From time to time I check in to offer brief comments on the state of IBM’s mainframe business when IBM releases its quarterly earnings reports. Unfortunately we can only get an incomplete view since the IBM z ecosystem is much, much larger than server hardware revenues alone suggest. Even so, the server hardware revenues in the earnings reports may offer some clues.
IBM reported a massive increase in IBM z Systems sales in the first quarter. Sales more than doubled versus the year ago period, up 118% (130% at constant currency). Capacity deliveries increased 95%. These are phenomenal results, no question.
These results are partly explained by the fact the first quarter of 2015 was the first quarter of availability for the new IBM z13. IBM only started shipping z13 machines last month (March) in any sort of volume, but even with a partial quarter the results were astounding, even considering that the year ago quarter was well along in the previous model cycle. The results suggest IBM will have strong mainframe momentum into the second quarter and beyond.
It’s fair to say that IBM is becoming (or rebecoming?) more of a full scope mainframe company, partly as a consequence of divestitures and acquisitions. But it’s a new mainframe company because it’s also a cloud company. Becoming both simultaneously is not a coincidence; they’re quite related. The IBM mainframe is the original and best-of-breed cloud services environment, and the mainframe is capitalizing on (and driving) industry trends. Most importantly customers are buying, and how.
Simple math suggests that price per unit of capacity increased a bit versus the year ago quarter. That’s obviously good news for IBM since that means the company had huge sales without resorting to discounting. (Anybody can give away a product, especially a great product, but that’s not a sustainable business.) There is a reasonable explanation, though, and it’s one we’ve seen before. Capacity shipments at the beginning of a mainframe model cycle are heavily physical, weighted toward whole new machines and processors. To some extent capacity pricing inevitably reflects the more physical character of those shipments. In fact some mainframe customers don’t add capacity at all when they order the new model, but they still obviously pay for the machine. Later in the model cycle capacity shipments tend to be less physical, more focused on machine upgrades rather than whole machines, and in the past capacity pricing has reflected that shift to some extent. (We could also be seeing product mix effects within “mainframe capacity.”)
While I think we will see some lower capacity pricing consistent with past model cycles, at this point in history my preference would be to see surging capacity demand (check) and gently declining capacity pricing, model cycle to model cycle. That result is good for IBM, but it’s also good for IBM customers who rightly demand continuing innovation. We’ve reached a point where hardware, including mainframe hardware, no longer represents the lion’s share of IT budgets. It’s more like a mouse’s share, so even if hardware prices fall further IT budgets just won’t materially budge. Moreover, given the increasing difficulties working around the limits of physics and IT budgetary math, I don’t think we can reasonably expect hardware prices to continue falling so far quite so fast. Those increasing hardware design challenges should favor mainframes, as it happens.