March 19, 2001 10:25 AM PST

IBM recovering from Sun blindness

About two years ago, IBM realized it had fallen in the very market responsible for its initial success--the powerful server computers that lie at the heart of corporate networks.

Two major companies afflicted the computing colossus: Sun Microsystems and IBM itself. While Sun captured the energy of the Internet, IBM salespeople fought themselves instead of their competitors.

To correct that course, IBM has rolled its four server lines into one brand name, eServer. Top server executives are compensated based on the success of all servers, not just their individual product lines.

IBM has appointed "eServer managers" for major customers to make sure one IBM server line doesn't compete against another. Research and development is spreading technology from high-end product lines to lesser siblings.

In other words, Big Blue thinks its server business is back on its feet.

"I am convinced we are on the right strategy to win the most important battle," Bill Zeitler, senior vice president in charge of IBM's server group, said in an interview.

Recent figures from IDC provide modest reinforcement for IBM's optimism. Though its server sales for all of 2000 grew 4 percent, to $13.6 billion--three points slower than the rest of the market--a strong fourth quarter showed 31 percent growth to $4.5 billion, compared with 14 percent growth for the market overall.

"All the moves they've made are pretty darned positive," said Illuminata analyst Jonathan Eunice.

But the question now is not whether IBM's products are good--it's whether IBM will be less damaged than competitors by the economic slowdown.

Servers don't look like the salvation they once did from the fickle, low-margin PC business. With dot-com companies collapsing and corporations delaying computing projects, IBM no longer looks as insulated from economic troubles that have afflicted Compaq Computer and others with a heavier dependence on PCs.

"We have spoken with the chief information officers at a number of large financial services corporations, and they indicated they have started to slow their purchases of mainframe" computing power, Merrill Lynch analyst Tom Kraemer said in a report Friday. That news could be a problem for those hoping mainframes would be a bright spot in the current environment, he said.

One element of today's ugly market could work to the advantage of IBM and Hewlett-Packard over less-established Sun, said Gartner analyst Tom Henkel.

"I'm sure as pain goes, Sun is probably feeling a little more pain than HP and IBM," Henkel said. "For a long time, the dot-com revenue was the turbocharger that kept pushing Sun to outstanding quarters." Dot-com companies often were "blank slates" starting their computing systems from scratch, but HP and IBM have an advantage when adding to traditional companies' mix of numerous server types.

In the big picture, IBM has made major progress, Henkel said. "IBM is much more frequently on client short lists," Henkel said. "Two years ago, we saw HP and Sun on 80 percent of calls, with IBM on 50 percent. HP and IBM have virtually swapped places. More often than not, we're seeing an IBM vs. Sun scenario."

Now IBM must convert internal changes to market success while Sun is distracted with overhauling its servers with the new UltraSparc III chip, Henkel said.

"They've probably got 12 to 18 months to really score some big wins," he said. "Certainly between now and the end of the calendar year is the strongest opportunity, given the delays in the UltraSparc III and the difficulties Sun has had with UltraSparc II."

But in the long run, IBM believes servers, and therefore IBM, will prevail. "We're coming into the golden age of servers," Zeitler said.

The dark days
IBM was not always this cheery.

"In 1997, they had a really dismal product line," Illuminata's Eunice said. Internal competition also made IBM an easy target for Sun. "It's like a Third World nation where one group of the army turns its guns on another group of the army and tries to execute a coup."

Zeitler acknowledged that IBM's strategy had been disorganized. "We had these products selling against each other," he said--a telling admission given the company's history of downplaying the issue. And worse, "It looked like Sun really had its act together. We didn't have a strategy to participate in this e-business thing."

For Rod Adkins, the low point was October 1998, when he took his current job at the helm of IBM's pSeries Unix server division. "We just weren't engaged in the marketplace like Sun. Sun was the undisputed champion," he said.

Naturally, Sun agrees.

"We are hitting them where it hurts. We are in the depths of the data center," said Shahin Khan, head of server marketing for Sun. "They are now putting their crosshairs on us."

Khan acknowledged, though, that IBM has more resources to take on Sun than vice versa. "I can't outspend them. I can't out-advertise them. I can't out-people them," he said. But he contended that Sun's products are years ahead of IBM's, and IBM still is overly attached to the flagging mainframe business.

"I think IBM is a mainframe company and always will be a mainframe company," Khan said. "I think Sun is a scalable Internet infrastructure company, and that's where the future is going."

Maybe so. But mainframes, while admittedly a declining business, still are lucrative, Eunice said.

"It's better for IBM to sell a zSeries" (mainframe) than a lower-end IBM server, Eunice said. Mainframes have higher profit margins, lock customers in for future purchases more effectively, and generate more continuing service revenue, he said.

IBM indeed is proud of its mainframe technology. And even Khan admits that Sun gets high-end Unix server technology ideas from mainframes.

Divide and conquer
"Partitioning," which lets customers divide servers such as Sun's top-end E10000 machine into several independent computers, is a standard mainframe feature. But as Khan likes to ask, "Why should it be that it's (Sun's) Solaris that offers partitioning and not IBM's version of Unix?"

