By Timothy Prickett Morgan
Thanks in no small part to the Millenium Bug remediation process, mainframe sales have enjoyed something of a renaissance in the years since 1996. Now though, mainframe vendors have spotted a blip on the radar screen, and it looks suspiciously like a Millennium Bug lock-down sales freeze.
IBM and Hitachi have been slugging it out in the mainframe market for the past three years, with Hitachi pushing $1.2bn worth of its Skyline bipolar mainframes in 1996 and another $1.3bn in 1997. Then last year, it was IBM’s turn with its G5 series of 9672 mainframes, which had roughly the same power as the Hitachi Skylines. The G5 sales went through the roof, so much so that in the third quarter of 1998, G% revenue reached $1.3bn, matching all of 1997 Hitachi’s Skyline revenue for the year before. It was hot competition, but everyone was coming out ahead.
However, IBM’s latest third quarter has painted a very different picture. After five consecutive quarters of greater than 100% growth, S/390 MIPS shipments fell 18% and revenue plummeted 40%. The market was so quiet you could almost hear the silent prayers of mainframe sales reps the world over. And they are praying that the forecast boom in corporate e-business investment will be to return mainframe sales to their pre-Millennium Bug lock-down status.
Not surprisingly, in the quiet period before IBM published its third quarter when we talked to Ross Mauri, the vice president in charge of solutions and strategy at the IBM S/390 division, he had little to say about any impending mainframe sales crisis. Instead, Mauri took a conservative line, pointing out the loyalty of IBM’s global base of 20,000 loyal medium-sized enterprises, which between them helped push S/390 MIPS up 62% throughoput 1998, growing the combined IBM and PCM mainframe base by 30% in the year.
Historically, in a good year, those numbers would be 15% at the most, and the contrast shows that there has been a resurgence of the mainframe he said. Indeed, industry estimates put the number of 9672 CMOS mainframes installed at more than 6,000 footprints, making the line one of the most successful mainframe lines ever sold by IBM.
It’s a rosy picture, but one that could easily turn sour; particularly if the biggest customers, the top 2,000 mainframe shops which account for most of IBM’s shipments, can’t find a new reason to buy more MIPS after the Millenium.
IBM and the other PCMs are certainly doing their best to think of new reasons for them to keep buying Big Iron. In the enterprise application space, IBM says that it has 400 customers using Domino on the mainframe and 500 customers using SAP AG’s R/3 ERP suite, up from 300 installations this time last year in each category. If customers had to install whole new mainframes to support these workloads it would be very expensive – Domino, for instance, would cost about $200 per email user compared to $20 per user for high-end Unix servers and $10 to $15 per user for low-end NT servers – but since mainframe customers have already paid for their MIPS as part of their Y2K projects, it doesn’t really cost them much to plop Domino on their existing mainframes. Ditto for SAP R/3 and other ERP suites.
Once you are already storing your corporate data on a mainframe and have anywhere from 50% to 100% extra capacity in the data center, it isn’t that much of a stretch to put new ERP suites on mainframes rather than on alternatives. We are seeing these effects now, says IBM’s Mauri. Pilots are going to production, and it is driving S/390 hardware and software sales. When we look out a number of years ahead, it’s the momentum with new workloads that is important.
Some mainframe customers are recognizing that they don’t need to add tiers and increase the complexity of their applications to go out on the web or do groupware, says Steve Josselyn, the high- end server analyst at International Data Corp. Despite that, Josselyn’s models of the mainframe market show an average compound annual decline of 3.5% in revenue for all vendors between now and 2003. And as for a possible uptick in mainframe revenues, which seemed remotely possible prior to IBM’s financials were released, Josselyn correctly foresaw troubles. An uptick is possible, he said, but we are starting to get indications of a lockdown, and my guess is that the fourth quarter is going to be a tough one. Josselyn is in the process of revising his MIPS shipments estimates, but had pegged total shipments at 2 million MIPS for 1999, 3 million for 2000 and 5 million for 2001.
Neither IBM nor IDC know if IBM can make those numbers, but IBM is optimistic that the S/390 business will pick up once the Y2K slowdown effect subsides. S/390 demand is still strong and were are maintaining our competitive position and buying back share, IBM’s chief financial officer Douglas Maine told Wall Street analysts when going over IBM’s third-quarter results in late October. We are expecting more normal customer buying patterns to resume next year.
Now, does that mean normal as prior the Millennium Bug lockdown? Or normal as before the good old Y2K kicked life back into the old mainframe? á
