Re: CFINT: I understand it now...

On Saturday 10 November 2001 10:13 am, Leif Svalgaard wrote:

> If as you say, server programs are far MORE efficient, people
> can get by with smaller boxes further eroding IBM's revenue
> and thus the viability of the platform. I think I may be missing
> something here, but I can't see what.

Well, you should be thinking that not all revenue is the same. Consider
that if IBM sells $10 billion in iSeries that revenue must support the R&D,
marketing, support etc. of that platform. Those expenses are probably
different if they sell $10 billion in Wintel machines. So, it could be that
selling $8 billion in Wintel is as attractive as selling $10 billion in
iSeries (sans the "interactive tax").

But by charging more for the interactive capability of the iSeries, IBM
reaches a win/win situation (for themselves).

First, the product line stays profitable. That keeps IBM happy with the
fact that they produce and sell it.

Second, if there is a migration away from interactive jobs, this leads to a
whole new win/win for IBM because either:

1. The need for iSeries will drop off as the revenue for interactive
features drops off, so when the lack of CFINT revenue makes the product
line unprofitable, the customers who have migrated away from CFINT will
find it easier to migrate to IBM hardware that has not been discontinuted.

or:

2. The migration of applications available on the iSeries to n-tier
architecture will make the product more attractive in the marketplace
allowing greater sales and increased overall revenue. This would offset the
loss in CFINT revenue and keep the product profitable.

Now let's suppose IBM cannot charge more for the interactive feature. What
will they do? I don't think they will continue to provide the product line
at a loss, so what will their choice be?

If they cannot find a way of selling machines at the same price they are
selling them today, then they will need to spread the overhead of the
product line evenly.

This would mean that the users who rely specifically on interactive
processing would surely see a price break. I'm sure those machines would
come down in prices as their current prices represent additional allocation
of support for iSeries specific features.

But the machines currently being sold a servers in the market would fall
well behind the market price/performance curve as their prices went up to
support their share of the load, thus cutting off the iSeries future in
those markets. I think this would certainly lead to a quickly dwindling
market share.

At that point, the cost of the iSeries models would rise because the volume
to support manufacture of the product would not be there. Sooner or later,
the machine would be discontinued.

The key, Leif, is to remember that not all revenue is the same. Just as
you'd be much happier with getting $100 for an hour of your time than $1000
for your house, IBM has their preferences too.

Now, if the iSeries is as profitable as it has been in the past, then there
might be room for IBM to reduce costs and still be making as good a margin
as they do in other areas. I think it is good for user's groups and
customers to keep pressure on IBM to do this. But I don't know how to
determine what the profitability of this area is within IBM.

--
Chris Rehm
javadisciple@earthlink.net

And thou shalt love the Lord thy God with all thy heart...
...Thou shalt love thy neighbor as thyself. There is none other
commandment greater than these. Mark 12:30-31