Sun was there first with Unix servers that could be partitioned, but IBM's "Regatta" Unix server, due this fall, likely will outpace Sun's partitioning technology, Eunice said. Where the smallest partitions allowed on Sun machines are four-processor boards, Regatta will feature mainframe-like abilities to have a partition running on a single processor or even a fraction of a processor, he said.

"It's not like a mainframe, it is a mainframe," Eunice said. "Five years ago, that would have been death, but today I don't think you have to apologize for using mainframe components."

IBM is bringing chip packaging technology as well as partitioning from mainframes to Unix servers, Zeitler said.

"Multichip modules," the grouping of several chips within a single package that first was used by IBM in its mainframes in 1998, also will arrive with Regatta, Eunice said. "Multichip modules are serious big-iron technology," Eunice said. "There is a genuineness to the cross-product line sharing that is coming about...It makes me bullish on their ability not to spend all their time bickering with each other."

Intel servers rise within IBM
Technology sharing also has boosted IBM's Intel server line.

"When we first came here, the Intel servers were big desktops. These are now small mainframes," said John Callies, general manager of IBM eServer appliances.

The earlier attitude to Intel servers at IBM was derisive, Callies said. Now, with advances such as 16-CPU Intel servers based on IBM's Summit supporting chips, "We're not a joke anymore."

But the Intel server business has been hampered by the numerous delays of Itanium, the first in Intel's line of more powerful 64-bit CPUs that the chipmaker hopes will displace competing CPUs from Sun, Compaq, SGI, HP and IBM.

"I'm disappointed that the benefits are going to come 24 months after we originally anticipated," Callies said.

Things should improve with the arrival of McKinley, Intel's second-generation 64-bit CPU. "You're going to see a completely different definition of what Intel servers are," Callies said.

Linux: The Tie that Binds
It wasn't part of the initial plan, but an unexpected force arrived to inject energy into IBM's server overhaul: Linux. The operating system, though not the easy road to riches many start-ups had hoped, has shaken Microsoft out of its leisurely assault on Unix.

In early 1999, IBM merely announced its Intel servers would work with Linux, adding it to the stable of more than a dozen operating systems it already supported. Later, though, IBM's Linux love affair grew more serious. It decided to spread Linux to all four server lines and in December said it spent $1 billion on Linux in 2000 and pledged to spend even more in 2001.

"It turns out Linux is the enabler that lets you (bring) applications into all these different environments," IBM's Zeitler said. Java had some promise for that job, too, and IBM is spreading Java across its server lines, but Big Blue wasn't comfortable with the degree of control inventor Sun has over Java.

"It was proprietary. It was controlled too tightly," Zeitler said.

IBM's strategy to push Linux across all four of the main server lines has helped unify IBM's server groups, Eunice said, by simplifying the use of higher-level software such as databases or the Websphere e-commerce package.

Perhaps more important, Linux has changed IBM's popularity among programmers and has raised the company's profile in a very similar way to what Sun accomplished with its Java software.

"As Goethe said, boldness has a magic to it," Eunice said. "The fact that they took this wild, completely committed swing at Linux--I think that's very appealing to people. It says IBM is moving back to innovation. You can't buy that kind of positive feeling. Now it's Sun that's on the defensive about Linux."

Making Linux a priority on the mainframe was a great idea for customers that would like to split a single mainframe into hundreds of different virtual Linux computers, IDC analyst Dan Kusnetzky said. Scandinavian telecommunications company Telia has taken that approach, and IBM is working with Princeton University and Japan's Keio University on programs that would give students their own piece of a mainframe, IBM has said.

"Having 1,500 Linux images on one (mainframe) is drastically cheaper to manage than 1,500 separate appliances," Kusnetzky said. "You could have $50 million to $60 million savings just on administrative staff, and that doesn't even include savings on floor space, air conditioning and maintenance."

Telia believes it is likely to have 2,000 to 3,000 small businesses using its services soon, said Illuminata analyst James Governor. "At that point, the economies of scale kick in, and the mainframe begins to make sense," he said.

"This is like the Holy Grail. This is the fabled new mainframe installation. Sun just got out-consolidated by IBM," he added, referring to the strategy Sun has used to sell its computers as a way to consolidate multitudes of Windows servers.

And Linux is a boost to IBM's business partners as well. Sytek Services, for example, has been selling IBM mainframes for 14 years--but not to the 1,500 largest customers, which IBM keeps to itself. But when Linux is involved in the sale, Sytek "can sell to any company we want," said Sytek President Robert Kusche.

Stand and deliver
With IBM speaking so boldly about getting its act together, it's now time for the company to deliver the goods. Prognosticators are varied on how well Big Blue will do.

"I was very skeptical when they started," Eunice said, but the latter stages of IBM's server overhaul have come when IBM has been in a position of some strength. "They did not do it when they were in bad times. There was something here other than trying to mask bad results or a dismal future."

Change has to be deeper than just top server executives cooperating more, Henkel said, and he's not convinced of how deeply the new philosophy has penetrated IBM.

"Often, what you see in reality is that individual sales reps tend to default to the things they know best," Henkel said. "One of the challenges we see facing IBM is coordinating the messages among the different (server lines). Things are never as simple as the cookbook."

 

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