Two Big Deals in the Mobile World

The U.S. Labor Day weekend has not been a restful one in the mobile communications and devices industry. Vodafone is selling its share of Verizon Wireless to Verizon in a blockbuster $130 billion cash and stock deal, and Microsoft is buying Nokia's struggling mobile phone business, other assets, and licenses for 5.4 billion euro (about $7.2 billion).

What have these deals got to do with mainframes? Plenty. The mobile business is still growing rapidly, and mobile devices (smartphones and tablets) are rapidly displacing traditional PCs as the dominant application and information service clients. That growth is increasing transaction volumes and associated batch processing on mainframes. It's also encouraging existing and new mainframe customers to add applications and application functions to their mainframes, especially to support increasing demands for continuous service and improved security given the challenges mobile devices present.

So how can mainframes address mobile platforms? They already do, and it's quite easy to do more. One excellent example is IBM Worklight for zEnterprise which makes it easy to support multiple mobile device types from your mainframe with functionally rich, device-appropriate, secure "apps" and mobile Web user interfaces. Another example is the IBM CICS Transaction Server Feature Pack for Mobile which is available to CICS customers at no additional charge and which supports lightweight, mobile-appropriate JSON Web services.

The contrast between the two deal sizes is interesting all by itself because it demonstrates where the value has shifted in the mobile market. The smaller Nokia-Microsoft deal is an attempt to combine two weak mobile players into one in order to try to compete with Apple and Google, in particular. The trouble is that Google (especially) has a different business model with lots of services, advertising, and content, and that business model is working well. Google seems to have won the mobile OEMs who were perhaps a bit uncomfortable with Google's acquisition of Motorola, but Microsoft's acquisition of Nokia trumps their mild concern. In other words, Microsoft isn't going to get any help now from Samsung, HTC, LG, ZTE, Lenovo, and other mobile device makers. It'll also be tough for Microsoft to compete against Apple in the premium segment of the mobile device market, and Apple is also strong in content. All that said, I think the acquisition makes sense for Microsoft. Microsoft really doesn't have much choice. Nor does Nokia. When Nokia's CEO, Stephen Elop, a former Microsoft executive (and soon a Microsoft executive again it seems, perhaps even the next CEO) bet his new company on Microsoft's struggling mobile Windows platform, he set in motion a chain of events that would very likely result in Nokia's divestiture of its mobile device business to Microsoft. I don't think too many people are surprised that Microsoft is carving up Nokia now. Cynical observers might even say that was the plan all along.

An interesting footnote is what happens to struggling Canadian mobile pioneer Research In Motion (RIM), makers of the Blackberry. Their new BB10 platform is technically very good, but that's never enough. According to reports RIM is at least open to the idea of selling itself to another company, but there's no perfect suitor available. None of the Chinese companies make much sense given that many of RIM's government customers would flee if such an acquisition came to fruition. HP might make some sense, but is there room for both a third and a fourth mobile platform, and would HP have any chance of finding room in the mobile market given Microsoft's still deep pockets? (Microsoft's Nokia acquisition is another piece of bad news for HP at least in terms of limiting HP's options and in terms of pulling some of Microsoft's attention away from the traditional PC business and OEMs like HP.) Samsung might be interested in acquiring RIM. Samsung would probably take BB10 and merge it with Android, retaining Android application compatibility but adding some more Samsung/RIM differentiation. That'd make some sense if the price is right. Google might have similar ideas, also at the right price. Both Samsung and Google wouldn't mind having RIM's patent portfolio. I don't see IBM being too interested except perhaps for RIM's Blackberry Enterprise Server (BES) software which another suitor might be willing to carve out for IBM, HP, or somebody else. Oracle, Facebook, and Dell are longshot candidates to buy RIM, each for different reasons. Or maybe nobody buys RIM, and we (probably) fondly remember the Blackberry much like we remember Amiga computers.

It's rarely boring in the technology industry.

by Timothy Sipples September 3, 2013 in CICS, Current Affairs, Financial, Web Technology
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Server Hardware Trends: A Commodity Market Plus IBM

The New York Times summarized the latest IDC and Gartner server marketshare reports, highlighting the rise of the non-branded custom-built commodity server makers that supply big Internet firms such as Facebook. "Others" is now the #3 server "vendor" on a hardware revenue basis and #1 on a volume basis. (On a revenue basis, IBM is #1 and HP is #2.)

These long running trends are fascinating, and I've described them before in various ways. I think it's important, though, to distinguish between IBM and HP because they have very different positions in the overall market. IBM is now the only remaining credible vendor of "high-end" servers. We've seen time and time again in many markets — retailing, to pick an excellent example — that getting stuck in the middle is a bad place to be because competitors are both attacking from below and above. The attack from below is based fundamentally on price, particularly acquisition price. Those are the "Others." The attack from above is based on value, sustained high levels of research and development to deliver innovation, and best-of-breed capabilities and qualities. That's IBM. In the middle is HP, the JCPenney of the server market. In a few more quarters Dell will probably be right there, too, but we'll see.

I very much like IBM's position given these market trends, and I'm not too worried about the slight hardware revenue dip IDC and Gartner reported given the structure of that dip. IBM's high-end got higher, to put it succinctly, and there's some good evidence IBM's margins improved. Moreover, most of IBM's revenues associated with its servers are not measured by its hardware revenues alone, and that's unique to IBM. When HP sells servers they typically don't include much else from HP that customers buy. In contrast, it's very rare that an IBM server gets sold without substantial IBM content that customers buy.

