IBM slashes Linux mainframe prices to arrest decline in revenue

Network World - IBM is slashing prices on mainframe Linux products and selling new mainframe bundles to try to reverse declining revenue.

IBM has cut in half prices for some specialty Linux processors, according to a report in the Channel Register. The vendor has also released seven new mainframe bundles designed for specific application workloads, with IBM saying that its goal is to lure customers away from Sun Microsystems and Hewlett-Packard platforms.

Last month, IBM reported that System z mainframe server revenue decreased 39% year-over-year in the second quarter, while overall company revenue declined 13%.

Mainframe revenue goes in cycles, with IBM posting big numbers shortly after new releases, and then seeing a gradual falloff thereafter, said Pund-IT analyst Charles King.

Thus, a drop in revenue this year is not surprising, given that IBM unveiled a major new mainframe server, the System z10, in February 2008. But the revenue decline is still steep, because of the general downturn in IT spending.

"The mainframe business goes through some fairly cyclical ups and downs. … I do think that the latest drop is more severe than usual, but I don't look at it as quite so desperate as I think some people do," King said. "What you're seeing is a mix of tough times combined with the natural falloff in mainframe sales."

IBM's recent moves are illustrative of its increasing reliance on Linux as a driver of mainframe sales, King noted. IBM has argued that the mainframe, combined with the specialty processor known as Integrated Facility for Linux (IFL), is ideal for consolidating x86 and Unix applications.

IBM acknowledged "new pricing" for the IFL processors, but did not offer specific numbers. The Channel Register article details a price change from $90,000 to $47,500 for IFLs running on the System z Business Class mainframe.

Cutting the price was essential to help IBM compete against the latest Intel processors, IBM told the Channel Register."The price change is in part because of the increased performance with the latest Nehalem EP Xeons," Karl Freund, vice president of System z strategy and marketing at IBM, said.

King said he doesn't expect a major price cut for something as widely used as IBM's z/OS mainframe operating system. If there were additional price drops, King speculated that they would probably target other specialty processors such as zIIP (designed for business intelligence, ERP and CRM) and zAAP (designed for Java and XML).

Although recent mainframe revenue reports look poor in comparison to last year, IBM said it is having success on the Linux end. "More than 40% of new System z customers installed Linux last year, and Linux continued to grow over 15% during the first half of 2009," IBM said in a press release.

Over this entire decade, IBM says IDC numbers show that its revenue market share for servers costing $250,000 or more has moved from 17% to 32%.