IBM’s New Server Marketing Strategy Is All About Growth
While IBM’s overall hardware sales have shrunk and expanded again during the 1990s, Big Blue’s server sales have not grown as much as the company would like. Whatever rebound IBM has had in recent years in overall hardware sales, which have grown to over $36 billion in 1997 from $30 billion in 1993, can be attributed to IBM’s expanded intelligent workstation (PCs and RS/6000 UNIX workstations) and OEM hardware (mostly PowerPC chips and disk drives) businesses. Despite IBM’s best efforts to make its four strategic server platforms—PC, AS/400, RS/6000, and S/390—equivalent to other open systems, IBM sold just under $12 billion in servers last year, the same as it did five years ago. Stagnant server sales is the main reason IBM created one consolidated organization for server development, marketing, and sales earlier this year. IBM can no longer afford to allow infighting among its server lines; it has to get them focused on working together to sell whatever equipment customers want to buy.
While this sounds simple enough, it has taken IBM the better part of a decade to see that it has to change if it is to take on its very aggressive competitors in the server business. Compaq, Hewlett-Packard (HP), and Sun Microsystems all want to be the top name in servers, and they can all tell compelling stories as to why an IBM solution is no longer viable. IBM, of course, is not taking this sitting down. It has honed its product lines, sharpened its marketing message, and fine-tuned its server sales force to help it make a credible counterargument; the results IBM has attained so far this year are encouraging. Server sales are growing for the first time in three years. Still, IBM has a lot of work to do if it hopes to match the high growth rates of its competitors.
While Compaq, HP, and Sun would never admit it, IBM is operating from a position of strength. According to IBM, it held the highest market share, about 23 percent, of the $50 billion worldwide server business in 1997. (That number doesn’t include server software or peripherals.) IBM’s biggest competitor was the Compaq/Tandem/Digital
triumvirate, which had about 11 percent of the market with $5 billion in server sales. (See Figure 1.) Compaq, which just shipped its two-millionth PC server in September, concentrates heavily on the low-end PC server and PC desktop businesses. HP was the third biggest server vendor last year with 8 percent of the market ($4 billion in sales), and Sun Microsystems was fourth at 7 percent of the market ($3.2 billion in sales).
To put things in perspective, AS/400 system and server sales accounted for a third of IBM’s overall server sales, which was just about equal to S/390 mainframe sales for the first time in IBM’s history and which was bigger than the entire server businesses of either HP or Sun Microsystems. IBM’s RS/6000 and PC server businesses together were just about the same size as Sun’s entire server business. No other vendors in the world, including Japanese giants NEC, Fujitsu, or Hitachi, had more than 5 percent of sales.
Of course, size isn’t everything. Growth is important, too. Nobody knows this better than Bill Zeitler, general manager, server brand management at IBM’s server division. He is the first to admit that IBM has to get server revenues growing at the same 18 to 20 percent rates that Compaq, HP, and Sun have enjoyed. Zeitler’s focused marketing message is already starting to pay off, primarily in the AS/400 market but also in the RS/6000 market.
Both AS/400 and RS/6000 server shipments are increasing in the double-digit percentage range compared to last year. The AS/400 in particular is very strong. In the first quarter of the year, unit shipments were up 31 percent and revenue was up 16 percent compared to a year earlier; in the second quarter, shipments were still up 25 percent, and revenue was up in the double digits, probably 11 or 12 percent. With the Northstars’ shipment in mid-September, both revenue and shipments should remain high for the rest of the year, and IBM could even break $5 billion in AS/400 sales for 1998.
Of course, like all the other vendors, IBM’s server division wants to tap into the explosive growth in the Microsoft Windows NT server market. With NT servers accounting for 33 percent of the $81 billion server market that Merrill Lynch expects will develop by 2002, IBM has to jump on that bandwagon to survive. But since IBM does not intend to focus on platforms so much as on solutions, NT won’t get heavier billing than OS/400, OS/390, or AIX; in fact, it will likely get less, even if IBM does eventually get as much or more revenue from Netfinity PC servers as it does from AS/400s.
