Annex Bulletin 2005-17                            July 26, 2005

Confidential Client Edition

IBM CORPORATE

Updated 7/26/05, 4:45 PM EDT (adds "Executive Quotes, Photos")

Analysis of IBM’s New “Z9” High End Servers: A $1.2 Billion-Mainframe Bet

Polaris Eclipses T-Rex

New Mainframe, New Strategy – Quantum Leaps from Just Two Years Ago

NEW YORK, July 26 – Just over two years ago, Big Blue took a swipe at its large systems strategy critics who compared mainframes to dinosaurs.  IBM chose an in-your-face code name “T-Rex” for its then new $1 billion-z990 server (after the fearsome 20-foot tall, 15-ton Tyrannosaurus Rex, the “king of dinosaurs”).

Less than a year later, on mainframe’s 40^th birthday (Apr 7, 2004), the T-Rex was followed by the “son of T-Rex” - the “z890.”  What ensued was the most successful IBM mainframe sales year in decades (see “IBM Servers to Grow Again,” Feb 2005 and “IBM Server Renaissance”, Nov 2004).  

"We've shipped more capacity in the last four years than in 36 years before that," said Erich Clementi, IBM's "mainframe czar," speaking this morning at the IBM announcement press conference in New York attended by some 130 reporters.

But success can be a pain… next year, when you have to do it all over again, and scale new heights.  As you saw from IBM’s latest report, after rising 45% the year before, mainframe revenues declined 24% in the second quarter as the customers awaited Big Blue’s next “big bang.” 

"We make announcements all the time, (but) we only do events like this once every five years," said Bill Zeitler, IBM senior vice president, speaking at the IBM announcement press conference in New York this morning (see the photo below).  Zeitler heads up the company's systems and storage hardware business.

The new Polaris mainframe, IBM’s code name for the $1.2 billion-“z9” server being unveiled today, leaves the T-Rex in the dust, just as dinosaurs eventually ended up in the dustbin of history.  It’s a quantum leap not only from the two-year old T-Rex (up to eight times more powerful), but it represents a doubling of performance even relative to its successor – “son of T-Rex,” announced only 15 months ago (see the chart).

Why the Polaris code name?

Just like Polaris, the Northern Star that has been used for navigational purposes for centuries because all other stars appear to rotate around it, the new z9 intends to be the guiding light to safe harbors for wayward IT travelers in the 21^st century.  As such, it may become the new center of each customer’s IT universe.

That’s because the z9 is a lot more than just a bigger, faster mainframe.  It plays right into the sweet spot of four important industry trends that we identified earlier this year – recentralization, reintegration and virtualization, and corporate customers’ increased anxiety over security, both physical and intellectual (see “Poughkeepsie Spring” and “An iSeries Revival”).

It is clear that the z9 will be IBM's high-end systems platform for ages... Which in IT terms means at least for the next five years or so.

"This system is going to be the base for the next phase of mainframes," said Clementi.  

Strategy Triad

“There are three systems imperatives,” explained Irving Wladawsky-Berger, a veteran IBM vice president who is in charge of innovation at Big Blue, speaking in a pre-announcement briefing.  “Virtualize everything, commit to open and collaborate to innovate.”

He said that the demand for high-end systems has become global in nature.  And that requires that traditional transaction processing be augmented by a collaborative approach that more tightly and securely integrates technology, processes and personnel.

Virtualize Everything.  A project leader in a large federal government agency’s data center, who asked to remain anonymous, also raved about the importance and value of virtualization in his world. 

“We’re finding we can get it on more hardware now with less pain,” our source said.  “Virtualizing is really saving us (money) because we can just stamp out images.”

“We run the agency’s web portal based on IBM WebSphere software,” he added.  “That’s become a new standard for enterprise web content management system and enterprise collaboration.  And all these agencies are starting to roll in and use that technology because the government has taken money away from them” (making it more difficult to use a “go it alone” approach). 

“And virtualization is saving us people dollars because of being able to just stamp out virtual servers on the mainframe,” for these new customers, he added.  “And they are all very reliable.  Nobody has a problem going there anymore.”

No wonder Websphere revenues have been consistently growing in the double-digit range during the last two years, including in the last (second) quarter (up 18%), when the mainframe hardware revenues slumped.

IBM today also enhanced its virtualization technology.  Called Virtualization Engine 2.0, the technology is a giant leap forward in enabling virtualization for the first time across an entire enterprise and beyond.  It uses open interfaces and Web services to connect IBM and select non-IBM server and storage systems.

Commit to Openness.  If you still hear some IBM mainframe critics these days complain about Big Blue’s “proprietary sysems” approach, you should know that such critics are marooned in the past.  There was indeed a time… make it a long time – several decades long – when IBM only designed and sold proprietary systems. 

But that began to change five years ago, when the zSeries was announced, along with a new strategy embracing openness.  As a result, some 75% of the mainframe MIPS IBM ships now are for workloads built on open standards.

"Ever since we opened the mainframe, we've seen amazing things happen," said IBM's Clementi.  "Mainframe has become mainstream, and is ready to collaborate."

Words like that are music to IBM mainframe customers' ears.  

“We’re going to expand our use of (zAAP) Java,” one big IBM customer in the health care field told us this spring.  “I think it’s been a good thing for IBM to do (to open up).  The irony now is that Microsoft is now the big bad proprietary vendor (the attributes that used to be ascribed to IBM in the past).  What goes around comes around.  It’s Microsoft’s turn now.”

