News: Analysis & Commentary: COMPUTERS
IN IBM'S CORNER: A BRAND-NEW HEAVYWEIGHT
The G4 could reverse Big Blue's mainframe sales slide
Only computer makers have problems like this: In each of the last three years, IBM has shipped 50% more mainframe computer power than in the prior year. Yet IBM's mainframe revenue keeps tumbling--an estimated 20% since 1994 (chart). Says Chairman Louis V. Gerstner Jr.: "We have to get the economic model to the point where we don't keep losing revenue even though we're selling more."
That time could be at hand. On June 9, IBM will bring out its latest generation of mainframes. Known internally as G4--for fourth generation--the machine costs less because it uses the kind of chip and disk-drive technology found in personal computers. IBM's mainframe execs are also taking other lessons from the PC industry, including speeding up product cycles and adopting popular, industry-standard software.
The result is the hippest mainframe yet--to hold off the powerful "servers" that use Intel Pentium chips. The new IBM machine comes with cryptography software burned into the chips, making the G4 a good choice for running an electronic-shopping outpost on the Web, for example. Also, instead of just using traditional mainframe programs, the G4s can run off-the-shelf programs, including those written for the Microsoft Windows NT and Unix operating systems. By yearend, Sun Microsystems Inc.'s Java software for the Web will run on IBM's big iron, too.
GREAT EXPECTATIONS? But can IBM sell enough G4s to reverse the pattern of the past few years? If G4 demand enables IBM to ship 57% more mainframe computer power in 1998, says International Data Corp., the company will see an increase in mainframe revenue. That's doable, since IDC predicts customers will soak up 65% more power in 1998 and 59% in 1999. "We see a lot of things that suggest to us that there could be substantial growth, but we're not going to predict it," Gerstner told analysts on May 7.
Despite the chairman's caution, investors are encouraged. After a 2-for-1 split on May 9, IBM's stock is in the mid-80s--near its all-time high. The price reflects expectations for the G4 as well as already strong results in PCs, services, and disk drives. "They could have a really good second half--that's clearly the potential," says Salomon Brothers Inc. analyst John B. Jones Jr.
Why is mainframe demand strong? Corporations are awash in data that only the biggest machines can handle, and new applications such as electronic commerce and data mining are better suited to big number crunchers. "Seven years ago, we said the mainframe was dead," says Philip G. Heasley, vice-chairman of First Bank System Inc. "Now, we have [machines] 20 times bigger than we ever dreamed the mainframe would be."
SPEEDY DEVELOPMENT. And the price is right. Analysts expect the G4 to cost about the same as large-scale Unix systems--$9,000 per million instructions per second (MIPS) of computing power. Gartner Group analyst Michael Chuba figures the price will be 50% less by the end of 1998. That's because IBM is speeding up development to remain competitive, especially with Pentium servers using Windows NT. With the G4, IBM proved it can create new machines at a PC-like pace. It went from drawing board to production in nine months, compared with the three years required at the beginning of the decade. "We don't intend on standing still," says Linda S. Sanford, general manager of IBM's mainframe business.
Playing by the rules of PC economics may mean lower profit per machine. But IBM enjoys a multiplier effect from mainframes that helps compensate: Sales of high-margin disk drives, software, and services boost total mainframe-related revenue to $20 billion a year.
Still, IBM mainframes will face their biggest challenge ever: William H. Gates III has beefed up Windows NT to take on the "mission-critical" jobs for which companies still purchase these big machines. IBM is fighting back, however, adding 400 new applications that were never available on a mainframe. According to Sanford, half the IBM mainframe computing power sold last year went for new programs. "It's critical for them to get more applications," says Merrill Lynch & Co. analyst Daniel Mandresh.
So far, Big Blue still has the edge with corporate computer buyers. "The current version of NT is not enterprise-ready," says Leon B. Billis, chief information officer for the Equitable Life Assurance Society of the U.S. But there's always the next version. So even though insurance giant Aetna Life & Casualty Co. still finds NT wanting, Chief Technology Officer R. Max Gould is betting that Gates will fix any shortcomings. "Where will we be in the year 2005?" he asks. "Clearly, Gates has been gaining share all the time." And that's one PC-industry truism Gerstner can't choose to ignore.By Ira Sager in New YorkReturn to top