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IBM's blue bigness: A heftier systems bulge than you'd expect

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Playing to its strengths

By my model, IBM will have to sell $966m in System z mainframes and $1.68bn in Power-based servers in the fourth quarter of 2010 to get overall sales for 2010 to match the annual sales levels set in 2009. Forget about setting record sales levels for the past decade.

IBM may have started out as a hardware vendor, but that is not where the money is anymore, even if IBM does need to sell hardware to get to those software and services profits.

IBM's operating systems business is not huge by Microsoft standards, but AIX and IBM i (formerly known as OS/400) help pad the revenues and bolster profits, and the z/OS, z/VM, and z/VSE monthly revenue stream is steady money for which IBM hardly has to do any work. IBM also receives some revenues reselling Windows and Linux on its server platforms. The average is somewhere between $500m and $600m per quarter. So add that to the systems bucket.

Now, add in external storage sales, which includes disk arrays, tapes drives and libraries, and sundry other storage devices. To be sure, IBM sells storage that sometimes is attached to other servers, so not all storage revenues are directly affiliated with a specific IBM server platform. But that doesn't make them not a part of IBM's overall systems business. Generally speaking, IBM's storage revenues, in my model, range from $700m to $1.1bn (I am rounding).

Now, let's add in the maintenance revenue stream from IBM Global Services. IBM doesn't provide a breakdown of maintenance revenues by product line, and for the sake of this simplistic model, I am attributing all hardware and software maintenance revenues to the IBM systems business. Yes, IBM provides tech support for other people's systems, but it is hard to believe that this matters much.

I suppose you could say that a portion of IBM's systems business – and perhaps a very large portion of it – is sitting over at Global Services, where the company manages servers on behalf of tens of thousands of customers for billions of dollars. I have not added this in to get IBM's "real" systems business.

When you add up servers, storage, operating systems and maintenance over the past five years (minus Q4 2010), here's what it looks like in my model:

IBM systems revenue, 2006 through 2010

IBM systems revenue, 2006 through 2010

As you can see, the "real" IBM systems business is wiggling somewhere between $5bn and $7bn per quarter – roughly twice as much revenue as is generated from raw server iron each quarter. Look at how steady those maintenance and operating system revenues are. Everyone loves a business like that, particularly considering that the gross profits on both have to be quite high.

This is why IBM stays in the systems business, and will continue to do so as long as it can generate revenues and make money. ®

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