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IBM doubles Power Rewards to chase Sun gear

Big Blue can't discount like in the old days

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One other catch. No matter how many Sun, HP, Fujitsu, or whatever boxes you want to ditch to consolidate their workloads on IBM's Power Systems, the total number of points cannot exceed a dollar value that is more than 50 per cent of the total value of the Power Systems box you acquire. So, for instance, if you buy a Power 595 for $1.5m, you can't get more than 750,000 points and therefore $750,000 worth of services out of Big Blue.

A few observations about the Power Rewards deal. First, IBM's margins in its overall hardware business are crap and by doing this kind of deal, Big Blue is able to shift what would otherwise be a discount to other IBM divisions - mainly Software Group and Global Services - to get deals done. By doing Power Rewards, IBM preserves more of the Power Systems top line than it might otherwise be able to do, so it props up those quarterly revenue figures IBM gets to quote. (Just like rebates do, since rebates are not discounts, but cash back after a deal is done, which is obviously counted as a cost of sale not a reduction in revenue, by the bean counters.) IBM cannot afford to be discounting Power Systems, not with its Systems and Technology Group reporting sales down 23.5 per cent to $3.23bn in the first quarter and pre-tax income down 80.7 per cent to $28m. (That was million, people.) Power Systems had a sales decline of 2 per cent in the first quarter, which was the only bright spot among its server lines.

Second, IBM has to ratchet up the dollar points, and probably even to do HP takeout deals, because the economy has slowed takeouts considerably. In the past three years, brags IBM, it has done 1,640 migrations from Sun, HP, and other iron to IBM gear - with half of them being Sun customers moving to Power.

But before the economic meltdown, the quarterly number of deals was up over 100 and averaging closer to 125 takeout deals. In the first quarter of 2009, IBM did 62 competitive takeouts, with 28 deals from Sun. That is a lot lower rate than before, and given the state of the economy, IBM has to give more to get customers to move. Particularly in the Sun base, which is heavy in the financial services sector that is coping with mergers and collapse and is not exactly in a mood to spend money. But, they are also under pressure to consolidate servers to save dough, so there opportunity is not zero.

Finally, as good as Sun's missteps with the Rock chips (matched by IBM's missteps with Power6 and Power6+ and Intel's quad-core "Tukwila" Itaniums, to be fair) and its financial woes and now the uncertainty from two merger deals in the past two months are in terms of giving IBM an opportunity to chase Sun iron, this is nothing compared to the heyday of the 2001-2002 IT recession.

Back then, it was the UltraSparc-III processor that was late to market and then woefully underpowered compared to the first dual-core chip in the world, IBM's Power4 and its "Regatta" server line. Back then, even with 40 per cent discounts on Sun Fire servers, Sun's gear was wickedly underpowered and seriously overpriced compared to IBM's Regatta machines. IBM came into HP and Sun shops and started the discounts at 45 per cent off, and even at that level could offer about three times the bang for the buck than Sun iron, or offer three times the performance for an equivalently priced system, however you want to look at it. And Sun was too stupid or stubborn to cut its prices, or had little choice because it needed to appease Wall Street and try to preserve profits.

IBM could, of course, cut its RS/6000 prices like crazy because its proprietary AS/400 customers, who used the same basic Power iron, were being absolutely reamed on hardware and software prices and, being locked in with their legacy applications, didn't have a lot of choice other than to port code and databases to AIX. (Many did, of course, but most stayed and paid.) Sun must have been thinking that Solaris and Sparc constituted a stronger legacy platform than it actually turned out to be. (My best guess is that in 2000, there were 2 million Sparc servers in the world, and maybe there are 1 million today.) Anyway, with the AS/400 (now Power Systems i) platform having seen a big revenue collapse of its own (liker from $4.2bn in sales in 1998 to maybe $900m in 2008), IBM cannot slash Power Systems AIX prices to chase Sun accounts, at least not like it did back in the last recession. And hence, you get deals like the Power Rewards program, which give benefits to customers without resorting to the red discount pen. ®

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