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July 14, 1998

IBM NUDGES EC PARTNERS TO PUSH ITS MAINFRAMES

By CBR Staff Writer

With the economies in Europe heading for the rocks, and IBM stuck in the middle of a four-month transition between its G4 and G5 series of 9672 CMOS mainframes, it doesn’t come as much of a surprise that Big Blue has secretly announced that it will give bonuses to European high-end server business partners who meet or exceed their revenue targets for the third quarter.

By Timothy Prickett Morgan

It’s just another case of IBM’s bad luck as the company enters a mainframe product transition at the same time as European economies start heading south, but it’s clear that it has to do something in Europe if it is to shore up the losses it will undoubtedly incur as the result of the severely weakened economies in its Asia/Pacific regions. (All is not lost, of course. Weakened local currencies in Japan, Singapore, Indonesia and Thailand lower IBM’s manufacturing costs in the region as well, which tends to increase profits back home, especially in the disk drive business.) Europe still accounts for some 35% of IBM’s mainframe business, and a large piece of its profits since mainframes command higher margins in Europe than in its United States home market. European mainframe buyers tend to be smaller companies than their US counterparts and therefore require much smaller machines than the Hitachi Skyline processors that are so popular back in the States and among the largest banks and financial institutions across Europe. The typical European mainframe customer can get by with a 65 or 90 MIPS 9672 engine just fine. So IBM lagging behind Hitachi when it comes to raw processing power on mainframe engines just hasn’t mattered, expect for the obvious PR factor. Of course, this is exactly what plays against IBM as it delivers the G5 processors, which at 125 MIPS have almost as much power as the 150 MIPS Hitachi Skyline processors. Those same European customers who could get by with a G4 or G4 processor are unlikely to be impressed with the G5s – unless IBM cuts prices radically from their current $5,500 to $6,000 per MIPS. With times so tough, IBM has to resist the temptation to panic and cut prices to keep its S/390 business partners from undercutting it to make their sales targets. It is a tricky balance indeed.

Panic

Under the High-End Server Business Partner Performance Bonus IBM proposed last week, those BPs who make 100% of their revenue targets for the third quarter will receive a bonus equal to two% of their sales for the quarter. Those who exceed their targets by 10% will get a 2.5% bonus. The bonus applies to BPs who sell S/390 kit in the UK, France, Germany, Italy, Sweden, Finland, Norway, Spain, Portugal, Belgium and Luxembourg. It’s hard to say if the bonuses will be enough to get BPs to shake their sales prospects harder to close deals now rather than the end of the year, when the G5s will be shipping in volume. If they are really as panicky as we expect, BPs will be selling S/390s and Multiprise 2000s at close to cost (if not below it) just to get rid of them and to get the software and services revenue that comes with a new system sale. This will be especially true in the United Kingdom, where consumer confidence in the economy has plummeted in the wake of poor economic stats. UK industrial production was down 1.2% in May, compared to a gain of 1% in the prior quarter. Similarly, manufacturing production figures for May were off 0.4%, compared to a loss of 0.2% last quarter. According to the latest Institute of Directors study published in late June, pay increases, export orders and plant capacity utilization are all starting to shrink in the UK; the IoD even went as far as to say the R word (recession) when it spoke about the slow down in the manufacturing sector of the British economy. Against that backdrop, it’s hard to imagine that IBM mainframe prices or revenue targets will hold in the UK, whether or not IBM gives its S/390 BPs short-term economic incentives or not. Obviously, the relatively stronger economies on the Continent will be forced to pick up the slack, but it’s difficult to imagine IBM selling more mainframes than it otherwise would if every company is getting ready to start belt-tightening in anticipation of a mild (or not so mild) world recession.

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