For once, IBM’s server marketing strategy is pretty much the same across all of IBM’s server platforms. Between now and 2000, IBM will focus on the six areas discussed in the following paragraphs.
Year 2000 and euro. Without question, the AS/400 division, like all other server vendors, is benefiting from the expanded processing and storage capacity needs of the world’s companies as they struggle to update their applications for the Year 2000 and, in Europe, to support the new euro currency. IBM is not specific about the number of 1998 sales driven by Year 2000 and euro projects. Even so, a good estimate would be that at least a third of the 28 percent of unit-shipment growth that IBM saw for AS/400s during the first half of 1998 was dedicated to Year 2000 issues; and, as IBM adds euro support to OS/400 at year-end, customers in Europe as well as U.S.-based multinationals will buy more machines to support their euro update projects just as they have for Year 2000 projects over the past year or so. (Many, of course, will already have extra capacity from their Y2K projects, so it won’t be as big an increase in server sales.)
Small and medium businesses. IBM is focusing on small and medium businesses not just because everyone else is but because this niche has generated a large percentage of IBM’s server revenue in the last 15 years (Microsoft just figured out last year that the small and midsized market exists). IBM says that about 80 percent of the world’s employees work at some 75 million small- and medium-sized businesses, and that, all told, these companies account for 45 percent of the world’s collective information technology budget. Budgets at small- and medium-sized businesses (SMB) grow at an acceptable rate of 10 to 15 percent per year, so doing well in this market can be an important component of IBM’s overall success with servers. It’s no wonder that 80 percent of AS/400 shipments and 65
percent of its revenue come from this market. (See Figure 2.) Of course, a big part of profits and prestige comes from the larger Fortune 1000 accounts that use AS/400s, so expect IBM to continue to build ever-more-advanced machines targeted at these customers.
IBM says that, this year, the worldwide small-business server market, where machines cost between $15,000 and $50,000, should run to $6.5 billion. Big Blue wants to capture as much of that market as it can. While about 80 percent of that $6.5 billion market is split pretty evenly between North American and European countries, about 17 percent is still expected to come from weakened Asia/Pacific companies. IBM, with its worldwide sales and service reach, has a distinct advantage over its competitors in that region. The same advantage applies in the Latin American markets, even with IBM’s political woes in Argentina and Mexico.
Regardless of geographical region, IBM’s low-end Model 150 and Model 170 AS/400 servers offer the best bang for the buck in AS/400 history, making them central to the AS/400 division’s efforts to garner even more SMB business. IBM has sold about 6,000 of the Apache and Northstar Model 170 Invader servers and about an equal number of the Model 150 AS/400 entry servers as of the beginning of the third quarter. These machines and their follow-ons could very well account for 35 percent of IBM’s AS/400 shipments by this time next year.
New applications, new markets. IBM has a dominant market share in a number of different markets in the four geographic areas in which it sells AS/400s. In North America and Europe, the AS/400 dominates discrete and process manufacturing, but it is weaker in the United States than in Europe (oddly enough). Similarly, the AS/400 is very strong in the European food, durables, and nondurables wholesale businesses, but the AS/400 division is less successful in the United States and in Asia outside the food markets. Latin American wholesale companies are just starting to take notice of the AS/400.
IBM plans to focus its AS/400 sales efforts on five core industries—distribution, manufacturing, banking and finance, telecommunications, and insurance—to maximize its sales and to protect the markets where it holds the most sway. Last year, the AS/400 had about 11 percent of the $36 billion midrange server market, but it holds a much higher market share in distribution, manufacturing, and banking and finance. (See Figure 3 for a graph showing last year’s AS/400 sales and market opportunities.) IBM wants to target these businesses, mainly by selling the AS/400 as a bookkeeping box first, then moving it out into enterprise resource planning (ERP) and other mission-critical applications like groupware and data warehousing (which IBM now calls Business Intelligence).
