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  1. Technology
January 6, 1988

IBM CREDIT SEEKS TO LOCK USERS INTO SILVERLAKE BUT USED CPU MAY BE BETTER BET

By CBR Staff Writer

City analysts may find the computer leasing business so labarynthine that they generally choose not to follow the leasing companies, but users and IBM’s competitors have no such option: they have to get to grips with what is going on in the market and what new kinds of business are being written. Hesh Wiener has been following and commentating on the market for many years, notably in his monthly newsletter Computer & Communications Buyer. Here he discusses and explains a new departure taken by IBM Credit Corp in the System 36 and 38 market, which goes under the impenetrable name of the Technology Exchange Option.

It’s called the IBM Credit Corporation Technology Exchange Option, and it’s IBM’s answer to the question, What do you do with a dead minicomputer? The Technology Exchange Option, in everyday language, is a rollover deal – a lease that includes the refinancing of the unpaid balance of a prior lease. The practice was begun in October, when IBM Credit said it would allow users to sign a lease on a System/36 models 5360 and 5362 or any System/38 and subsequently trade the box in on a new, larger machine. There are, as one would expect, a few limitations. The exchange must take place before the end of 1989, and the user must give IBM at least 12 monthly rental cheques before the swap can be done. In other words, the deal has to be struck soon and the swap must be consummated by the end of next year. Option G Prime If the user takes IBM up on the option, a soon-to-be-specified portion of the unpaid balance of the initial lease is added to the new deal. We understand that the amount will be half the unpaid balance, but IBM Credit is likely to evaluate that number during the year as it sees the results it is getting. It’s not at all clear how IBM Credit Corp will figure the interest charges for the stretched payment schedule. The initial lease can be three, four, or five years in length. It can be a normal IBM Credit lease, the so-called Option B Prime deal. (The name is a poor choice for a company that’s lost some business to a mini maker called Prime that is run by ex-IBMers). The rollover can also be done under IBM Credit’s government lease, called an Option G Prime.

The new lease has to be executed under IBM’s prevailing rate schedule, which cannot be forecast at this time. Peripherals and software can’t be traded up, but IBM indicates it will cut some kind of a stretch deal that could lower the user’s monthly payments as the processor lease is, in effect, extended. In essence, this is the kind of deal done every day by third parties. It is new for IBM Credit, and it shows that the organisation is willing to learn, and to adapt to new circumstances.

The Technology Exchange Option is a way for IBM to salvage the last scraps of business in the moribund S/3X market and, at the same time, build interest in the forthcoming Silverlake system. Silverlake is generally expected to be a processor family that can run System/36 or System/38 applications. It’s probably easiest to view it as a repackaged System/38 with a System/36 emulator built in. We believe that the Silverlake’s S/36 mode will be less efficient than the S/38 mode. Apparently, Silverlake will support some or all of the peripherals on the S/3X, or at least all the peripherals IBM offers on brand new systems, devices like the 933X disks and the latest terminals and printers. We doubt Silverlake will allow users to plug in all their old disks. In addition, the preservation of old line printers may not be important to users who plan to comply with SAA (Systems Application Architecture) standards, because SAA defines only all-points-addressable printers, like laser units.

We have no idea what IBM Credit Corp will do with all the old S/3X machines it gets back. We’re not worried, though. IBM Credit probably doesn’t know, either, and it’s not worried. For small companies and others that have trouble getting credit, the deal may be a good one, even if it’s not quite as nice as the little picture in IBM Credit’s booklet suggests. That illustration makes it look as

if the payments rolled forward will come to an under-25% addition to the cost of the Silverlake lease; we suspect it will be more. Nor is there a picture of the small user’s balance sheet before and after the deal is inked. Regardless, for large and solvent users, we think the Technology Exchange Option, as it now stands, is a non event. Suppose a user wants to sign a three-year lease and swap up after 18 months. For simplicity’s sake, let’s figure that half the machine is paid for before the swap. Another 25% will be rolled forward into the new deal. The total cost, then, is 75% less something for the value of the deferred payments. Worth something Let’s just call the whole deal a 65-percenter. Suppose that same user bought the System/38 on the used market. This could cost 55% to 65% of list, depending on the model. Maybe this shop wants a relatively exotic configuration; that might cost 70%. At the end of 18 months, the machine would be worth something, surely. Even if it’s only worth 15% of list, the net cost of the deal is anywhere from 40% to 55%, a lot less than IBM Credit’s package. Going the lease route gets you to a similar figure, although the lease rates on System/38s tend to be high. Now that users know about IBM Credit’s rollover offer, however, third parties will probably have to offer cheaper deals if they want to win business. Even at the same price, third parties are generally more flexible than IBM Credit. They didn’t have to come up with rollovers; they have long since offered them. So, for most big shops, IBM Credit’s Technology Exchange Option is only moderately interesting. Of course, when IBM Credit starts rolling 3090 leases into Summit deals, and 3380 leases into financings of the next generation of disks, the situation could become truly fascinating.

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