By contrast, IBM is continuing to champion openness and sharing.  The company’s mainframe designers are now touting an enterprise-wide Services Oriented Architecture whose purpose is to interconnect and leverage the various IT assets that customers have accumulated over the years.

Collaborate to Innovate.  It does not seem intuitively obvious that collaboration is a key to innovation.  Leonardo da Vinci, for example, the great Renaissance inventor and artist, would certainly have had a good laugh if anyone presented him with a “design by committee” concept.

Yet the famous German poet and writer Johann Wolfgang Goethe understood the importance of collaboration before creation. 

“The greatest genius will never be much if he pretends to draw exclusively from his own resources,” Goethe said. “Every one of my writings has been furnished by a thousand different persons, a thousand different things.”

At this day and age when thousands of workers are scattered in dozens of countries around the world in global enterprises, impediments to collaboration are also obstacles to innovation.  And that’s what the new IBM products are intended to remove, fostering the sharing of ideas (applications) and not just data.

Top-Notch Security.  Ever since 9/11, increased demand for top-notch security has elevated the importance of the zSeries, especially in a 24/7 operating world where the mainframe shines.  It is, after all, the system some of the world’s largest banks bank on.  Now, other industries, including governments, are coming to realize that the zSeries is the “Fort Knox of the IT world” when it comes to security.

Besides the cost savings, “the other reasons (for switching to mainframe) were the mainframe’s superior reliability and security,” explained Dr. Claudio Podesta, Iside SpA’s Assistant General Manager of Operations, one of Italy’s biggest banks.  “So I backed a sure winner.”

That was “yesterday.”  Today, the IBM mainframe security just got even better.  The z9 is the most sophisticated, secure computing system ever, IBM claims.  The z9 mainframe will act as a centralized hub to help businesses collaborate more efficiently with each other able to fend off all know threats.

For the first time, the identities of consumers and their personal information can be encrypted not only on the mainframe, but wherever the information is stored, including tapes. 

The loss and theft of tapes with 676,000 customer records has recently grabbed headlines and caused consumer concern around the world.  The number of computer viruses is also exploding.  They were up 25% in 2004 to over 112,000.  The growth rate of viruses embedded in e-mails has doubled from prior years.

The new z9 security features seek to thwart such threats to corporate data through a holistic approach, including physical and virtual protection of customer assets.

Per Ardua Ad Astra

One of the challenges that IBM and large enterprises face is a relative dearth of mainframe skills. 

“The people who know those disciplines and understand the mainframe structures are in their 50s,” said Kevin Sharkie, Aviva Australia’s CIO (Aviva is the largest insurance and finance company in Britain).  “And that is a problem; that is a global problem.” 

Given the scope of the problem, “per ardua at astra” (“through hardships we reach the stars”), the Royal Air Force motto, aptly applies to this predicament.

IBM understands that.  In Australia, for example, the central government and IBM are working on setting up courses at various universities that would reintroduce the mainframe skills lost in the last several decades.

In China, IBM just announced (March 2005) the “IBM zSeries University Program” that will be offered at seven universities in that country (see the photo from the March 18, 2005 press conference).

IBM expects that opening the courses on mainframe technology will uplift the academic levels of selected universities.  It also hopes teaching and using the mainframe technology skills will provide the universities with capabilities to implement large scale IT programs.

IBM’s goal is to have 20,000 skilled mainframe professionals in the global marketplace by 2010. 

So if anyone is thinking that the mainframe is dead, or even hibernating, think again.  Big Blue and its large customers are clearly thinking and investing for the long term.

New Sources of Demand

And no wonder.  Besides the traditional legacy customers and applications, there is a whole new world of wealth out there waiting to be poured into the mainframe.

Peter Horowitz, for example, a Managing Director with BearingPoint, noted in a June 8 release that China’s banks are poised to potentially become some of the most influential financial institutions in the world over the next 10 years.  But they first need to know their customers and conduct better segmentation of the market.

“The growth of China's mass affluent and high net worth segments will require improved financial planning processes, asset allocation and ‘open product’ architectures, such as the ability to distribute financial products manufactured by other institutions,” said Horowitz.  

“In many countries, servicing a client's assets and liabilities, simultaneously, is difficult given the integration needed for legacy systems and platforms.  China is positioned to leapfrog these platforms with an approach taking a complete view of a client's needs from the outset.”

And when China banks do leapfrog over their competition, IBM and its z9 will be there to catch it.  And you can take that to the bank. 

Summary

IBM’s new mainframe, the z9, as impressive as it is on a “speeds and feeds” basis, is merely a part of a much bigger picture.  Big Blue is on a quest to redefine the axioms of corporate computing.  Not for the first time.  Not for the last time.  But again for the long haul.

"We've been in the forefront of many industry trends that are generating new demand," IBM's Zeitler told the media and analysts assembled in New York today.  The z9 mainframe and the associated software and hardware are just the latest example.

And when Big Blue means business, it usually means big business.  The company is putting big money where its mouth is.  Some $1.2 billion went into the latest turn of the wheel of progress - the Polaris eclipsing the T-Rex.  Clearly, IBM believes its 41-year old has a bright future.

Smart money should not bet against Big Blue’s strategy.  Most of us did it once before when we buried the mainframe in the early 1990s.  And smart people are supposed to learn from history, not repeat it.

Happy bargain hunting!

Bob Djurdjevic