Re: Cheaper Servers? -- MIDRANGE-L

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Low-End iSeries a Tough Sale
by  Jill R. Aitoro
Industry Reporter

March 26, 2002 -  For the past few years, AS/400 fans have been warning IBM
that the platform is pricing itself out of the entry market. IBM has
countered those arguments with talk of total cost of ownership and the
iSeries troika: availability, scalability, and reliability. But those
arguments no longer hold as much weight against the new class of
increasingly reliable - and much cheaper - Intel-based servers, and the
iSeries may risk losing the small and midsized shops that helped it stake
its claim in the server market.

"Small to medium-sized businesses are who stand to benefit from all of the
things an iSeries can offer - full integration, low support requirements,
and incredible flexibility," says Fritz Hayes, president of independent
consulting company Atwater Associates. "[But] the initial cost structure is
high," particularly for his target customers, businesses with between 10 and
500 employees.

In the early days of the AS/400, customers rationalized the cost as fair
considering the platform's far superior performance. The significance of
that superiority in the low-end market, however, is shrinking as the
competition matures and multiplies, says Tom Bittman, Gartner Group vice
president and research director. "As a transaction-processing machine, the
iSeries is more efficient" than its Intel-based nemesis, he says. "The
low-end iSeries is more balanced in terms of processor and I/O." But in
terms of general-purpose servers, he says the iSeries has lost much of its
edge. "The iSeries at the low end is standing still while the competition
advances."

But IBM's pricing structure doesn't reflect that changing market dynamic.
IBM's asking price for a low-end iSeries is still comparatively high. A shop
can purchase a high-end xSeries server from IBM for less than $10,000 - and
that's for a dual-processor machine, says David Wagner, managing partner at
reseller ASC. The iSeries model 270 line starts at $11,973, IBM says, with a
processor at the high end costing about $130,000. Invest in a dual
processor, Wagner says, and watch associated software costs pile up. "The
cost doesn't double, it triples and quadruples," Wagner says.

But IBM says that simply pricing barebones offerings isn't the way to shop.
"[Companies] have to look at the context of what the user requirements are,"
says David Bruce, iSeries midmarket segment management. Customers and
vendors should compare a "solution-level" price to the competition, he
says - including not only the price of the box and processor, but also
database server, application server, proper memory and disk space, and all
other necessary software. "People have to look at the whole picture," he
says. "Otherwise, it's not even as close as apples to oranges."

While a customer could assemble a less expensive Intel-based solution, it
would fall severely short of the iSeries in capabilities, Bruce says. "If
what a company is looking to do is run an application with no add-ons for
things like database and security, that's not a market that the iSeries is
trying to capture," he says. "When all is actually considered, the 270 isn't
outrageous in terms of price."

The iSeries sales force at the high end, however, can tout benefits like
logical partitioning, scalability, and data center capabilities. Vendors
peddling low-end servers generally must stick with the same old iSeries
story. Too often, that doesn't wow the cost-conscious customers who populate
the small-business market. "I could sit there all day and talk about
reliability and lower cost of maintenance, but customers just can't get over
the [upfront] cost," says Wagner, whose target market is companies with
between $5 million and $50 million in revenue. "There's no rational sales
argument to present with a straight face. The solution is to put in more
xSeries boxes."

The inability to sell low-end iSeries servers presents a double whammy for
vendors catering to smaller businesses. Not only do they get little return
on their investment in iSeries hardware, but they could also get the hook
from IBM. ASC, for example, signed on with AccountMate at the end of 1999
with plans to port its SQL package to the DB2/400 database. "We made a
serious investment in terms of hardware, software, and development - over a
quarter of a million dollars," Wagner says. About a year after its software
offering became available, ASC got booted by the iSeries "gatekeepers"
because it didn't meet the minimum annual attainment (MMA) of $100,000 in
iSeries sales. "There was no support from IBM," Wagner says. "There's no
flexibility at all with the partners."

IBM concedes that flexibility isn't part of the partner picture. Bending the
rules for one partner would be a slap in the face for those who deliver,
says Enrico Parodi, IBM Server Group's director of partner marketing. "It's
not a matter of flexibility. It's a matter of treating all the partners the
same way," he says. "Out of respect for those that do meet the MAA, IBM
tells those that don't that they can't be partners."

But the MMA restriction can end up penalizing partners that cater to smaller
shops. "It takes a lot more energy to sell an iSeries in a small business
today than to sell Windows 2000 on an xSeries," Bittman says. "And it takes
a lot more energy to sell an iSeries in a small business than to sell an
iSeries in a large one. Channel partners and even IBM reps aren't going to
invest their time bothering."

Some partners and analysts think that the iSeries is turning its back on the
entry market. After all, Bittman says, customers who opt for xSeries still
contribute money to the IBM coffer. "The competition has the volume and
business model to eat the iSeries' lunch," he says. "IBM's letting the
iSeries low-end market go. It's not so much a strategy as a lack of one."

But Bruce says otherwise. IBM doesn't deny that plenty of recent iSeries
enhancements such as 24/7 availability directly benefit the high end more
than the low end. But that's not because the enhancements don't apply to the
low end. "A lot of the small customers haven't taken advantage of those
capabilities because they don't have the requirement," Bruce says. While
some may argue that such enhancements are therefore high-end investments,
others could argue that the smaller customer just hasn't leveraged those
enhancements in the marketplace, Bruce says.

This year, customers can expect more of the iSeries' high-end capabilities
to trickle down to the low end. "Customers will have a much lower cost,
higher availability option in the bottom of the product line," Bruce says,
which could make low-end sales less of a struggle for vendors. "IBM is
looking at what's going on in the market and trying to balance affordability
with the functionality that customers are asking for."