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IBM TO MAKE NEXT GENERATION z10 MAINFRAMES FROM POWER FAMILY CHIPS

IBM has decided to fold its mainframe processor chips into the Power family, much the way it moved its AS/400 engines into Power architecture years ago. IBM says the mainframe versions of the Power 6 or p6 chips, which it calls z10 when the result is a server not just a chip, will have some unique features.

It is very hard to predict the timing of an official announcement, but Big Blue has been conducting customer briefings since last August.

The IBM slide show is here (warning: 2 meg download) and our preliminary analysis is here.

With mainframe sales in a sharp dip as the financial sector firms that buy so many putting all capital equipment acquisitions on hold, IBM may have to act more quickly and more decisively than it would under more propitious conditions.

PLATFORM SOLUTIONS ANSWERS IBM COMPLAINT, COUNTERSUES

Platform Solutions, Inc., (PSI) has not only responded to IBM's intellectual property infringement complaint, but also countersued.

The defensive portion of PSI's court filing basically asserts that the patent infringement claims made by IBM are invalid and additionally sketches out the details of its position.

The countersuit accuses IBM of going back on explicit and implicit promises to license software for use on PSI servers, based on a principle lawyers call promissory estoppel. In addition, PSI alleges that IBM's insistence on licensing its software only to persons who have purchased IBM servers is tying. Tying, forcing a buyer to acquire one product in order to purchase another when the buyer really only wants the second product, is illegal under US antitrust laws. However, these laws only apply if the complainant can show that the party alleged of tying is a monopoly that is abusing its position with the act in question.

In the past, IBM has successfully deflected antitrust claims by proving that it does not have a monopoly in servers, which it says is the relevant market for antitrust considerations. But IBM's prior tactics may not apply to this case, which is about software rather than plug-in peripherals.

We have produced a more detailed discussion of this matter and in that essay we provide a link to the actual court document filed by PSI as well as other material that is relevant to the matter.

IBM will soon respond to PSI's claims, and that response may well have implications for the Flex-ES emulation system and Hercules open software mainframe emulator.

IBM SUES PLATFORM SOLUTIONS, HALTS LICENSING OF FLEX-ES EMULATORS

IBM has taken steps to curtail two mainframe emulator systems.

IBM has halted licensing of key patents to Fundamental Software, blocking the use of IBM software on Fundamentals's Flex-ES mainframe emulators, effective November 1. The X86-based systems were popular among developers and end users; hundreds are in use. IBM's decision to halt future licensing will not directly impact the installed base, which will continue to enjoy the use of any software licensed under agreements in force at the time of installation.

IBM also has filed suit against Platform Solutions, a company hoping to launch a mainframe emulator that runs on Itanium platforms. Some details of the matter are available here.

Flex-ES boxes are mainly used by shops that require under 50 MIPS of processing power and include versions that run on laptops. IBM hopes to sell low end z9 mainframes to some of these small shops but it has no portable alternative for use by software developers and support personnel, a niche that was filled by products from resellers of Flex-ES.

Platform Solutions has some test machines installed at end user locations, but as far as we know has not actually sold any. Until the litigation began, the company seemed to be aiming for a commercial debut during the first quarter of 2007. Platform maintains that IBM's claims are without foundation, so it could still make a formal product announcement despite the legal cloud obscuring its position. But for now IBM has said it will not license its software for use with the Platform boxes, and that refusal puts Platform in a bind.

RESELLER WHISPERS UP PLATFORM SOLUTIONS PCM MACHINE

T3 Technologies, which says it is the top distributor of Flex-ES based emulated mainframes, is getting ready to offer a plug-compatible system. The machine, which it calls Liberty, is based on software and firmware from Platform Solutions (see our related essay).