I don't know exactly how big the high-end server market will be, but it will continue to be a terrific business amidst the continuing explosion of information, long-term economic trends, and increasing quality demands. As long as IBM keeps finding ways to differentiate and to innovate up and down their solution set, the company will do fine, and more importantly so will its many and growing numbers of customers. However, while IBM is very much pursuing its high-end strategy with gusto, IBM is also eager to push into volume markets as well — IBM in the role of Target (and/or Costco) to offer an alternative to Walmart, metaphorically speaking. I'm referring of course to IBM's OpenPOWER Consortium with Google, NVIDIA, and others.

So these Gartner and IDC reports are really not good news for HP in particular. As I've said before I don't know how HP gets out of its shrinking box. HP's CEO Meg Whitman has a tough job.

by Timothy Sipples August 29, 2013 in Cloud Computing, Economics, Financial, Systems Technology
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IBM Announces 2Q2013 Earnings: zEnterprise Even Better

From time to time I post updates on IBM's earnings reports, as I did last quarter. The caveats I included then still apply.

That said, zEnterprise had yet another fantastic quarter: revenues up 10% (11% at constant currency) and capacity shipments up 23%. That's yet another big server marketshare gain for zEnterprise. zEnterprise was also a very bright spot in IBM's earnings report. Thanks to all the current and new zEnterprise customers that are showing new and renewed appreciation for the unique competitive advantages of zEnterprise.

IBM's other hardware product lines had a tough quarter, but that's sometimes how it goes and why IBM's diversification is a strong advantage. Non-mainframe UNIX servers had another dreadful quarter in particular — HP and Oracle/Sun continue their UNIX server slide into oblivion — and IBM gained marketshare in that segment despite a 24% (constant currency) slide in its Power server business. As I've said before, my best guess is that the UNIX market continues to split with many of those UNIX workloads moving to Linux (including to Linux on zEnterprise, which is picking up workloads from HP and Oracle UNIX server retirements) while others are moving to high-end highly virtualized Power servers. However, like all servers, Power servers are subject to model cycle swings.

I don't see any way that HP and Oracle fix their UNIX server businesses. I predict that both vendors will soon wrap their operating systems into virtualization packages to license and to run them on X86-based hardware in order to cut costs and to support their remaining few customers' workloads that must run on HP-UX, VMS, and Solaris. (Sun already effectively did that with its Solaris on X86, so Oracle is somewhat better positioned in not angering its remaining UNIX customers too much.) I don't know what HP does with NonStop (formerly Tandem), but it won't be pretty.

UPDATE: IBM's CFO Mark Loughridge mentioned on the earnings call for analysts that he expects another double digit revenue growth quarter for zEnterprise in the third quarter. Wow.

UPDATE #2: IBM has posted the charts Loughridge used for his presentation to analysts. One of the charts indicates that zEnterprise's gross profit margin declined in the second quarter, although I haven't found other details. My best guess, recalling previous earnings reports, is that IBM was selling more zEnterprise capacity upgrades a year ago (2Q2012) on existing machines relative to new machines. This past quarter, if I'm right, the mix shifted more toward physical machines that can later be upgraded. Both new model deliveries and capacity upgrades are reportedly profitable, but upgrades are more profitable. Said another way, if I'm right this decrease in the gross profit margin is actually good news because that means IBM shipped more new physical zEnterprise machines (some to brand new mainframe customers presumably) and did not "coast" on capacity upgrades. Then those new model machines can be upgraded, so we would expect that red arrow to turn into a green arrow if/when IBM's mainframe customers upgrade those machines. We really don't have enough financial data from IBM to prove or to disprove this hypothesis, but it seems like a reasonable understanding of the model cycle effects.

A couple other points jumped out of Loughridge's presentation and comments. The next quarter (3Q2013) is the first quarter when zEnterprise revenues will be compared against the quarter with the first sales of the zEnterprise EC12, a model that has already proven wildly popular. Yet Loughridge is predicting another double digit revenue growth quarter for zEnterprise. That's interesting.

Another point is that Loughridge spoke again about a possible divestiture in 2013 or 2014. That's not unusual: IBM routinely divests particular businesses that don't seem like a good fit for IBM's business model. For example, in 1934 IBM sold its food scale business to Hobart, and Hobart still runs that business very successfully. As another example, IBM sold its hard disk spindle business, a business IBM invented, to Hitachi a few years ago. A lot of analysts think IBM is contemplating divesting its System x (X86 server) business, and there have been press reports that IBM discussed the idea with Lenovo but did not reach an agreement. Maybe, maybe not — I don't automatically believe everything I read. But I have a couple reactions to that possibility. One is that IBM seems to have a good track record protecting customers in both acquisitions and divestitures. IBM acquires businesses to grow them, and that means encouraging existing customers to buy more and attracting new customers. That has to be done the old fashioned way, with product improvements, integration, better service, etc., and IBM generally seems to do that. IBM also has a very good track record finding excellent stewards for its divested businesses. The other point I'd make, which I've made before, is that analysts that say IBM is "getting out of the hardware business" are flat out wrong. It's much more correct to say that IBM has been adjusting the mix within its hardware businesses, in recent years buying Netezza, DataPower, and Texas Memory Systems to pick three hardware company examples. Hardware, software, services, and financing are all important, but it's the flexible combination that's magic. The three "hardware" examples I mentioned are all highly solution-focused examples, and that's squarely where IBM wants to be. The strategy is conceptually simple, but it's also a strategy that's very difficult for IBM's competitors to mimic successfully.

by Timothy Sipples July 17, 2013 in Financial
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IBM Acquiring CSL International

IBM is acquiring CSL International and its CSL-WAVE software for monitoring and managing z/VM and Linux on zEnterprise.

