Original URL: http://www.theregister.co.uk/2009/04/29/ibm_sun_set_deal/

IBM doubles Power Rewards to chase Sun gear

Big Blue can't discount like in the old days

By Timothy Prickett Morgan

Posted in Servers, 29th April 2009 16:17 GMT

After having snubbed Sun Microsystems last month, leaving it to be acquired by database and application software powerhouse Oracle for $5.6bn, IBM wants to do its best to make sure that the Sun that Oracle gets perhaps by summer is as weak as possible. And hence, it is ratcheting up the marketing pressure.

Today, IBM announced that it is doubling up the points that UltraSparc and Sparc64 shops can earn under the Power Rewards deal to $8,000 per processor core (assuming that a point in the program is worth a dollar, which it is).

For many Sun and Fujitsu customers, the trade-in points, which are good for the purchase of various IBM hardware, software, and services, are now considerably higher than the purchase price of entry Sparc gear, and for many more, that is a lot more than the current street value of their gear they have in their shops if they bought it on the second-hand market.

That $8,000 per core, which is called the Sun Set Special, is a lot more money that Big Blue was offering to Sparc customers a year ago, when it set the points at a measly $1,000 per core with a Sun or Fujitsu label when it debuted the converged Power Systems server line based on Power6 processors, finally merging its System i proprietary and System p AIX and Linux servers.

At the time, IBM was keen on chasing Hewlett-Packard's installed base of PA-RISC servers running HP-UX Unix, mainly because the PA-RISC boxes were soon to lose support and customers were - and many still are a year later - facing a recompile of their applications if they decide to move to Itanium-based Integrity servers running HP-UX. And therefore, PA-RISC cores were assessed at $4,000 per core compared to $1,000 per core for Sparc, Itanium, Alpha, and MIPS used cores in various server lines.

IBM estimated that there were 175,000 HP-9000 boxes out there with PA-RISC chips, still doing work, a year ago when the Power Rewards program was announced, and I estimate that somewhere around 175 conversions of HP iron to Power iron have been done in the past year. That may not seem like a lot, but these deals range between hundreds of thousands of dollars to millions of dollars, and they yield money every year through maintenance, upgrades, and other services.

Last November, when Sun's financials ran aground (and HP's didn't) and when it became clear that customers were starting to get jumpy about the future of Sun's "Rock" UltraSparc-RK processors and their "Supernova" systems, IBM jacked up the Power Rewards to $4,000 per core on Sun and Fujitsu Sparc boxes. And this February, IBM offered Power Rewards to companies swapping out x86 and x64 servers made by HP, Dell, Sun, and other who consolidate workloads onto Power iron $500 per core. (Customers who want to consolidate from System x or BladeCenter x86 and x64 servers made by IBM are not allow to participate in Power Rewards, officially anyway, and I am sure an IBM sales rep can have an arm twist to change that.)

The one interesting thing on this deal is that companies running IBM's proprietary OS/400, i5/OS and i operating system (the name change connotes recent release levels, not substantially different functionality) are able to get Power Rewards credits if they move to Power-based blade servers and consolidate workloads running on non-IBM x86 and x64 rack and tower servers onto x64-based blade servers made by IBM.

Depending on the deal, the Power Rewards program can cut the cost of doing a migration in half, according to IBM's calculations. Full details of the offer are here.

The Sun Set Special only runs through June 30, the end of Sun's fiscal 2009 year and not expected to be a very good one for Sun. Customers can buy Power 520, 550, 560, 570, and 595 machines (which use a mix of Power6 and Power6+ processors these days) or older System p 590 and 595 or System i 595 servers (which are based on older Power5+ processors) as part of the Power Rewards deal. While the deal is not restricted to AIX, it is far more likely that customers using Sun or HP boxes will be on Unix and will want to move to AIX; but i 6.1 and Linux are acceptable target platforms if customers want to go that way.

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. ®