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IBM Puts Upgrade Price Increases in Context

Analysis of News Events
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In recent weeks, IBM has done two things that illustrate one of its longstanding philosophies about how it sells the eServer iSeries. First, it released a new study by International Data Corporation (IDC) which documents the superior return on investment that customers can achieve by consolidating Windows, Linux, and Unix servers to the iSeries. Second, it announced that on January 1 of next year, it will increase prices on upgrades from iSeries 8xx systems to eServer i5 models.

If these two actions seem to contradict each other, have patience. By the time you finish this article, I will explain how they fit into Big Blue’s time-honored strategy for marketing its premier midrange server. Before I do that, however, let’s dive into the events in question.

Cost of Ownership Revisited

In its latest study of the iSeriesInfrastructure Simplification and the ROI of Consolidating Windows, Linux, and AIX 5L Application on IBM eServer iSeries Systems – IDC interviewed 12 iSeries customers at great length to understand their IT costs. As the title of the report implies, each of the customers had consolidated Windows, Linux, or AIX workloads from other servers to the iSeries.

Through its interviews, IDC found that these workloads were being managed with greater efficiency, fewer full-time equivalent IT staff, and greater reliability on the iSeries than on their original servers. As a result, the iSeries consolidations delivered an average three-year cost savings of $147,194 per 100 users. These savings, in turn, yielded an average three-year return on investment of 258%. Almost 59% of the savings were actual reductions in "hard costs" such as savings on hardware, software, and IT staff. The remaining 41% of the savings came from downtime reductions and improvements in the productivity of IT staff and users.

If this study seems vaguely familiar to you, it is because IDC conducted a nearly identical analysis of six companies in 2003 that yielded similar results. As I stated in a review of the earlier study, I found the results to be valuable but open to attacks by critics. By studying only six companies, the 2003 report could have been dismissed as statistically unreliable. In addition, critics could have pointed out that the study did not compare the savings of consolidating workloads to the iSeries versus consolidating workloads to fewer Windows and Linux servers. It would be fairer to determine the savings realized by consolidating Intel server workloads to Intel servers, and then compare the results to the savings realized by consolidating the same workloads to an iSeries.

I am glad to say that IDC’s latest study goes a long way toward addressing the first issue of statistical validity. By replicating the 2003 study with 12 new companies, IDC has done much to show that the original results were not a statistical fluke. I am also glad to see that the study analyzed companies that consolidated AIX as well as Windows and Linux workloads. This helps to set the iSeries apart as a server whose consolidation capabilities (and the savings that result from those savings) are practically impossible to compare with those of other servers. After all, what server besides the iSeries can consolidate Windows, Linux, and Unix workloads with comparable levels of virtualized management? I certainly can’t think of one.

It was precisely because of these capabilities that my firm – Andrews Consulting Group – recently published a white paper that I wrote about the advantages of consolidating Intel servers to the iSeries. If you have not seen the paper, I would encourage you to download it from IBM’s Web site. By the way, feel free to email me if you have any questions or comments about the report.

Coming to an iSeries Upgrade Near You...

While IBM was demonstrating the cost savings of the iSeries with one hand, it was increasing prices to upgrade to the latest models with the other hand. Early this month, the company announced that on January 1 of next year, it will increase prices for upgrades from iSeries 810, 825, 870, and 890 models to eServer i5 systems. Admittedly, such price actions are not uncommon to the iSeries. They also took place in 1999 and in 2001 during periods when the fair market values of used AS/400s declined sharply. In both cases, IBM increased upgrade prices to reflect growing price differences between used systems and the servers to which they could be upgraded. A similar decline in fair market values has beset the iSeries 8xx family over the last year. As such, IBM’s price action follows a historical precedent.

As an examination of the announcement reveals, IBM is boosting upgrade prices by between 1.3% and 50.3%, with the average increase standing at 12.5%. While the price increases vary widely, there are patterns in the increases. For each iSeries 8xx model, IBM is boosting prices for less expensive upgrades by greater margins than prices for more expensive upgrades. For instance, the cheapest upgrade path for an iSeries 810 Enterprise Edition with 1,470 CPW is an eServer i5 Model 520 Enterprise Edition with 2,400 CPW. The price for this upgrade will increase by 38% on January 1. By contrast, upgrades from the same iSeries 810 to more powerful eServer i5 models will be increased at rates as low as 5%. The more expensive the upgrade and the greater the increase in CPW levels, the lower the price increase.

In addition, IBM is increasing prices for upgrades of Enterprise Edition models at greater rates than for Standard Editions of the same models. Take our prior example as an illustration. While it will cost 38% more to upgrade an iSeries 810 Enterprise Edition with 1,470 CPW to an eServer i5 Model 520 Enterprise Edition with 2,400 CPW, the price to upgrade between the Standard Editions of these models will only increase by 12%.

What do these increases mean for iSeries customers? If you are an iSeries Model 8xx user who has been considering an upgrade to an eServer i5, you should seriously consider doing so this year. You should especially consider upgrading now if you have been contemplating one of the less expensive upgrades for an iSeries 8xx Enterprise Edition, as prices for such upgrades will increase by the greatest percentages.

A Perennial Pricing Position

While some customers may grumble about IBM’s latest pricing action, it is not an action that is at odds with the company’s cost of ownership claims for the iSeries. For years, IBM has positioned the iSeries as the most cost-effective platform for consolidating other servers rather than as the first business application server that small businesses should buy. This positioning reflects a simple reality: the Intel server industry has a cost structure and distribution model that lets it sell the cheapest servers...end of story. IBM knows that the iSeries cannot profitably compete head to head with Intel servers on their terms. However, it can compete with them once those servers proliferate to the point where their ongoing costs exceed those of the iSeries. It is at this inflection point when low list prices begin to lose their luster as purchase criteria.

Since IBM believes that many firms are finally hitting this inflection point, it is happy to sit back and let the market come to them. Indeed, it is so confident that the market is coming to them that it is not afraid to increase upgrade prices. While IBM’s confidence may not be warranted in some situations, a growing number of companies are making IT infrastructure simplification a top priority. Clearly, IBM is betting that more companies are going to do likewise.

In short, we all know that just because a product is cheap does not mean that it will cost the least. Perhaps IBM’s latest announcements are just its way of reminding us of this truth.

Lee Kroon is a Senior Industry Analyst for Andrews Consulting Group, a firm that helps mid-sized companies manage business transformation through technology. You can reach him at This email address is being protected from spambots. You need JavaScript enabled to view it..

LEE KROON
Lee Kroon is a Senior Industry Analyst for Andrews Consulting Group, a firm that helps mid-sized companies manage business transformation through technology.
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