It's clear that IBM is continuing to enhance its cloud offerings with this acquisition.

by Timothy Sipples July 10, 2013 in Cloud Computing, Financial
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BMC to Sell Itself to a Private Equity Consortium

BMC, a software company with an extensive portfolio of tools for z/OS, has announced it recommends shareholder acceptance of an offer from a consortium of private equity investors to buy all of the company's publicly traded shares. The consortium includes Bain Capital and Golden Gate Capital, and the offer price is $46.25 per share which values the company at about $6.9 billion.

There's a reasonable theoretical argument that companies liberated from quarterly Wall Street reporting pressures will be able to invest more and more strategically in developing their businesses, and that's the argument BMC's management is making. However, the actual results of companies that sell themselves to private equity firms are decidedly mixed.

Golden Gate Capital already owns at least a portion of several software companies including Infor and Attachmate (which in turn owns Novell), so they have some investment experience in IBM zEnterprise-related software companies. Bain Capital owns part of SunGard.

by Timothy Sipples May 6, 2013 in Current Affairs, Financial
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Fun Fact: zEnterprise Alone = Triple Oracle

To gain a little more insight into the server market, I was reading through IDC's 2012 year end server market report and compared that to Oracle's latest financial report. Here's the fun fact: IBM's zEnterprise server hardware business alone is triple Oracle's entire hardware business: "Exa," Solaris servers, tape, everything.

Sure, insert standard disclaimers here about quarterly and annual variations, model cycles, etc. But

by Timothy Sipples April 19, 2013 in Analysts, Financial
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IBM Announces 1Q2013 Earnings: zEnterprise Shines

IBM announced its first quarter earnings for 2013, reiterating its earnings guidance for the year. Bearing in mind my previous cautions about not reading too much into one quarter or into one segment of the global mainframe ecosystem, IBM's zEnterprise server business performed quite well, growing 7% year over year (8% at constant currency). Any growth in the server business these days is highly likely to be a marketshare gain, and so it was with zEnterprise. Yes, that's correct: IBM mainframes are gaining substantial marketshare in the server market.

IBM's CFO added a few comments to give some color to that performance. One comment was that "MIPS" deliveries galloped ahead faster (27%) than the growth in revenue, so that means customers continue to enjoy progressively lower prices when they buy mainframe capacity. He also pointed out that speciality engines are continuing to perform well, too, reinforcing the fact that mainframe customers continue to place new applications on mainframes at a brisk pace. And he mentioned that several large mainframe sales got pushed into the second quarter, perhaps due to the unusual timing of the Easter holiday, so IBM is expecting a further increase to double digit zEnterprise growth in the second quarter.

Overall, though, IBM's hardware business had a tough quarter. One surprise (to me, anyway) was IBM's Power server business which declined 32 percent. There were several comments about that statistic. One is that IBM is overwhelmingly #1 in the UNIX server market and still probably gained marketshare — that gives you some idea how horribly Oracle/Sun and HP are doing in the same market segment. Also, IBM had a somewhat tepid quarter in their so-called "growth markets," and 20% or more of IBM's business in those markets is hardware, a lot of which is Power-based. There were also some model cycle effects as Power servers are transitioning to POWER7+ processors. IBM said they'll be increasing their efforts to promote Linux on Power in order to try to win a greater share of the Linux server market to add to their dominance in the UNIX market.

IBM's CFO noted that the PureSystems are doing quite well. In fact, IBM's CFO's comments would indicate they're selling in much greater numbers than the Oracle "Exa" systems, probably because they're more open and flexible, providing direct support for a much wider range of industry applications while also delivering the benefits of integration. (The new IBM PureData System for Analytics, featuring Netezza technology, is the PureSystem model most relevant to zEnterprise customers.) However, the growth spots in the quarter (zEnterprise and PureSystems) were not enough to offset the overall decline (14%, excluding IBM's divested Retail hardware segment) in IBM's total hardware business.

In his comments to analysts, IBM's CFO pointed out how storage is changing, with more content and value in the software used to manage storage. (IBM's storage software business was up more than 10%, he pointed out.) To which I would add that trend is true for all types of hardware, and I've mentioned that before. It doesn't mean you can't do without hardware — far from it — but getting the combination right is critically important, and how you do the accounting is much less important. Likewise, I would caution cost-focused IT organizations (which is almost all of them) not to concentrate much on hardware costs. The other parts of IT, notably staffing, continue to increase as a share of spending. Ignore those and your bottom line is in peril.

by Timothy Sipples April 19, 2013 in Financial
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Oracle Announces Fiscal 3Q2013 Earnings: Hardware Imploding

Oracle announced its fiscal 3Q2013 earnings. They weren't good. Even software license revenues were down.

Total hardware sales were down again: another whopping 23% (22% at constant currency) year over year to $671 million for the quarter. Hardware systems support fell less quickly to $570 million as Oracle's hardware maintenance prices continue to climb. Note that these figures include what Oracle calls its "engineered systems," i.e. Exadata, Exalogic, etc. Oracle said they showed "excellent growth" but that their average selling prices are down. Oracle did not say much about its storage business (which includes StorageTek tape products).

Oracle said that its delayed T5 processor would be introduced "next week." Oracle CEO Larry Ellison called the SPARC T5 "the fastest microprocessor in the world." He claimed that Oracle would publish 17 "world record" benchmarks. (We'll see.) Despite the claims, Oracle predicts that its next financial quarter will see another 12 to 22 percent drop in hardware sales in constant dollars (13 to 23 in reported dollars), so apparently Oracle won't be able to deliver many systems with SPARC T5 microprocessors, Oracle won't be able to sell many, or both.

