary image stuck.
By mid-summer, it was time for a typical
“woe Nelly”-cry from Armonk. Allowing
IBM’s most profitable server line to continue to shrink was simply not
acceptable to either Zeitler or Sam Palmisano, the IBM CEO.
So a new general manager was installed with the mandate to turn
things around. Quickly.
Yesterday. Or else…
Mike Borman, the iSeries general manager of three months, fresh from a job
of running the IBM global business partner operations in the small and
medium business (SMB) market. In
other words, Borman is a Big Blue executive who is used to delivering
under pressure of a corporate gun pointing to his head.
“Our technology is fabulous, (customer and
partner) loyalty is strong, satisfaction second to none,” Borman told
the IBM conference attendees in Austin last week.
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.”
Fidelity’s Marianelli, perhaps unwittingly,
gave Borman an assist in it. The
man who is in charge of consolidating the company’s 10,500 servers said
he’d found out that two of them were untouchable.
He discovered that all Fidelity mutual fund trading goes through
two AS/400s. Which means
that, 6% to 10% of all New York Stock Exchange volume runs on these two
machines, he added.
Yes. Friendly? Yes. Easy
to use? Yes.
Those are all well-known iSeries’ attributes that have made it a SAFE
choice for its 240,000 customers. What
is less well known is that the iSeries is also indispensable
to some of them; even to the largest ones, like Fidelity.
And that’s one of the iOpeners
we took home from Austin last week.
Another is the secret to the Big Blue server
renaissance: IBM research lab has walked out into the street.
IBM customers are now a key part of the product development
efforts. No longer are the
IBM scientists carrying on their experiments in the sanctity, secrecy and
solitude of the hallowed halls of Big Blue labs before emerging to the
customers what’s good for them. That
was the old IBM. Now it’s
the other way around. The
customers are telling IBM what they want.
And Big Blue is trying hard to provide it to them.
If “the world is your oyster,” then the
IBM server folks are trying hard to pry open the ones with the pearl
inside – before serving them up to customers as fine necklaces or
bracelets. That is why the
Big Blue server product lines are once again a growing part of the
How long will the
renaissance last? As long as
IBM server people keep running scared and take nothing for granted.
For, complacency is the root of many downfalls.
And, fear is a part of all triumphs.
Happy bargain hunting!
 “Silverlake,” the name of a small lake in Rochester, MN, was the IBM code name for the AS/400.
 The iSeries global installed base is about 450,000 systems. They are being run by about 240,000 customers.
PHOENIX, Nov 24 - No sooner had we gone to print with our "Server Renaissance" report, but IDC released its third quarter global market share survey data. And the latest figures reconfirm the existing trends: IBM and Dell are gaining share in a growing global server market. Revenues were up 5.5% in the third quarter to $11.5 billion.
Within that big picture, another sub-trend is discernible. Top and the bottom of the global server market is gaining at the expense of the middle. Just as with IBM servers, the high-end servers (over $500,000 in price) and small (Intel-based) servers (under $50,000 in price) are growing (at 2% and 18% respectively), while the midrange servers (between those prices) are shrinking (at 10%).
But IBM zSeries revenues increased by 12% in the third quarter, as you saw from our above report, while the overall global high-end server market grew by only 2%. Which means that other vendors' big server revenues must have declined, we estimate by about 7%, in the same period. And that suggests that IBM market share gains were the biggest at the top of the global server market.
For additional Annex Research reports, check out...
