Big Blue Serves up Linux-Only Big-Iron Gift

Late last year, IBM Corp. gave Linux-on-System z boosters a big gift: a new Linux-only System z Solution Edition, priced to move at just $212,000.

It's an especially timely gift. IBM's new Enterprise Linux Server (ELS) comes in both Business Class (BC) and Enterprise Class (EC) form factors. Both flavors include an Integrated Facility for Linux (IFL), support Red Hat Enterprise Linux or SuSE Linux Enterprise, and bundle z/VM. The ELS does not support z/OS.

It's the latest wrinkle in Big Blue's ongoing push to both reduce Big Iron's total cost of ownership (TCO) and further boost adoption of Linux on its System z mainframes. With respect to the former, IBM kicked things up a notch last August, when it announced a septet of System z "Solution Edition" bundles (see http://esj.com/articles/2009/08/25/big-iron-cost.aspx). Big Blue positioned the new solution editions as prepackaged hardware, software, and services bundles designed to support specific workloads -- such as (in the cases of the first offerings) data warehousing, application development, disaster recovery, security, and SOA, among others.

IBM's Linux-on-System z push has been a work in progress, characterized by fits and starts of activity. Last year, for example, Big Blue tinkered with its Linux-on-System z pricing, slashing the cost of its Integrated Facility for Linux (IFL) specialty processor engine by more than 40 percent and expanding the scope of a limited memory pricing offer. IBM also announced a System z Solution Edition for Enterprise Linux which it positions as a means to retrofit an existing z10 BC or EC for Linux.

In the past, Armonk has done much to encourage uptake of Linux-on-System z, first announcing a low-price, Linux-only "baby" mainframe (the z800) a decade ago (the z800 was also paired with a "lite" version of Big Blue's z/OS operating system, z/OS.e). More recently -- in October of 2008 -- IBM announced a new budget-oriented System z10 Business Class (BC) entry. System z10 BC was the company's least expensive Big Iron offering to date, debuting at $100,000. (By way of contrast, System z10 Enterprise Class (EC) systems sell for about 10 times that much.) System z10 BC could run z/OS, Linux, Java Enterprise Edition (JEE), and other next-generation workloads.

The new ELS isn't an altogether unexpected deliverable. Big Blue has quietly been selling a Linux-only System z10 BC mainframe in the Asia-Pacific region, according to Vince Re, chief architect of CA's mainframe practice. That system typically sold for less than $250,000, Re told Enterprise Strategies during an interview last summer.

There's a method to IBM's madness. Its mainframe market practice dipped severely last year: in Q2, for example, Big Iron revenues were off by almost 40 percent, while MIPS shipments were down by half again as much. In Q3, things improved slightly: mainframe revenues were off by 26 percent, relative to the year-ago period; MIPS shipments were still down by 20 percent, however. Server vendors as a whole remarked an improving -- if by no means robust -- buying climate in Q3 of 2009; that being said, demand for IBM's other platforms clearly outpaced demand for System z: Big Blue's System p practice, for example, was down by only 10 percent -- at a time when the overall Unix market was off by almost 25 percent from its year-ago tally. (IBM's System x line actually posted a very modest gain.)

Linux-on-System z, on the other hand, has been a safe harbor of sorts.

According to market watcher Gartner Inc., while overall mainframe capacity dipped by 5 percent in the first half of 2009, Big Iron Linux actually gained 18 percent. "Though the number of Linux-only mainframe shops remains small, IBM has succeeded in getting workloads running on distributed platforms consolidated to mainframes using IFLs," noted Gartner analysts Mark Chuba and John Phelps, in a research blast last summer.

At a time when demand for traditional mainframe workloads seems to be dropping rapidly, Big Blue is doubling-down on Big Iron Linux.

Price Slashing Likely on Tap This Year

Expect more cost-cutting and packaging experimentation from IBM throughout 2010. The System z team is reportedly preparing a next-generation z11 mainframe system, due out (according to several published accounts) late this year. The rub -- from IBM's perspective -- is that speculation about the System z11 has already circulated. In a market research item published last October -- on IBM's System z Web site, in fact -- Ian Bramley, a principal with consultancy Software Strategies, speculated about System z11. (Bramley did so in the context of contrasting the performance and features of IBM's POWER-based System p and System z platforms with the Integrity server line of Hewlett-Packard Co., or HP.)

To the extent that economic conditions forced customers to cancel or defer System z purchases in 2009, there could well be plenty of pent-up demand for mainframe MIPS. If the example of IBM's last next-gen mainframe deliverable (System z10) is any indication, however, foreknowledge of a mainframe platform refresh can have a chilling effect on Big Iron sales. System z10 debuted in early February of 2008, following several months of anticipation. In the two business quarters prior to its debut, however, IBM's mainframe practice took a beating: in Q3 of 2007, for example, mainframe revenues were off by nearly one-third and MIPS shipments were down by 21 percent.

