By Timothy Prickett Morgan

While it is hard to say for sure exactly how much AS/400 iron IBM sold in 1998, the latest estimates by International Data Corp suggest that the AS/400 division did its part in helping IBM’s overall Server Group revenue not make its growth targets last year. The revenue shortfalls in servers are, according to IBM, mostly attributable to product transitions, but careful thought reveals that this is an increasingly lame argument given that most server vendors revamp their product lines once a year. What the revenue shortfalls in IBM’s Server Group really indicate is that IBM is not willing to cut prices low enough and fast enough to keep products moving despite the fact that everybody knows new AS/400e processors – in this case, a revamped Northstar line that came out in early February – are just around the corner.

It is also likely, although neither IBM nor its software partners have said so, that the rapid drop off in enterprise resource planning software has been having a profound effect on AS/400 processor sales since September or October of 1998, perhaps even earlier. The impact would have been felt especially at the high- end of the AS/400 line and among bigger ERP shops, who would have been ahead of the Y2K curve compared to medium and small businesses. Even with tens of thousands of shipments of model 150 Entry and model 170 Invader servers, the low-end of the AS/400e line, there was not enough money to make up for revenue declines at the high-end, where processors run into the millions of dollars for heavily configured machines. Hence, AS/400 processor sales were down and, thanks to a modest increase in AS/400 disk sales, overall AS/400 iron sales were up a meager 1%rather than the double digit growth IBM was seeking.

Whatever the cause, IDC says that AS/400 revenue from the sale of base processors has been dropping for years and continues to drop. In 1996, IBM sold some $4.47bn in base processors, which includes the value of base memory, disk, other features and the OS/400 operating system. IBM also, says IDC, sold 1,829Tb of disk capacity worth $1.34bn, making a total of $5.81bn for AS/400 hardware sales in 1996. The 1996 sales figures were helped dramatically by an unexpected explosion in 530 system and 53S server sales at the end of the year, which gave IBM an estimated $1bn in processor sales above that which it was planning on.

In early 1997, AS/400 processor sales dropped off, and towards the end of the year IBM got caught in another product transition, this time in moving to the AS/400e Apache servers, and processor sales returned more or less to their normal levels. IDC estimates that IBM sold about $3.32bn in AS/400 processors (raw processors and upgrades with OS/400 included) in 1997, plus $1.4bn in AS/400 disk subsystems (about 2,153Tb of capacity) for a total of $4.72bn in AS/400 hardware sales. That was a decline of 19% for all hardware, and a decline of 26% in processor and upgrade sales. Last year, IDC says IBM’s AS/400 division had processor sales of $3.31bn (down 0.3%) and disk sales of $1.47bn (up 5%, with a total of 4,497Tb shipped). So, overall hardware sales were up in 1998 by 1%.

It is hard to say how much of the processor sales numbers figures are represented by OS/400 licenses, but one thing is clear: the proportion of a total AS/400 server sale that goes into software is increasing. OS/400 represents anywhere from 25%to 35%of the base cost of an AS/400 based on OS/400 V4 license prices. But how IBM reckons that revenue internally does not have to necessarily bear any relationship to OS/400 V4 prices, which are only technically applied to first generation AS/400 RISC models – those with 4XX or 5XX designations. OS/400 is bundled for free on Apache and Northstar generations of AS/400s. IDC’s numbers also do not reflect the hardware sales IBM gets from peripherals other than disk subsystems. A substantial portion of an AS/400e server’s value is now locked up in AS/400 memory cards, LAN cards, and various other I/O processor cards to link AS/400s to other devices in a network. It is likely that IBM sells anywhere from $500mn to $1bn a year in such hardware, and perhaps more if customers are upgrading memory and disk subsystems to boost the performance of their existing machines rather than buying new processors. á