Every server processor vendor has product cycles. However, if the business is healthy there are both up quarters and down quarters. We haven't seen an up quarter in Oracle's (and formerly Sun's) hardware business in a long, long time. Oracle's entire hardware revenues are now about a third what Sun's were just over five years ago, for perspective. The SPARC T4, introduced in 2011, might have slowed the hardware slide but didn't stop it. We'll see what happens next, but it's awfully hard to sustain sufficient hardware R&D with these financial results.

UPDATE: I have a few more thoughts about Oracle's "engineered systems." First, it's important to recognize that these systems are essentially "appliances": fixed function/single purpose servers that are bundles of Oracle software and rather common hardware. Exadata, for example, is an Oracle Database box. Oracle counts these engineered systems as hardware sales — they have to be counted somehow — but are they? I think they're at least as much "software" as "hardware." Read on for an explanation.

The financial problem is that every Oracle engineered system is a perfect or near-perfect substitute for an Oracle software sale. If you buy an Exadata box you don't buy Oracle Database licenses for your other servers, or at least you buy fewer of them. To some extent, probably a large extent, an engineered system sale subtracts from software sales. In other words, Oracle is simply moving many software sales among existing Oracle customers from the "software" part of its balance sheet to the "hardware" side. That could be a good strategy, or it could simply be a more expensive way to package and sell certain Oracle software products, reducing Oracle's profitability. If Oracle receives $X in profit from an Exadata sale and $Y in profit from the equivalent Oracle Database software sale, and if $X is less than $Y, then the engineered system could be a very bad idea, financially speaking. On the other hand, if the engineered systems are providing real value above traditional and cloud-based software solutions, and if Oracle can share in some of that customer value (i.e. collect more profits), or if at least the engineered systems have higher win rates with better customer loyalty, then they might be helpful to Oracle.

We don't really know yet which is the case. But there are some clues. Oracle reported that the average selling price for the engineered systems is coming down, and they say that's due to the introduction of smaller models. Even so, unit sales are below previous forecasts, even the revised ones, and in this most recent quarter software license sales are down. I wonder whether there might be some cannibalization going on, with the modest engineered systems sales understandably eating into Oracle's software sales. Margins are much higher on software, so if cannibalization is happening it's probably not a good trend. Also, it's hard for me to understand how fixed function appliances fit into the growing public and private clouds. Yes, I'm sure Oracle will have some marketing answer why their engineered systems are compatible with the word "cloud." I don't agree even if I stretch the definition of "cloud," and I suspect a lot of potential customers would also disagree with Oracle, viewing their engineered systems as what they probably are at least in part: vendor lock-in devices. If you only want to buy your storage from Oracle, for example, buy an Exadata box. (And databases never get larger, of course.)

I haven't seen IBM follow this path. And to the extent Oracle thinks it's following in IBM's path, Oracle is misreading IBM and its history. Yes, one can buy WebSphere Application Server appliances for example, but they are virtual ones with plenty of convenience and also lots of flexibility. IBM's "hardware" appliances tend to be very specialized with no direct software-only counterparts. The IBM PureData System for Analytics and DataPower are two excellent examples. My observation is that, in general, IBM is trying to deliver "workload-optimized" systems which are extremely convenient, easy to deploy, and easy to manage, but which also have a lot of flexibility. Granted, IBM has a lot of advantages, including the fact that IBM can research, design, and fabricate its own silicon. I can't think of any other big enterprise software vendor that can do that. As I've written before, it takes a considerable amount of long-term effort with sustained investments to make that hardware-software magic happen, and it's something IBM does uniquely well in its markets.

by Timothy Sipples March 21, 2013 in Financial
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IBM Reports 4Q2012 Earnings: Full Speed Ahead

IBM reported its 4th quarter and full year 2012 financial results yesterday. Wall Street seemed impressed with the results, propelling IBM's stock price over 4% higher in after hours trading.

I like to take a look at the zEnterprise hardware results which IBM generally reports not because one quarter is particularly important, and not because IBM's hardware sales are all that indicative of the growth in the overall mainframe ecosystem. That said, they can give us some clues what's going on.

The clues are great. IBM's zEnterprise servers were the standout in the whole earnings report, with revenues (i.e. sales) up 56 percent in the 4th quarter (year to year). That's not necessarily a complete surprise since the 4th quarter was the first full quarter of availability of IBM's new zEnterprise EC12 model. However, Wall Street had some concerns that customers would hold back on their purchases due to economic uncertainties. That didn't happen with respect to IBM, it would appear. Also, IBM pointed out that zEnterprise revenues grew a whopping 68 percent in their growth markets (the countries outside the United States, Western Europe, and Japan). That portends well for zEnterprise growth, because those economies are growing faster. More zEnterprise customers in more countries growing faster is great for the entire mainframe ecosystem. (I would advise mainframe professionals to be aware of opportunities that might be outside their own borders.)

"MIPS," a measure of mainframe computing capacity, increased 66 percent. I've pointed out this simple math before, but here it is again: revenues were dramatically up, and capacity shipped increased even faster. That means IBM continues to offer lower mainframe capacity pricing to its customers. One of the common industry myths is that the mainframe market is a monopoly. Not in my view, and declining unit prices is consistent with a highly competitive server market. IBM is the most successful enterprise server maker, and there's no better enterprise server than zEnterprise (sporting those wonderful 5.5 GHz cores and extremely high qualities of service), but IBM keeps increasing its price competitiveness. That's exactly what I want to see at least as a long-term trend: IBM succeeding (to keep funding strong research and development efforts for even better products), and customers enjoying a healthy share of that success with both progressively higher business value and lower prices ("value for money").