Big Blue posted a 15 percent drop-off, year-over-year, in Big Iron revenues in Q4 of 2007, with just a 4 percent drop-off in MIPS shipments. (Market watchers say that the fourth quarter is traditionally a big quarter for mainframes, high-end Unix systems, and other pricy equipment.) If customers have Big Money to spend on Big Iron systems but also know that a major mainframe refresh is on tap for later in the year, Big Blue likely will have to pull out a lot of stops to convince shops to buy early.

One exception to this pattern seems to be System p, which -- all things considered – performed strongly in 2009. After all, IBM is very close to delivering a POWER7 refresh for System p -- sources say POWER7 should appear in the first quarter of 2010 -- and yet System p sales were down only 10 percent in Q3.

There are a couple of reasons for this. First, IBM faces more pressure in the RISC/Unix space, where it currently enjoys a double-digit lead over both HP and Sun Microsystems Inc. for Unix market bragging rights. IBM's Unix market dominance is a relatively new phenomenon: historically, it trailed Sun and HP in that segment. Big Blue's System p team has learned to be creative, ambitious, and aggressive when it comes to competing on acquisition cost, TCO, or other features.

Second, IBM in Q3 offered System p customers a clear (and, to a degree, affordable) upgrade path to POWER7 (see http://esj.com/Articles/2009/08/04/IBM-RISC-Unix.aspx?Page=2).

There's another crucial difference, too. IBM likes to tout its so-called mainframe "technology dividend" as an incentive for customers to stay current with -- or upgrade from older mainframe hardware to -- each new revision of its Big Iron CMOS. It works like this: Big Blue and most mainframe ISVs license their software on the basis of millions of service units (MSU) consumed or in terms of total MSU capacity. IBM's newer, beefier mainframes have lower MSU ratings than do their predecessors, so a customer who buys the same amount of next-gen mainframe capacity -- or processing power -- gets a 10 percent reduction in MSUs. The upshot, according to IBM, is that it actually costs customers less to run z/OS workloads on newer mainframes.

In some cases, mainframe technologists say, Big Blue's MSU dividend can result in substantial savings (see http://esj.com/articles/2007/03/13/cutting-it-costs-with-ibms-msu-software-licensing.aspx). There's no such dividend for System p shops.

To be sure, customers who upgrade to POWER7 platforms should realize huge improvements in performance: POWER7 ships in 4-, 6-, and 8-core configurations; POWER6 and POWER6+, on the other hand, are available in dual-core configurations. In addition, POWER7 will both run cooler and consume (on a per-core basis) less energy than its predecessors.

On the other hand, there's nothing quite like System z's MSU rating scheme in the System p world; what's more, pricing for AIX workloads simply isn't comparable to pricing for z/OS workloads: the former have long been considered a (sacred) "cash cow" for IBM.

It's in this regard that foreknowledge of IBM's upcoming mainframe refresh can have a chilling effect on Big Iron sales. The MSU technology dividend by itself likely isn't enough to tempt a customer into upgrading to new mainframe hardware. But if a shop plans to upgrade to meet current (or, more likely, projected) capacity demands, it could play the waiting game. Why should it pull the trigger on a z10 machine when, in less than a year's time, it can upgrade to next-gen System z processing power -- probably at a similar price point -- and reduce its workload licensing charges in the process?

These are concerns of which Big Blue is almost certainly aware. Quite aside from the brutal economic climate, IBM has effectively acknowledged that it jas reached a point in z10's lifecycle where demand is likely to be depressed. In his Q3 conference call with the financial community, for example, IBM chief financial officer and senior vice president Mark Loughridge described System z's Q3 performance as "consistent with what we would expect at this point in the product cycle."

Loughridge also described IBM's System z refresh as a "unique opportunity" for the company in 2010. "[O]n the hardware base of business … in 2010 we are going to have a new z series," he confirmed. On the whole, IBM Loughridge seemed largely upbeat about 2010, particularly on the hardware side of the business.

"[A]s we go into the fourth quarter, remember we're not just saying we see an improvement in profitability for our hardware business going from third quarter to fourth quarter. We're looking at it and saying that really that segment-based hardware business ought to be growing profitability at double digits as we go into the fourth," he said, during the same call.

"[W]hen you look at our hardware business, with strong share performance in the third quarter, with [System] p up 5 points of share -- that's quite significant --- [with System] x up 2 points of share, we think that we are going to turn around in the fourth quarter generating double-digit profit growth with new products going into 2010, a new z Series, [and] POWER7 now across the p series line by the end of the year to continue this momentum."

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