T3 Liberty
Platform Solutions firmware and software, HP Itanium hardware

So far, T3 hasn't gone public with its plans, but it has circulated a promotional flyer in which the IBM Business Partner describes itself as "the other mainframe company." Officially, neither T3 nor Platform Solutions seems to be talking about their relationship, which is just as well. T3 bills the machine as a PCM offering built on HP Itanium hardware, which is one way to look at things, while Platform Solutions says its position is that whatever it makes using its code is a PSI machine, regardless of whose hardware is inside the box. A third interpretation may emerge if a deal between EDS and Fujitsu goes ahead. As we understand it, EDS wants to offer Platform Solutions' software and firmware running on Fujitsu Itanium servers as the equipment in its services deals.

To make matters more complicated, T3 seems to be saying it will not only offer the product in its American home market, but also in the EU from offices in the UK, Germany, and Italy. The machine is built to run on 200-240 volts and 50-60 Hz current, so it can work more or less anywhere.

For now, T3 is not talking about MIPS, but the photo it offers suggests a machine with modest power, a box that may overlap its Flex-ES line on the low end and small IBM mainframes on the high end. Our guess is that the four-way Itanium server pictured in the promotional material will yield something like 200 MIPS while running in mainframe mufti. Platform Solutions wants to sell small boxes as well as larger machines directly, providing servers that may range from under 100 MIPS to 2,000 MIPS and possibly higher.

But it all remains kind of iffy. PSI is still perfecting its 64-bit mainframe functionality and has only put boxes that provide 31-bit addressing into field tests. IBM is saying nothing about whether it will let PSI users license its software under general commercial terms, as it did in the case of other plug-compatible vendors. And, with the exception of L. L. Bean, none of the end users who have been testing PSI systems wants to talk about the machine or the deals with IBM under which software has been licensed.

COMMON MEMORY AT $25 TO $30 PER GIGABYTE

Memory stick prices are very attractive, making it easy to equip PCs and servers with ample capacity to support the latest softoware. The popular 533 MHz DDR2 modules seem to be retailing for $25 to $30 per gigabyte. Dual channel technology is priced at the high end of this range, while single channel sticks are somewhat cheaper. Modules rated at higher speeds, such as 800 MHz, cost a few bucks more. Laptop memory is considerably more expensive, with SO DIMM sticks running $60 to $70 per gigabyte.

Our bellwether memory dealer, McDonald and Associates, in Omaha, has been selling parts at these levels in small quantities and appears to be willing to talk about price to customers who are looking for sticks by the dozen.

The more sophisticated types of error correcting memory used in midrange servers can cost more than standard PC memory but still can be a lot cheaper on the open market than when it is purchased from a server vendor. Customers usually don't shop the third-party market for memory when a server is very new but instead look for bargains when they are trying to stretch the life of an older server by another year or two. More often than not, a little bit of shopping can yield a lot of savings.

EVEN IN HARD TIMES, IBM VOWS TO EARN $9.20 A SHARE

Against a background of challenging business conditions and growing competition in the server market, and despite an 11 percent decline in reported revenue, IBM was able to achieve essentially flat quarterly profit compared to a year ago. IBM $2.30 billion in income versus $2.32 billion in the first quarter of 2008; earnings per share rose to $1.70 from $1.64 because IBM took some of its shares off the market. Wall Street's initial reaction was negative because of the fall in revenue. Sentiment may have been affected by the grim environment; IBM's report came out on a day when stock markets the world over reflected a general pattern of falling share prices.

IBM's hardware business, the segment it calls systems and technology, suffered badly in the quarter, with revenue falling 23 percent to $3.4 billion and pretax profit just about disappearing. IBM said its pretax earnings declined 80.7 percent to $28 million, yielding a maring of 0.8 percent. By contrast, software brought Big Blue $1.3 billion in pretax profit on $5.2 billion in revenue, a margin of 26 percent. Even though software revenue fell 6.5 percent from the year earlier quarter, profit was up by 5.4 percent. In most other reporting segments IBM saw revenue and profit fall, but its Global Technology Services activities, which generated more than $9 billion in revenue, reported pretax income up nearly 12 percent despite a 9.6 percent reduction in revenue.