IBM also said that they shipped the greatest amount of mainframe capacity they've ever shipped in history in the 4th quarter. Yes, some of that growth is attributable to "organic growth," which is the natural increase of transaction and batch volumes among existing applications. However, keep in mind that much of the developed world is in recession, and economic activity is not growing terribly fast there. So I think it's very fair to assume that much, maybe most, of this capacity growth is attributable to new applications, migrations of existing applications that were running elsewhere onto zEnterprise, and new customers. IBM didn't provide quite that level of detail, but I think that's a reasonable conclusion.

IBM doesn't break out its software and services businesses to identify which parts are attributable to zEnterprise. It's probably impossible to precisely calculate a "What if IBM didn't have its zEnterprise servers and somebody else did?" counterfactual. But most analysts conclude that IBM's zEnterprise business is essential to driving IBM's high profitability.

There have been some commentators that suggest that IBM has been de-emphasizing hardware, but I think that's simply wrong. IBM seems to continually reinvent itself, moving to where the ball will be before it gets there, not where it has been. I think hardware will always be a critical ingredient in that success, and more importantly so does IBM if you look at the company's research and development. There's an interesting comparison with Apple here. Apple got out of the X86 server business because, for Apple, that wasn't a business in which they could compete with high value, differentiated products. Apple also got out of printers and digital cameras several years ago, again for the same reason. But is Apple a hardware company? Or is Apple de-emphasizing hardware because Apple keeps distributing more music, movies, electronic books, "apps," and cloud services? Well, yes... and no. It's substantially the same with IBM, albeit in a completely different information technology market segment. (Apple and IBM literally never compete with each other.)

I remember listening to IBM's previous CEO, Sam Palmisano, answer a version of the question "What is IBM?" And he said IBM is not a hardware company, not a software company, and not a services company. It is, he said, for lack of a better word, a solutions company. IBM needs all three parts playing their roles in harmony, and IBM needs all three parts constantly evolving. So if that means IBM should not be in the point of sale device business (a recent divestiture) but should be in the enterprise memory storage and "big data" business intelligence engine businesses (two recent acquisitions), then that's what IBM is going to do. (A lot of analysts have missed this, but IBM has bought some "hardware" companies lately. I put the word hardware in quotes because the reality is that it has been a long time since hardware has been purely mechanical or electromechanical. Most "hardware" products are a blend of hardware and software.) Both of the latter hardware-related acquisitions are highly relevant to zEnterprise, in the form of the DB2 Analytics Accelerator as an example.

Anyway, I think analysts that focus only on one or a couple of the "big three" parts of IBM miss the big picture. Fortunately so have IBM's competitors.

by Timothy Sipples January 23, 2013 in Financial
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IBM Announces 2Q2012 Earnings: Mainframe Sales OK

Per usual I like to inspect IBM's latest earnings report to understand what's going on with the company that produces the world's most important enterprise servers. I do, however, caution that zEnterprise hardware sales are but a small fraction of the "mainframe ecosystem" and even of IBM's mainframe-related businesses. It's similar to how the Dow Jones Industrial Average, which includes IBM, represents only a tiny piece of the overall U.S. stock market.

Anyway, with that caveat aside, the whole of IBM reported profits that exceeded Wall Street's expectations. Total sales were down 3 percent, but if adjusted for currency effects they would have been up 1 percent (quarterly basis, year over year). Profit margins improved, too — up 1.2 to 1.5 percentage points, depending on the measurement standard. IBM's profit stream is an enormous competitive advantage, because it means the company can continue plowing some of its profits back into vital research and development, including enterprise server development. It's very hard for a company to sustain such a commitment over a long-term basis without that sort of financial security. HP and Sun are good counterexamples.

Turning to the mainframe hardware revenues, as expected they were down. Unexpectedly they were not down much: 11 percent (9 percent at constant currency) versus 7 percent for IBM's total hardware business. Servers, as most of us know, have strong model cycles, so what you want to see in a strong server business is big growth at the beginning of the cycle followed by much less big decreases in sales. And that seems to be what's happening. You don't want to see continuously plummeting sales, as with Oracle, or sales retrenchment into lower value product mixes, as with HP.

The traditional measure of mainframe capacity shipments, MIPS, declined only 8 percent. Once again that means the average price per MIPS decreased — that's just simple math. That's good if you're a mainframe customer, obviously, and it's also good for the IBM mainframe's market competitiveness. (Although I think that's more psychological at this point, for reasons I've explained previously. Price psychology is important, certainly, but mainframe computing hasn't been expensive for a long time.) Also, as IBM's CFO pointed out, IBM's mainframe hardware profit margin increased in the quarter, as you might expect at this point in the model cycle. Profit is the fuel for R&D.

However, I think IBM's CFO disclosed the most interesting mainframe data point in response to an analyst's question. Many people want to know that the mainframe ecosystem is expanding in terms of the customer base. Well, the zEnterprise hardware business was up 11 percent in IBM's so-called "growth markets." That's promising. We don't know how much of that sales growth is attributable to brand new mainframe customers, but that's exactly where you'd expect to see most of IBM's new mainframe customers, weighted toward developing countries. Those are the countries where I mostly work, so I'm particularly happy to see that positive number.

IBM's CFO Mark Loughridge also said that IBM gained marketshare in its high-end server businesses which obviously include its zEnterprise mainframes. Said another way, sure, IBM was down a little in the quarter, but IBM can confidently predict that everyone else was down a lot more in the same quarter. The world needs servers, even amidst model cycles and economic challenges, so winning the marketshare battle helps assure future success. IBM's history is replete with examples of its prospering during lean times.

