Price Increases on Upgrades to Take

• 01/10/2000

IBM informed its business partners last month that it will institute a price increase for all upgrades to the AS/400 700 series, effective Feb. 1, 2000, hoping to give customers adequate time to decide the best approach for meeting their IS needs in the upcoming year.

New Prices in Effect February 1, 2000 From/Model To Current List Price Feb. 2000 List Price Percent Increase* 620-2180 720-2062/1503 $119,000. $140,000. 18% 500-2140 720-2061/1501 $ 38,000. $ 47,000. 24% S30-2320 730-2066/1509 $170,000. $220,000. 29% S30-2258 730-2066/1506 $ 45,000. $ 70,000. 56% 640-2237 730-2065/1509 $125,000. $265,000. 112% *Increases are similar on the 4xx model lines.

"We wanted people to understand what their options are, quite frankly," says Drew Flaada, director of product management for the AS/400 division. "I mean, if you look at a 90-day window to do this kind of an upgrade, it's rather unprecedented compared to what you'll see in any other industry. … [Customers] can make decent decisions based on their particular financial situation."

The increases will effect all upgrades to the 700 series and within the 600 series, regardless of what customers are upgrading from. IBM regularly readjusts the value of older systems, either annually or as new hardware is introduced. The last pricing change occurred this past February, when the 700 series was unveiled. According to Flaada, the changes do amount to an actual cost increase for customers who choose to upgrade after Feb. 1, but they are not considered to be a price hike per se. Flaada compared the proposed rate adjustment to monthly revisions in the blue-book values car dealerships use to determine the value of a trade-in.

"You almost have to look at it in car dealer terms," he explains. "Whenever we do an upgrade, what we do is we price the upgrade to be the difference between the new product that we are installing for a customer, minus the residual value of the product that we're taking back. So in effect what this price increase will reflect is not an increase in the price of the 7xx series. What it really reflects is a decrease in the value of the product that we're taking back."

Actual cost increase for customers "depends on where you're coming from and where you're going to," according to Flaada. Value decreases on used products, and therefore increases in upgrade prices, will be more dramatic for upgrades from newer systems, because products lose the most value proportionally in the initial years after they are introduced. An upgrade from an older product, a 500 series for instance, to a 700 series might amount to a 20 to 25 percent increase in cost, while moving from a 640 product into a new model could mean as much as a 100 percent increase.

"If you look at the products in the marketplace most of the depreciation takes place within the first couple of years. That really reflects that in these pricing tables," Flaada says.

Some additional increases will also be seen in software subscription prices, effective Feb. 1 as well. The P05 pricing tier will be subject to a projected increase of 28 percent, the P10 tier will increase by 18 percent and the P20 through P50 tiers by five percent.

"That's really a reset based on, for one thing, bringing the lower pricing tier in alignment with the actual utilization that we're seeing from a product standpoint. But also, it's a way to reflect the additional products that are being encompassed by software subscription since we introduced it," Flaada says, adding that the number of products included in the subscription has increased by more than 50 percent since it was first introduced, with more to be added in 2000.

Flaada added that IBM chose to announce price adjustments in December to allow customers to plan their system upgrade based on whether they can feasibly squeeze an upgrade into their 1999 budget at the existing costs, or wait and work an upgrade into their 2000 budget.

"What we really wanted to do was get the notification out early enough so that customers can plan around this," Flaada says. "What we're telling the customers right now is that we are going to reset the value of those used products, but we're going to do it on February 1 of next year. It gives people an opportunity to work through and say 'Gee, do I want to take some action yet in '99, or maybe in my first-quarter budget 2000, try to take advantage of this.'"