IBM bought Lotus a few years ago so it would have a front-office application to sell on its servers, and Domino has become a very important new application to the AS/400 base. IBM says that it has shipped over 5,000 native Domino licenses on the AS/400. While these numbers are small compared to the almost 200,000 AS/400 sites in the world, every customer who installs Lotus Domino is effectively adding another machine sold (even if those customers only upgrade their existing server) since Domino eats a machine’s worth of power.
The ERP software suite market is also an important part of growing the AS/400 business, and IBM has taken steps to reverse a downward trend in OS/400’s market share in ERP. In 1996, the AS/400 had about 20 percent of the ERP market; but last year, even with 32 percent growth (thanks in large measure to J.D. Edwards, which accounts for a third of ERP software sales on OS/400), the AS/400’s share of the ERP market slipped to 18 percent in a $9.6 billion market that was growing at 41 percent. (Figure 4 gives a breakdown of the ERP software market by platform.)
According to analysts at AMR Research, the best known of the ERP market research firms, the AS/400 is expected to see its market share slip a point or two in 1998. But the AS/400 base could hold on to its share of the burgeoning ERP market—projected to grow to $52 billion by 2002—now that IBM has forged strong partnerships with SAP, Baan, PeopleSoft, J.D. Edwards, System Software Associates, Intentia, MAPICS, Infinium, and JDA to have their code tightly linked to AS/400s. Many of these
vendors started out in the AS/400 market and moved out into UNIX and NT (SAP, Baan, and PeopleSoft are the exceptions). To retain market share, IBM has to make it easier, if not cheaper, for purchasers of any of these ERP suites to install them on AS/400s rather than on UNIX or NT servers. Early indications point to IBM’s success in this regard. According to a recent SAP R/3 implementation study performed by META Group, it can take half as much time to get R/3 ready to run on an AS/400 as on competitive UNIX and NT platforms.
Network computing. Larry Ellison still believes in network computing. So does Louis Gerstner. But so far, the network computing initiative has been a set of solutions (often vaporware) chasing customers who don’t seem to want it. IBM wants the network computer to take off because getting rid of smart PCs and putting in smart network servers means selling more server processing power.
Thus far, network computers are little more than dumb terminals in Internet drag. The promise of easier administration that IBM and other vendors keep emphasizing with network computing eventually may be realized, but too few customers are using the hardware and software to say for certain. [See Kris Neely’s “IMHO: A Train Looming in the Distance,” in this issue.] Yet, many current AS/400 customers working from antiquated equipment and old PCs would undoubtedly be better off if they moved users to network computers.
E-commerce. IBM believes just about every company needs to have a Web presence, a supplier/customer extranet, and a corporate intranet in addition to the core financial and ERP applications that run its business. When you add it all up, that’s two to four times the computing power that the AS/400 base consumes today. Even if the AS/400 division ends up supporting only 20 to 25 percent of those new applications, it will come close to doubling the AS/400 division’s processor revenue. The trick for IBM and its Business Partners lies in convincing customers that OS/400, not NT or UNIX, is the best platform for these e-commerce jobs. This will not be easy, but the payoff is big.
Server consolidation. Server consolidation is IBM’s latest mantra. According to the company, upwards of 60 percent of its customer base is looking into it. Server consolidation means two different things: moving from multiple machines to fewer, more powerful ones or consolidating PC server workloads onto Integrated PC Server (IPCS) cards or AS/400e servers. To illustrate the first interpretation of consolidation, customers such as Enterprise Car Rental, which has 24 big 9406 servers, all linked by OptiConnect fiber light pipes, could consolidate AS/400 servers by moving to a couple of big Northstar AS/400e machines. A large percentage of AS/400 customers have multiple machines, and now IBM wants them to consolidate. (This move might not make sense; sometimes it is better to isolate workloads on separate machines rather than spend programmer time tuning applications running on one giant server.)