I'll close with this question and then answer it: does the world need high-end servers, i.e. hugely vertically scalable, mission-critical, intensely virtualized, large memory, high performance-in-every-way (including I/O) enterprise servers? I say yes, emphatically — and more emphatically every day. The world desperately needs these servers — not for everything, but for a lot of things. Not everyone agrees with me, but IBM does. What do you think?

by Timothy Sipples July 18, 2012 in Financial
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RBS NatWest May Need a Mainframe Operator

June was an awful month for the British banking industry: revelations that Barclays and other banks have been fiddling with the LIBOR survey, cheating borrowers out of billions; several banks offering restitution to small business customers who bought poorly explained rate hedging contracts that were written primarily for the sole benefit of the banks; and a massive breakdown in the payment processing flows at NatWest and Ulster Bank (both owned by RBS). Some bank customers couldn't access their money for days due to the failures.

RBS hasn't said anything about the root cause of the problem that affected so many customers — and which has cost the bank a substantial sum. However, The Register has published two reports (here and here) which explain the causes. The reports are thinly sourced, so caveat emptor. If the reports are correct, RBS applied an upgrade to their CA-7 scheduling software. The upgrade did not go well, but fortunately they had a safety net: they could back out the upgrade. Unfortunately the operator who backed out the upgrade also erased the roster of scheduled jobs, and it took days to recover from that operator error.

The Register also goes on to explain that RBS as recently as February advertised for one or more India-based CA-7 operators. The Register pointedly asked RBS whether the particular operator(s) who botched the back out of the upgrade is(are) based in India. RBS has declined to comment, but I'm sure that information will be revealed in due course since British banking regulators will conduct a full investigation.

Let me make an editorial comment here. Some of the most talented IT staff in the world are located in India. That said, RBS apparently wasn't interested in hiring the most talented staff. RBS's management was evidently interested in hiring the cheapest. I don't think a CA-7 operator, particularly one with the awesome responsibility of delivering banking service levels, ought to be paid £11,000 or less per annum.

I'm curious to know the truth, and hopefully the truth will be revealed and/or confirmed. In the meantime, remember that "you get what you pay for" — or what you don't pay for.

by Timothy Sipples July 2, 2012 in Business Continuity, Economics, Financial
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NASDAQ Needs a Mainframe

NASDAQ needs a mainframe with mainframe software engineering.

by Timothy Sipples May 21, 2012 in Application Development, Financial
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Oracle's Hardware Sales Down Sharply Again

Three months ago, Oracle reported financial results for the company's second financial quarter. Its hardware sales declined 14% year over year, to $953 million. Oracle predicted that hardware sales would fall again anywhere from 4% to 14% in the next quarter (at constant currency).

Actually they fell 16% year over year, to $869 million. Quarter to quarter they fell about 9%.

For perspective, Oracle claims that their nascent Exadata/Exalogic/Exalytics business is fast growing, but that only means the far larger Oracle/Sun Solaris business is collapsing even faster. Also, the earnings report reveals that "hardware systems support" (a.k.a. hardware maintenance) declined only 3% (constant currency, year over year). So Oracle's remaining customers are caught in the perfect storm of a cratering Oracle/Sun Solaris business combined with escalating maintenance prices. Fabulous.

Of course I realize that hardware sales can be cyclical, but Oracle's hardware problems are deeply structural. Oracle introduced servers with the new SPARC T4 processors in September, 2011, which took the SPARC CPU up to 3.0 GHz. This past quarter should have been a terrific one, or at least a decent one, given that Oracle/Sun model cycle. Instead it was awful again.

I predict that Stuart Alsop now has the opportunity to correctly predict when the last Oracle/Sun Solaris server will be unplugged.

by Timothy Sipples March 21, 2012 in Financial, History, Systems Technology
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My Mainframe-Related Pet Peeves

In no particular order:

  1. "Green screens" are good enough. No, they're not. Do you force your users to submit their input and receive their output via punched cards? User interfaces change and evolve, and appearance often matters. Stanford's IBM mainframe served the world's first interactive Web application. If you haven't provided Web user interfaces on your mainframe to serve users' demands, what on earth are you waiting for?
  2. Everyone must use Web interfaces. Some users prefer to continue with their familiar, fast, and efficient 3270 terminal user interfaces. Let them coexist. One size does not fit all.
  3. We haven't implemented encryption yet. Every mainframe has built-in encryption support. Why are sensitive account numbers, Social Security numbers, credit card numbers, financial details, and passwords still flying around your network, internal or/and external, "in the clear"? Turn encryption on. Just do it.
  4. FTP overuse. FTP is not an application integration solution! Connect two applications using FTP and you've automatically converted two or more business process steps into a "we might get around to it, eventually, if you're lucky" business process. Do you think your customers want that? And why are you copying all that sensitive data anyway? To make it easier for bad guys to get?
  5. We don't allow TCP/IP connections to our mainframe "for security reasons." Congratulations, that "security" policy inevitably leads to the least possible secure environment you can imagine as the business finds every possible workaround to keep doing business — a true security nightmare. Let the z/OS Security Server and RACF do their jobs, please.
  6. "Open" platforms and storage. If you connect exactly the same storage unit on your SAN (that you're already using for everything else) to a z/VSE system in exactly the same way, does that suddenly make your storage unit "closed"? If you're one of the people responsible for typing in activation keys to make sure Microsoft Windows can actually function, are you the same person who thinks that z/OS and Linux on z, both which eschew keys, are "closed"? Words should have consistent meanings. Many IT vendors have thoroughly debased the word "open," and some of us have fallen for that particular word game. It's past time they stop — and that all of us wise up.
  7. "Mainframes are expensive." You know what's expensive? Not knowing the value of your financial holdings during a financial crisis because you've scattered bits of your portfolio records into little servers — that's expensive. Letting unreleased Michael Jackson records escape before you can monetize them. Billions of dollars of credit card fraud. Building yet another massive data center. Paying for 60 more licenses of Brand O middleware (this week). Adding another 20 staff to your payroll (this week) to support the IT mess you've implemented. You know what's not expensive? Mainframes. Stuff that works well isn't expensive.
  8. "But that would require us to add MIPS...." So what? Business growth is never free, but it's darn inexpensive if it's a mainframe that's growing. And do you see MIPS listed as a currency, next to the yen, dollar, euro, and pound? It's not. IBM has different prices for different workloads.
  9. Mainframe chargeback regimes. Everybody does them wrong. It's only a question of how wrong. Just because a mainframe, as a standard feature, lets you count and apportion various technical quantities like CPU-seconds doesn't mean they have much cost accounting significance. You certainly shouldn't be putting prices on those technical quantities while everything else in your data center (and beyond) remains uncounted, nor should those prices be different than true marginal costs (which can often be zero or near-zero).

