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April 26, 2004

IBM cuts iSeries prices ahead of Power5 launch

Product transitions are always a pain in the neck for any IT vendor. As soon as they know a kicker product is imminent, all customers, except those desperate to buy a new piece of hardware or software, sit tight, because they want to see what the new product will be, and how it will be priced. This makes perfect sense to IBM midrange shops that may have one, two, or even three decades of experience in acquiring computers.

By CBR Staff Writer

If this is a problem for customers, it is, in many ways, a much more troublesome situation for IBM Corp. During the past several decades, about the only way to get System/3X, AS/400, or iSeries customers to buy ahead of a future product launch has been to cut prices, and this is exactly what IBM did last week with the iSeries line.

IBM learned a long time ago, way back when it was first selling System/360 computers, and even earlier with punch card tabulating equipment, that there is almost a perfectly elastic relationship between the price of an IT product and the ability of companies to absorb more and more capacity.

However, IBM’s goal has never been the proliferation of a technology, so much as the maintenance of the absolute maximum profits that can be wrung out of what amounts to captive customer bases locked into products by their legacy applications. IBM is all about profits, but it has to maintain a revenue stream to keep its top brass, sales reps, partner channel, and Wall Street happy. With iSeries sales down 7% in the first quarter and new Power5-based iSeries machines (or whatever they will be called) not expected until later in the second quarter, IBM had to do something to stimulate sales until the Power5 Squadron machines arrive on the scene, sometime before the end of the second quarter.

It is interesting to see what IBM did. First, it cut the list prices on base configurations of Model 810 servers (including iSeries for High Availability models) by between 9% and 35%. IBM also cut main memory prices on the selected Model 270s and on all Model 810 servers by 40%.

The Model 810 machines use many of the same main memory cards that are used in the Model 270s, so it did not make much sense to not make the 40% price cut effective on these Model 270s that share at least some memory cards with the Model 810s. After the price cuts, Model 810 and Model 270 main memory prices range from $1.89 per MB, on relatively dense cards with 512MB or 1GB capacities, up to $4.32 per MB on cards with only 128MB of capacity.

And I wouldn’t be me if I didn’t write the following sentence: While these price cuts are good, IBM is still charging about twice as much for ECC main memory on entry iSeries servers as it does for its own xSeries line and its competitors do for their X86-based servers.

IBM also cut list prices on the base configurations of Model 870 (16-way capable) and Model 890 (32-way capable) iSeries servers. Sources at IBM say that, generally speaking, list prices on these base boxes were dropped by approximately 20%. The actual price cuts vary on the processor performance and the OS/400 edition (Standard Edition with little 5250 green-screen capability or Enterprise Edition with fully enabled 5250 processing). Memory prices on the Model 870 and Model 890 were chopped by 60%. You heard that right. This brings iSeries memory, which can account for 25% of the cost of a configured system, more in line with other high-end SMP servers available from Big Blue and others. I said more in line, not actually in line.

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While IBM has cut prices from $12.15 to $4.86 per MB on the Model 870 and the Model 890, that is still about twice the cost (at list price), compared with ECC main memory for high-end Unix servers. Then again, big Unix boxes are sold at 35% to 50% of list these days, so the disparity at the street price level is larger than it might otherwise seem.

IBM cut prices on 10K RPM and 15K RPM SCSI disk drives used across the iSeries product line by between 20% and 50%, depending on the disk capacity and rotational speed. The price cuts are roughly in line with the disk price cuts that IBM announced almost exactly two years ago. After the cuts, IBM is charging $1,000, or 6 cents a MB, for a 17.5GB, 10K RPM disk. A 35.2GB disk spinning at 10K costs $1,359, or 4 cents per MB, while a 15K version of the 35.2GB disk costs $1,875, or 5 cents per MB. IBM’s fattest 70.6GB, 15K RPM disk now costs $2,875, or 4 cents per MB.

What IBM did not do, you might notice, is cut prices on the entry Model 800 or on the midrange Model 825. This is the best indication that IBM does not intend to dramatically improve the price/performance of machines in this class with the impending Power5-based Squadron servers. What it probably means is that IBM will launch a two-way and four-way capable Squadron box that competes against the Model 810 and which will have similar bang for the buck. It also seems to imply that IBM will not immediately ship an eight-way Squadron box, or if it does, it will not offer much better price/performance than the current Power4-based Model 825 does.

That doesn’t mean that Model 800 component prices have not changed. The main memory in the Model 800 had its price cut by 40%, and it uses the same disk drives that had their prices cut. Because IBM wants to keep the prices of the Model 800 machines constant, it actually raised the price of the base Model 800 servers to offset the cuts on the memory and disk components included in the base Model 800 packages.

This is IBM and its iSeries channel trying to maintain a profit margin on a base box. There is no other explanation as to why IBM would not let the price on the entry iSeries Model 800 drop below $8,795. Obviously, adding more memory and disks to a Model 800 above and beyond the base configuration is cheaper than it was before the price cut, so it is not all bad. But it would have probably helped Model 800 shipments considerably if IBM actually cut the prices on these boxes by 25% to 30%. The resellers we have talked to in recent weeks say that the Model 800 is not selling well, and there is no surprise to that. It is too expensive, and especially so compared to second-hand Model 250 and Model 270 servers.

There is one more price change that Big Blue announced last week that might show how IBM will be positioning the future Power5 machines. On the Model 825, Model 870, and Model 890 servers, IBM lowered the price of permanently activating excess processors in a box by $15,000 while raising the price of activating an OS/400 license on those processors. Big deal, right? It’s a net wash to activate OS/400 on a processor, so what is there to be excited about. Well, don’t forget about Linux on the Power4 machines and Linux and AIX on the Power5 machines.

Before this price change, it cost $20,000 to activate a 1.1GHz Power4 processor beyond the base three processors that come with a Model 825; after the cut, it only costs $5,000. Given that a single Power4 processor can do about twice the work of the fastest Xeon processor, this is the first time that the extra processors in the Model 825, which scales to six processors, are in price parity with the X86 Xeon and Opteron alternatives in the server market.

This article is based on material originally published by ComputerWire

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