IBM Announces 2Q2011 Earnings: Mainframe Up Big Again

The IBM mainframe keeps roaring ahead and gaining marketshare, with IBM reporting that System z hardware revenues increased 61 percent in the second quarter (versus the year ago quarter). MIPS, that classic measurement of mainframe capacity, increased 86 percent. (See this post for more insight.) IBM's CFO Mark Loughridge noted that IBM has added 68 new mainframe customers in the past year. About a third of those are in IBM's "growth markets" (i.e. outside North America, Western Europe, and Japan) — "planting the flag," he said. Loughridge also remarked that System z had its best four quarter period in five years.

IBM does not report other System z-related revenues separately, such as mainframe software and services, but in the aggregate those parts of IBM's business also performed strongly.

A year ago (last September) the zEnterprise 196 started shipping, so the next quarter's performance will be judged against that strong quarter. However, the new zEnterprise 114 starts shipping this quarter.

by Timothy Sipples July 18, 2011 in Current Affairs, Economics
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And with an entry list price of USD$75k for z114, this is an bold move to break perceptions that the mainframe is priced beyond reach by some.

Although, there is the eventual reality price that IBM quotes to customers in each region/country outside the USA that counts.

Posted by: Han | Jul 19, 2011 3:31:49 AM

That's a good point, Han, but (as I'm fond of saying) potential buyers in every country have access to the Internet and to IBM press releases. They also know approximately how much different their countries' IT prices are in general compared to U.S. prices, due to taxes and other effects. So I think there's plenty of price transparency.

All that said, price is not the same as cost -- as many more organizations are understanding. Installing and operating hundreds or even thousands of smaller servers is extremely costly and getting more so. Having a single version of the truth is much more valuable then having multiple silos of inconsistent data. As with prior models, the z114 is best understood and appreciated among organizations that focus on cost (rather than price) and who also assign costs and values to qualities of service. That is, if your business is more reliable, or you have fewer security breaches, do you save costs? Of course you do, so qualities of service ought to get factored into decisions.

I think IBM is being very smart. They now offer the lowest priced mainframe ever (even in absolute dollars, never mind inflation-adjusted real dollars), so that's going to grab some new attention. And they continue to provide technologies that help their customers drive down costs and improve service qualities. This z114 is a very attractive piece of kit.

Another interesting phenomenon in pricing, which occurs to some extent with all products, is what you might call "good enough" pricing. It's partly psychological and partly budgetary. Let's suppose for example that you're buying a pair of socks, and you recognize that one pair of socks is demonstrably better than the other pair. However, there's a price gap: one pair has an acquisition price of $10, and the other is $5. Would you buy the $10 pair? Maybe, maybe not, but perhaps $5 seems like a big premium, and perhaps it's tough to justify getting the $10 pair, even if they are substantially better.

OK, now the sock manufacturers drop their prices by 50%. (Perhaps they found better sheep to produce the wool?) The better pair is now $2, and the inferior pair is now $1. There's still the same ratio, but it's only $1 extra to buy that better pair. A lot of buyers would now say, "Sure, of course I'll buy the $2 pair. That's not a lot of money for socks either way."

The same thing is true in many areas of computing, and I think this phenomenon will work very much in IBM's favor, too, in promoting and selling more z114 mainframes. We've certainly seen that in notebook computers and mobile telephones, as examples. Netbooks challenged notebook pricing, but they didn't really take over the portable computer market because many buyers didn't think saving $50 or $100 was worth suffering the compromises in netbooks.

Said another way, as acquisition prices move closer to zero (the absolute lower bound, of course), the absolute price differences get compressed, and many people make buying decisions based on absolute pricing differences. Previously they could choose (for example) a $100,000 mainframe or a $60,000 alternative server, perhaps. Now maybe the choice is between a $75,000 mainframe and a $45,000 alternative server -- 25% acquisition price reductions for both (let's assume), but doesn't that second case look much more tempting for leaping up to the higher quality mainframe? It sure does to me, and I don't think I'm alone.

This is a bit of a gamble on IBM's part. IBM figured out a way to reduce their costs to manufacture a better mainframe (thanks to the two different hardware models they now offer in their baby mainframe), but IBM didn't have to pass along those cost savings. But IBM did, because I assume that IBM is betting that their lowest priced mainframe ever will spur increased demand. I think they made the correct bet at the right time.

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