Do you have any more I should add to the list?

by Timothy Sipples March 7, 2012 in Economics, Financial, Security
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IBM Announces 4Q2011 Earnings

Let's get right to the point: the mainframe had what's called a "tough compare" in the last quarter of 2011. A year ago, IBM's System z hardware revenues grew an impressive 69 percent year to year as the zEnterprise 196, with the world's fastest microprocessor, won tremendous favor among existing and new customers alike. That was probably the mainframe's best quarterly hardware revenue growth performance in history, at least when excluding the mathematically infinite growth rate in the long ago quarter when IBM shipped its first mainframe.

Every serious analyst forecasted that IBM's mainframe hardware revenues would be lower in 4Q2011 compared to 4Q2010, and that's what happened. However, there's an interesting and exciting twist. IBM had very nearly the same blockbluster quarter in terms of mainframe hardware capacity shipments that it did last year: MIPS shipments were down only marginally (4 percent). Moreover, the mainframe's gross profit margin was up. Profit is the mother's milk of R&D investment decisions for any corporation, especially a publicly traded one. And, with the application of simple mathematics, it's clear mainframe customers yet again enjoyed substantially lower per-MIPS pricing.

As I always point out when IBM announces earnings — and this time is no exception — mainframe hardware revenues are but a tiny part of IBM's, never mind the industry's, total mainframe-related revenues.

IBM's broader financial results are also quite interesting. While several other technology vendors — including Oracle, HP, and Microsoft — are reporting poor (or at least subpar) financial results, IBM didn't. So far IBM has proven to be remarkably resilient during economic downturns. In fact, there have been many times when IBM has turned recessions and depressions into competitive advantages. In one of the most famous historical cases, IBM's CEO Thomas Watson Sr. refused to reduce the size of his company or cut production during the Great Depression in the 1930s. IBM then was uniquely well positioned to win the new U.S. Social Security Administration's business to solve what was then the world's largest accounting problem. That business strategy was a huge, calculated gamble, but it certainly paid off for the company.

Anyway, this sort of earnings report is exactly what I like to see in a technology company. A company with stable, predictable growth in profits is extremely well positioned to make the long-term investments in research and development to assure a steady stream of exciting, useful technology products at competitive prices, including mainframes and mainframe software. Let's hope IBM keeps up its performance, but to date they're doing well.

by Timothy Sipples January 20, 2012 in Financial
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Oracle Had a Rough Quarter

Oracle reported its earnings for its second financial quarter, which ended November 30th. One of the big headlines: the company's total hardware revenues crashed below $1 billion to $953 million, down 14% year over year. Its software business was essentially flat on a revenue basis.

Oracle started shipping its new SPARC T4-based machines in late September. We would expect to see a substantial increase in revenue when a new model is introduced, but the opposite happened. Oracle's CFO explained that there were product transition problems which accounted for the drop. Perhaps, but Oracle is predicting that next quarter hardware revenues will drop again from 4% to 14% (constant currency). Keep in mind these figures include Exadata and Exalogic servers, which Oracle claims are growing. (CEO Larry Ellison said Oracle sold "over 200" of those servers combined in the quarter. More on that in a moment.) The bleeding continues unabated.

Another thing Oracle's CFO said should be disturbing to potential customers: "...we believe we could be back at pre-Sun operating margins shortly." If your revenues are declining, how do you increase operating margins? That's simple: you cut costs. Research and development are costs, and they should be big costs if you want to compete and win in the server market.

On the software side, Oracle has had some price increases, so a flattish performance there is also a problem.

Richard Sherlund, an analyst from Nomura Securities, asked a great question on Oracle's earnings conference call. In fact, Oracle promptly ended its call after his question. Sherlund asked, "Larry [Ellison, Oracle's CEO], could you reconcile these numbers you gave for Exadata and Exalogic? I think it adds up to 1,000 or 1,100. Didn't you say 3,000 just recently? And I think the company originally guided to 2,000." You can read what Oracle's executives said in reply.

In part of Mark Hurd's reply, he claimed "...we are taking huge amounts of share from IBM at their high end." IDC and Gartner keep close tabs on the server market, and they report exactly the opposite is happening. Maybe Hurd misspoke and will revise and extend his remarks.

by Timothy Sipples December 20, 2011 in Financial
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European Commission Satisfied with IBM's Practices

As The Mainframe Blog and other outlets reported this past September, the European Commission and IBM reached agreement on a competitors' complaint concerning mainframe hardware maintenance services. IBM proposed changes in how it supplies mainframe spare parts and technical documentation. However, the European Commission wanted to hear comments from interested parties about IBM's proposed solution.

After that comment period, the European Commission is still satisfied.