2004 IT: IBM Server Renaissance (Nov 2004); HP Hits Home Run (Nov 2004); Capgemini: Revenue, Stock Soars (Nov 2004); EDS: Jordan's Swan Song? (Nov 2004); To Russia with Love and $ (Oct 2004); IBM: Slow Quarter No Longer (Oct 2004); Accenture: Revenues, Profits Up, Stock Down (Oct 2004); Capgemini: A Takeover Target? (Oct 2004); Sellout of America (Oct 2004); Spy Wars (Sep 2004); Outsourcing Boomerang (Sep 2004); EDS to Cut Up to 20,000 More Jobs (Sep 2004); Capgemini Stock Plummets on Unexpected Loss (Sep 2004); HP Savaged by Wall Street (Aug 2004); Moody's Lowers the Boon on EDS (July 2004); HP: Delivering Value Horizontally (June 2004); Accenture: Revving Up a Notch (June 2004); Beware Your CFO! (May 2004); IBM: Changing of the Guard (May 2004); Capgemini: Texas-size Home Run (May 2004); Following the Money (May 2004); EDS: On a Wink and a Prayer (Apr 2004); HPS Wins by a Nose! (Octathlon 2004); Accenture: Burning the Track (Mar 2004); IGS: "Crown Jewel" Restored? (Mar 2004); HP: Still No Cigar (Feb 2004); Cap Gemini: Another, Smaller Loss (Feb 2004); CSC: Good Quarter Gets Boos (Feb 2004); EDS: "Hot Air Jordan" Flaunts Flop as Feat (Feb 2004); IT Industry: Whither Goeth It? (Jan 2004); Cronyism Is Alive and Well at EDS" (Jan 2004)
2003 IBM: "IBM vs. HP: Spinning Global Server Market Shares" (Nov 2003); "Finally Heard, Part II," (Nov 2003), “Small Is Now Big at Big Blue” (Oct 16), “On the Nose But No Cigar” (July 16), “A Paler Shade of Blue” (June 2), “Save, Spend and Split” (May 8), “Shrunk by the Marketplace” (Apr 17), “Turnaround Continues...” (Apr 15), "Finally Heard!" (Jan 29), “Start of a Real Turnaround?” (Jan 17).
2002 IBM: “Gerstner: The Untold Story” (Dec 27), "Gerstner Spills the Beans" (Dec 13), "On a Wing and a Prayer" (Oct 21), "IBM-PwC Tie the Knot" (Oct 2), Big Blue Salami (June 19), "Looming IBM Layoffs" (May 14), "IBM 5-Yr Forecast: From Here to Eternity?" (Apr 2002), “Tough Times, Soft Deals,” (Apr 25, 2002), “Gerstner’s Legacy: Good Manager, Poor Entrepreneur” (Jan 2002), IBM Pension Plan Vapors: Where Did $17 Billion Go? (Mar 2002), "Sir Lou OutLayed Lay!" (Apr 1, 2002).
A selection from prior years: "Break Up IBM!" (Mar. 1996), Fortune on IBM (June 15, 2000), “Smoke and Mirrors Galore,” July 2000), "Slam Dunk of Bunk" (Jan 2000), Annex Bulletin 98-14 ("Wag the Big Blue Dog"), Armonk's Fudge Factory (Apr. 9, 1999), Where Armonk Meets Wall Street, Greed Breeds Incest (November 1998), Stock Buybacks Questioned: Is IBM Mortgaging Its Future Again?, 97-18 (4/29/97), "Some Insiders Cashed In On IBM Stock's Rise, Buybacks" 97-22, 7/27/97, Djurdjevic’s Forbes column, "Is Big Blue Back?," 6/10/97; “Executive Suite: How Sweet!,” (July 1997), "Gerstner: Best Years Are Behind", Aug. 10, 1999), "IBM's Best Years Are 3-4 Decades Behind Us" (July 1999), "Lou's Lair vs. Bill's Loft" (June 1999), "Corporate Cabbage Patch Dolls," 98-39, 10/31/98; Djurdjevic’s Chronicles magazine October 1998 column, "Wall Street Boom; Main Street Doom", “Louis XIX of Armonk,” (Aug. 1996), "Mountain Shook, Mouse Was Born" (Mar. 25, 1994), “A Nice Guy Who Lost His Compass” (Jan 26, 1993), “Akers: The Last Emperor?” June 1991), Industry Stratification Trend (Mar. 30, 1990), etc.]