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IBM Defends Its Big Iron

Mainframe computer sales are sliding, but Big Blue has appointed a new manager to keep the powerful machines relevant with new software

Is computing's big iron finally rusting out?

IBM's (IBM) 45-year-old line of mainframe computers has survived the onslaught of minicomputers in the 1980s, the Unix operating system in the '90s, PCs, and the Internet. But a 39% plunge in mainframe revenues in IBM's second quarter seems to signal that this longtime mainstay of IBM's business is on its way to the junkyard.

Yet the mainframe may have more resilience than its naysayers expect as IBM works to keep the machines relevant. In the coming days, the company plans to introduce new mainframe software. On July 1, it named Tom Rosamilia, a 26-year Big Blue veteran, general manager of the mainframe business.

Rosamilia is charged with continuing advances in the mainframe's core technology and finding new uses for the computers. "The mainframe has proven its ability to change. It's flexible," he says. "That's why it has had such a long life."

Mainframes Are a Profit Spinner

The mainframe's fate still matters a lot to IBM. Since their debut in 1964, mainframes have helped send astronauts to the moon, ushered in computerized airline reservations, and crunched numbers for giant banks. Although analysts estimate that sales of the big computers represent less than 4% of IBM's revenues in a good year, the combination of mainframe hardware, storage, software, and services account for nearly half of its profits.

To be sure, IBM's mainframe business is slumping. The economic recession has put a damper on demand for computer systems that cost more than $250,000—and sometimes millions of dollars. IBM introduced a new version of the mainframe, called z10, in early 2008, and sales drove mainframe revenue growth of 34% in the second quarter of last year. By now, though, the new models have been installed by the most avid users and demand is trailing off.

But this is a slowdown, not a collapse, says Charles King, analyst at market researcher Pund-IT Research. "I wouldn't call it the beginning of the end," he says.

That's because the computer design that has shown so much resilience over the decades still has a lot of appeal to corporations. While the initial bill for buying a mainframe is high, customers can process large amounts of data very efficiently. "It's really solid, powerful, reliable, and able to handle the processing needs of large companies," says Jackie Barretta, chief information officer of Con-way (CNW), the large freight shipping company. Con-way leased two new z10s last year, and they provide the transaction processing for most of the company's computing systems.

A Future in Cloud Computing?

Now, Rosamilia's top priority is making it easier for corporations to run new software applications on mainframes. The company plans to introduce bundles of computers and software the week of Aug. 10, aimed at specific uses such as security monitoring, data warehousing, and disaster recovery.

Mainframes are also finding a home with companies hosting "cloud computing" software that's delivered over the Internet as a service. Since customers can run many applications at once in separate partitions, the machines often operate at more than 90% of their total computing capacity, far better than servers based on industry standard chips from Intel (INTC) and Advanced Micro Devices (AMD). "As companies move toward cloud technologies, this is going to be an important option for them," says Rosamilia.

Over the past decade, IBM has made it possible to run the open-source Linux operating system and related programs, and has introduced mainframe technology for running applications written with the Java software programming language. Last year, 25% of the mainframe processing power that IBM sold was for use with Linux, which costs customers a lot less than traditional mainframe software.

IBM has also sacrificed software revenues to gain new customers. For instance, it offers corporations lower-priced software and processing charges if they run the newer applications on so-called specialty processors tuned to run those programs, and which can be installed in mainframes.

Latest Threat: Neon's zPrime

Other companies are looking at IBM's customer base and angling for a piece of the profits. The latest threat to IBM's mainframe profits comes from Neon Enterprise Software of Sugar Land, Tex., a niche mainframe software maker. On June 30, Neon introduced a software program, zPrime, that makes it easier for corporations to run applications on IBM's specialty chips.

Neon predicts its product will make it possible for customers to shave about 20% off their mainframe budgets. "It helps them avoid hardware upgrades and avoid software charges," says Neon Chief Executive Lacy Edwards.

IBM says it's withholding comment on zPrime while it gathers information about how it works. Meanwhile, Neon claims to have rounded up 58 customers already. "It's an opportunity for us [to save money]," says Mark O'Gara, vice-president for infrastructure management at health insurance company Highmark, which is testing the software.

Will zPrime crimp IBM's profits? Brad Day, an analyst at Forrester Research (FORR), says it might. But the competition could also help bolster the mainframe franchise. "IBM likes anything that keeps the mainframe in place," says Day. "They want customers to stick with the mainframe, and this makes it more affordable."

Big iron lives on. But it will require constant innovation and risk-taking by Rosamilia and his colleagues to bring this franchise back to a healthier state.

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