In separate action, the European Commission is seeking more information on whether Google's proposed acquisition of Motorola Mobility runs afoul of European competition rules.

by Timothy Sipples December 14, 2011 in Financial
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Japan's NTT Data Is Rock Solid with zEnterprise

NTT Data is the largest system integrator in Japan. In this video a couple of NTT Data's professionals discuss the new banking solution they're building for the Bank of Japan and the exceptional attributes of zEnterprise, z/OS, and WebSphere middleware products on z/OS.

by Timothy Sipples December 13, 2011 in Financial, Innovation, Web Technology, z/OS
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An Update on the Relative Value of IBM v. Microsoft

As I mentioned this past September, IBM passed Microsoft in market capitalization. In other words, the financial markets assigned a greater total enterprise value to IBM than to Microsoft, based on the stock price multiplied by the total number of shares outstanding for each company. Stock prices are quite volatile, but it's interesting to see that the gap has widened. At the close of trading yesterday, Microsoft had a total market capitalization of $215.35 billion, while IBM's market capitalization was $228.71 billion. Translated into percentages, IBM is more than 6% more valuable than Microsoft.

Market capitalization represents the stock market's assessment of a publicly traded company's value, at least for the part of the company that's publicly traded. (Some companies are privately held with only a relatively small amount of stock publicly traded, but that's not the case here.) That value is, in turn, based on the market's assessment of the net present value of the company's earnings. The higher the expected profit (and profit growth), the higher the market capitalization should be, at least over the medium to long term. Therefore, at this moment, the stock market is betting that IBM has a brighter future in terms of profits than Microsoft, on a risk-adjusted basis.

What's particularly interesting to me in this comparison is that IBM's balance sheet, while extremely impressive, is rather different than Microsoft's. Microsoft has a bigger amount of cash (and cash equivalents) on its balance sheet. According to Yahoo! Finance Microsoft has over $42 billion in net cash, while IBM's total debt is actually greater than its cash balance. IBM's debt is a bit misleading because a good part of that is debt from its IT financing division, which is exactly what a financing division is supposed to do and which has no real equivalent at Microsoft. But there's practically zero valuation risk with cash on hand, meaning that the stock market should assign a lot of value to that cash. The stock market does, but it doesn't matter enough: IBM is the more valuable company. Said another way, the stock market doesn't seem to have much confidence that Microsoft knows how to leverage that cash hoard in profitable ways.

I'm compelled to agree, and the news this week reinforces my view. Consider that IBM is using some of its cash to buy Cúram Software. We don't know how much IBM is spending for Cúram, but a couple hundred million is a reasonable guess, perhaps even on the high side. Contrast that acquisition with Microsoft's $8.5 billion acquisition of Skype, which was completed less than two months ago. Is there anyone willing to argue that Microsoft's acquisition of Skype will be more than 42 times more beneficial (in terms of future profits) than IBM's acquisition of Cúram? I'm not willing to make that argument.

Meanwhile, Apple is still the world's most valuable publicly traded technology company with a market capitalization of $361.62 billion at yesterday's closing price. And with that statistic I'll conclude this blog post, written from my new MacBook Air, because my iPhone is ringing.

by Timothy Sipples December 8, 2011 in Financial
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IBM Passes Microsoft in Market Capitalization

I mentioned a few months ago that it might happen, and it now has. The financial markets now assign more value to IBM than to Microsoft. That is, after the close of Wall Street trading on September 29, 2011, IBM had a slightly higher market capitalization than Microsoft. Market capitalization refers to the total value of a company's shares of stock.

It's hard to say exactly what caused this flip-flop in market positions. However, Amazon's announcement of their new Microsoft-free Kindle Fire, priced at only $199, might have nudged the market. Microsoft derives about 60% of its revenues from its twin Windows and Office software franchises, and, like the iPad, the Kindle isn't tied to either of those Microsoft products. Mobile devices are eroding (or at least containing) Microsoft's previously unassailable client device business. Those mobile devices also rely heavily on cloud delivery of computing services, almost always using Linux-based servers and middleware which Microsoft does not produce.

Microsoft fully capitalized on one of history's smartest business deals when, back in 1981, Microsoft agreed to supply the operating system for IBM's then-new personal computer. However, Microsoft insisted on a non-exclusive deal with IBM. Microsoft also insisted on retaining ownership and copyrights in their operating system. IBM was desperate for an operating system, particularly since Digital Research rebuffed IBM at least initially. IBM still very much viewed itself as a box-pushing company at that time, and IBM's lawyers and management agreed to Microsoft's terms. Later, IBM considered but rejected the idea of buying Microsoft (and Intel) outright. The rest, as they say, is history.

What's particularly ironic now is that arguably Microsoft relied far too long on a strikingly similar box-pushing business model (Windows and Office) while IBM, chastened in the early 1990s, figured out how to recreate itself, in large part recognizing the enormous value of having a rich, business solution-supporting software portfolio. That's not to say that Microsoft doesn't: its server-oriented middleware business is fairly large and one of the few moderate successes in recent years. However, Microsoft's middleware exclusively runs on Microsoft operating systems, and that's a challenge for the company and for prospective customers. In particular, Microsoft is losing a lot of potential business with Silicon Valley-based cloud-oriented companies, precisely the sort of customers Microsoft would have won in the past.

I think this market capitalization flip-flop helps demonstrate why the future of the mainframe is extremely bright. What every current or prospective mainframe customer wants to see is a stable, prosperous supplier with a great business model, growing sales, aggressive investment in the platform and its software to stay six steps ahead of competitors, continuous improvements in price-performance, and increasing architectural relevancy in areas such as cloud, security, etc. We're seeing all that, and that's great news for now and for the future.

by Timothy Sipples September 29, 2011 in Financial
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