IT Spending: Servers Up, Mainframes Down in 2002

When it comes to 2002, IT departments are spending more on servers and less on mainframes.

A consensus of market researchers expects that capital expenditures for IT equipment will increase by Q4 2002. First, in July, came an optimistic forecast from research powerhouse IDC projecting growth in overall IT spending, driven primarily by software revenue. Now, word from research firm In-Stat/MDR is that enterprise capital expenditures on networking gear will ramp up by the end of this year.

But that’s not all. Market research firm Gartner Inc. reports that the market for low-end and midrange 32-bit Intel servers will record significant revenue growth in 2002.

On the flip side of the coin, however, Gartner reports that prospects for a spending recovery in mainframe market segments in 2002 and beyond are unlikely.

Jim Cassell, group vice president of Gartner’s Dataquest research division, says mainframe revenues declined by approximately $380 million through the first three quarters of 2002. On the other hand, Cassell allows, IBM’s success in 2001 -- which was bolstered by rapid up-tick of its long-awaited zSeries mainframes --presents an admittedly tough act to follow. Relatively speaking, he concedes, mainframe revenues aren’t down too terribly much in 2002.

"We’re fairly on top of Q3 and we’ve got pretty solid Q2 numbers, and at this point we see 2002 being down about $380 million from 2001 in mainframes," Cassell says, noting that in spite of a customary Q4 increase in IT spending, mainframe revenues are unlikely to outstrip their 2001 level. "That’s not surprising, particularly. First of all, it’s a tough year. Secondly, unit prices are going down, relatively speaking, so that’s a rather modest revenue drop year-to-year."

At the same time, Cassell acknowledges, Gartner’s preliminary research shows that revenues for 32-bit Intel servers increased by almost $1 billion through the first three quarters of 2002. "A lot of that can be attributed to Linux," he contends. "Linux is adding almost $1 billion to the IA-32 number this year."

The shortfall in mainframe revenues occurred during a year in which, according to In-Stat/MDR research analyst Sam Lucero, the vast majority of IT organizations -- over 73 percent -- made no changes to the sizes of their IT budgets. In-Stat/MDR’s data, which is based on information culled from a panel of medium- and large-sized enterprise IT organizations, indicates that only 26.8 percent of respondents decreased the size of their IT budgets from 2001 to 2002. Most indicated that they also hadn’t reduced the size of their IT staffs over the last 12 months.

According to Richard Fichera, a vice president and research fellow with consultancy Giga Information Group, there’s good reason for this. Even though zSeries comprises the most efficient and scalable operating environment available, Fichera points out, it also has one of the highest initial acquisition costs. In tough times, he says, corporate budget committees are likely to balk at the high cost associated with acquiring and maintaining a mainframe system.

"Despite all of the lip service about TCO and ROI, if you go to a capital committee with a capital request over $1 million, it gets an immense amount of scrutiny, because there’s an increasing amount of scrutiny for all capital expenditures," Fichera says. "It’s probably easier to buy $1.5 million worth of stuff that has a light cost than it is to make a $3 million mainframe acquisition."

For his part, Gartner’s Cassell acknowledges that IBM initiatives such as WebSphere application server, Web services, Java, and Linux are driving new customers to zSeries. Still further, he concedes, IBM’s Global Services division generates significant revenue by virtue of mainframe-oriented development, integration or modernization projects. At the same time, he suggests, the long-term prognosis for mainframe revenue growth similar to that demonstrated in 2001 isn’t altogether encouraging.

"Most of the major churn in the marketplace is gone. [In 2001,] they had an outstanding year because they had a CMOS machine at a lower price to replace all of those 390s out there," he concludes. "But we don’t see the z/OS numbers going up. We see them going down over time. [IBM is] selling more units, but they’ve also lowered prices, so it’s hard to make that up."

About the Author

Stephen Swoyer is a Nashville, TN-based freelance journalist who writes about technology.