Regarding the second definition of server consolidation, IBM keeps citing NT print and file jobs and Domino Web and email serving as two examples of PC server workloads that customers could move onto IPCS cards or AS/400e servers. Whether or not customers opt for PC server consolidation on AS/400s or their IPCS cards remains to be seen. Many of the 3,000 AS/400 customers who had Lotus Notes running on an IPCS have gone native on the AS/400 with V4R2; many more will jump this year since V4R3 is the last release under which IBM will support Domino on the IPCS.
AS/400 shops with Windows NT servers represent a much bigger market for potential server con-solidation. Here, a lot depends on the power and number of PC servers that AS/400 customers have at their sites. While the 200-MHz Intel Pentium Pro IPCS cards that IBM announced have much more power than the cards they replaced in February, they look a little long in the tooth compared to today’s 450-MHz Xeon Pentium II servers. If AS/400 shops have lots of small PC servers, then IPCS card consolidation
might make sense to lower administrative costs. But if they have powerful Pentium II- based PC servers, until IBM announces Xeon-based IPCS cards, customers will have to wait to consolidate.
IBM Charges a Big Premium for Northstars in Europe
Figure 5 shows the U.S. and European prices for IBM’s new Northstar AS/400e systems, servers, and mixed-mode servers. At current exchange rates, customers buying AS/400s in Europe are paying anywhere from 15 to 26 percent more than their counterparts in America for the same hardware. While all U.S.-based computer vendors have traditionally charged a premium for equipment sold in other markets, like Europe, the current premium IBM is charging for Northstar machines could cause European customers to do their shopping in the United States for upgrades and new machines. Moreover, regional Business Partners in Europe may be tempted to start importing equipment from the United States.
Customers in Europe should bargain hard for big discounts so they pay only as much as U.S. customers pay for Northstars. A typical AS/400 customer in the United States will get 10 to 15 percent off a Northstar machine, so EC customers should ask for at least 30 to 35 percent off to make sure they don’t pay too much more than U.S. customers.
Figure 3: Estimated AS/400 sales and market opportunities
SOURCE: AMR RESEARCH
IBM US IBM US IBM UK IBM UK Number First PPC AS Chip L2 Cache CPW CPW List Monthly List Monthly UK Model Of CPUs Avail Chip/Set Speed Per CPU C/S 5250 Price Maint Price Maint Premium
AS/400e Northstar Systems
650-2188 8 3Q 98 Northstar 262 MHz 8 MB 3660 2745 1600000 2667 1192547 1920 26% 650-2189 12 3Q 98 Northstar 262 MHz 8 MB 4550 3412 1800000 3000 1341615 2159 26%
AS/400e Northstar Servers
170-2290 1 3Q 98 Northstar 200 MHz NA 73 20 9995 90 6900 60 17% 170-2291 1 3Q 98 Northstar 200 MHz NA 115 25 15000 125 10199 84 15% 170-2292 1 3Q 98 Northstar 200 MHz NA 220 30 25000 190 17997 129 22% 170-2385 1 3Q 98 Northstar 200 MHz 4 MB 460 50 50000 265 36025 180 22% 170-2386 1 3Q 98 Northstar 252 MHz 4 MB 460 70 70000 320 50932 217 23% S40-2207 8 3Q 98 Northstar 262 MHz 8 MB 3660 120 400000 1540 298137 1110 26% S40-2208 12 3Q 98 Northstar 262 MHz 8 MB 4550 120 480000 1914 357143 1380 26%
Mixed-mode AS/400e Northstar Servers
SB1-2312 8 3Q 98 Northstar 262 MHz 8 MB - - 400000 1540 298137 1110 26% SB1-2313 12 3Q 98 Northstar 262 MHz 8 MB - - 480000 1914 357143 1380 26% S40-2340 8 3Q 98 Northstar 262 MHz 8 MB 3660 1050 900000 1950 670808 1367 26% S40-2341 12 3Q 98 Northstar 262 MHz 8 MB 4550 2050 1200000 2262 894410 1585 26%
Figure 5: Comparative U.S. and European prices for IBM Northstar AS/400e