Client/Server
References Case
September 12, 1994
Whether the big, multimillion-dollar machines are in for a second coming or a last gasp isn't yet clear. Mainframe sales in fact, continue to decline. But instead of shrinking 30% as in 1993, or plummeting .50% as International Business Machines Corp. had predicted it would this year mainframe sales are down only about 10% so far this year.
Now as IBM prepares to roll out the first of its next-generation mainframes tomorrow, the stronger sales are a mixed blessing. IBM had slashed its mainframe production capacity by about 40% over the past few years as sales plummeted, but now its mainframes are sold out through at least year end. IBM has been forced to turn away some customers to competitors, even as it has temporarily rehired more :than 100 laid-off workers to try to keep up with orders, says Nicholas M. Donofrio, general manager of IBM's mainframe division.
Why are mainframes doing better? An improving economy, a fading stigma about mainframes, a growing realization that a much-vaunted alternative will be slower in coming, and the fact that the big machines are the only ones that can do certain computing tasks are all contributing factors.
Corporate computer executives a few years ago feared the wrath of their chief executive officers if they made the unfashionable recommendation of buying a mainframe, says Robert Djurdjevic of Annex Research, a computer consulting firm. Amid the dramatic downturn in mainframe sales even IBM's then-chairman John F. Akers depicted the "big iron" computers as a fading breed. "There's been an unnatural suppression of demand as a result of the bad publicity," Mr. Djurdjevic says.
In addition, the big mainframe computers remain the only way to do such heavy-duty jobs as airline reservations. "There's no alternative," says Terre Jones, president of American Airlines Inc.'s Sabre Computer Services subsidiary. "We have a tremendous amount of mainframe-based software that is going to remain mainframe-based for some time."
The slowing decline in mainframe sales is aiding IBM's recent return to profitability by making up for shortfalls in several of the company's other businesses, such as personal computers. "Right now the mainframe is covering up a whole lot of mistakes in other areas," says Don Young, a Lehman Brothers Inc. analyst. IBM recently adjusted its estimate that mainframe revenue could fall as much as 50% this year to less than half that, which still may turn out to be overly cautious.
IBM's new mainframes use an exotic technology called parallel processing, which links together anywhere from a handful to scores of microprocessors, similar to the fingernail-sized "brains" of personal computers. Traditional mainframes use "bipolar" processing boards the size of a phonebook.
Because the new machines are based on less expensive PC technology, they cost less to make and their profit margins are higher, analysts say. The new systems, called Parallel Enterprise Servers, also are cheaper to buy. Priced from a few hundred thousand dollars to as high as about $1 million, they cost about $15,000 per unit of computing power - called a MIP (million instructions per second). That compares with $20,000 to $25,000 per MIP for a traditional mainframe, Mr. Djurdjevic of Annex Research estimates.
The new models also use about 90% less electricity to operate, meaning they can; quickly pay for themselves when they replace old mainframes, says John Jones, a Salomon Brothers Inc. analyst. The machines, about the size of a refrigerator, also take up about half the space of the old models.
In April, IBM introduced its first parallel-processing mainframes, specialized models designed primarily to link with traditional mainframes to offload certain tasks. The six models to be unveiled tomorrow are general-purpose computers designed to replace IBM's small and midrange mainframes. Later versions should surpass the power of the biggest of the old mainframes by 1997, says Mr. Donofrio of IBM.
He believes IBM will virtually halt production of the old machines by the end of the decade, though some customers will continue to use these computers for years.
Early signs seem to be promising for the new line. A recent Salomon Brothers survey of 50 of the largest U.S. companies found that almost half planned to buy one of IBM's new parallel processing machines, and nine of them had already done so. Mr. Jones of American Airlines says the two he has been using for several months under a trial program "performed perfectly" during a recent airline fare war, which pumped up computer usage to the highest level ever.
Still, Mr. Donofrio - who saw IBM's business get badly bruised by the dramatic mainframe downturn of the past few years - is cautious. "It's a long transformation," he says. "We're realistic."
[IBM's Mainframe Slide IBM had expected mainframe sales to plunge 50% this year but is seeing surprising signs of life for the big machines-even though sales continue to decline.]