In hardware IBM's best showing came in its System p line, which now includes what had formerly been the separately reported System i family. Reported revenue for the p line fell only 2 percent, which the company considered a very good result, and it was compared to other hardware lines. The mainframe processor business reported revenue off by 19 percent despite an 18 percent jump in MIPS shipped. IBM says growth in specialty engines was 20 percent with Linux engines up by 50 percent in the quarter. IBM does not disclose the share of MIPS shipped by engine type. IBM's trade in X86 industry standard servers, the System x line, took an even bigger hit, falling 27 percent. IBM says this change is due to the impact of virtualization; customers are buying fewer boxes and using them more intensively.

In addition to servers, IBM's hardware business includes storage products, off 20 percent, retail store systems, down 38 percent, and microelectronics, down 36 percent. IBM's manufacturing operations, which have performed very well in times of growing demand, apparently are not easily scaled back when demand falls. This situation is not unique to IBM, nor to manufacturing in general. Nevertheless, hard times in hardware was certainly an element in IBM's decision to abandon its reported attempt to acquire Sun.

IBM said that its prospects in services remain very bright. It said new contract signings for longterm services deals increased 14 percent. Shorter term contracts fell by 14 percent. The net was a 1 percent slippage, not a gain but still a result IBM said was more than satisfactory considering general business conditions. IBM similarly said that its software revenue, down by 6 percent, was healthy. In software, IBM's two growing product lines were its WebSphere family of server products and its Rational line of software development products. IBM reported a decline of 12 percent for its Lotus family, and this could mean that its market is adopting Microsoft Exchange and related products. If that is the case, there will be greater presence of Windows in glass house settings, and that represents a threat to IBM on other fronts, including DB2. IBM is only safe from Windows when users stick with mainframes or System p; System x products can all run Windows and System i on p hardware supports Windows coprocessors. So while IBM may try to draw the attention of investors to software and services, analysts continue to pay attention to Big Blue's results in the server market.

Notwithstanding the fact that hardware has become a smaller part of IBM over the years, it remains an engine that pulls along software and services revenue. If customers choose non-IBM hardware, they are very likely to turn to vendors other than Big Blue for related goods and services. IBM's two biggest rivals in server sales, HP and Dell, have been joined by Cisco, which could become a significant force in industry standard servers. In addition, the merger of Sun into Oracle, widely expected to be completed this summer, could also put pressure on IBM that would affect both revenue and profit.

Still, IBM does not seem to think it will have great difficulty meeting the challenges posed by competitors. The company is sticking with its forecast of at least $9.20 in earnings per share for the year, a figure that many observers believe IBM can beat quite handily even during a recession.

IBM FIRST QUARTER 2009 PERFORMANCE BY SEGMENT

REVENUE CATEGORY	EXTERNAL REVENUE	INTERNAL REVENUE	TOTAL REVENUE	PRE-TAX INCOME	PRE-TAX MARGIN
Systems & Technology	3,228	176	3,404	28	0.8
Percent change	-23.5	-9.6	-22.9	-80.7
Global Technology Services	8,754	342	9,096	1,104	12.1
Percent change	-9.5	-11.9	-9.6	11.7
Global Business Services	4,397	232	4,629	521	11.3
Percent change	-10.5	-9.9	-10.4	-10.0
Software	4,539	614	5,153	1,335	25.9
Percent change	-6.3	-8.0	-6.5	5.4
Global Financing	578	390	968	360	37.2
Percent change	-8.5	0.9	-5.0	-7.2
Total for All Segments	21,498	1,754	23,251	3,348	14.4
Percent change	-11.5	-7.4	-11.2	-0.6
Eliminations/other	213	-1,754	-1,540	-226
Total	21,711	0	21,711	3,122	14.4
Percent change	-11.4		-11.4	-2.4

The Eliminations/other line reflects an adjustment for activities that involve sales among IBM divisions that later yield sales to customers.

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