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The wait for Power5 cuts iSeries Q1 sales short

It could be because of Windows. It could be because of Power5. Either way, the 7% drop in iSeries revenue is a disappointment to many.

Anticipation of a new iSeries based on the Power5 chip is likely to blame, in part, for the disappointing drop in iSeries revenue during the first quarter.

IBM reported Friday that while its hardware division had another strong performance, up 16%, iSeries revenue actually dropped 7%.

The news is particularly discouraging, if not unexpected, because of a seemingly healthy 2003. iSeries revenue was up 12% last year and according to IBM, it signed 2,000 new customers worldwide. It gave users a glimmer of hope.

They tend to blame the vendor--when in fact they should be pointing fingers at themselves.
Jonathan Eunice
analystIlluminata Inc.

Still, many in the industry didn't believe this was a true iSeries comeback and brushed it off as just a normal product lifecycle spike -- even though the increase was proportionally greater than the overall server market, which grew 5% last year after two years of decline.

The rumor mill has been working overtime because of the anticipated release of the Power5 "Squardron" server. The system, based on a single-eight-way multichip module, will most likely to be announced sometime within the next few weeks.

IBM CFO John Joyce confirmed during a conference call Friday that a new iSeries product line based on integrated Power5 technology would be announced soon. Although he didn't say exactly when, he did say that it would ship near the end of the second quarter.

"This could be about product-line transition issues," said iSeries analyst Jonathan Eunice, Illuminata Inc., Nashua, N.H. "When new products are due customers are more likely to delay their purchases. Even just the rumor of it."

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This purchasing behavior is nothing new and happens pretty much every time IBM is expected to release a new piece of hardware, he said. "It's not unusual to have shortfalls before a major hardware release."

But the Power5 clearly isn't entirely to blame for the drop in sales. In fact, it's more likely that the drop is because the iSeries customer is being lured by the relatively low upfront costs of Windows and Linux, experts say.

iSeries users having been seriously considering other platforms for sometime, Eunice said. That, coupled with some very appealing incentives from Hewlett-Packard and Sun Microsystems, means IBM is losing iSeries customers.

Despite IBM's constant parading of customer wins, the fact is a lot of the iSeries volume has gone to Windows- and Unix-based servers, Eunice said.

But Eunice rejects the idea that it's because IBM is doing a lousy job marketing the virtues of the platform.

Users are furious at their vendors for not doing more marketing. But the problem is that customers are buying Windows and Linux, when they could be buying OS/400, he said.

"Even if they maintain the iSeries for core apps, the fact that they're putting more on Unix, Linux or Windows, is going to tend to take away from actual iSeries sales. This is a fact of life that the user communities do not like to acknowledge. They tend to blame the vendor -- when in fact they should be pointing fingers at themselves."

But IBM says it's committed to the platform and will continue to aggressively target the Windows market. On May 2, during the spring COMMON conference, being held this year in San Antonio, the company will launch what it says is an aggressive marketing campaign intended to lure new users to the platform.

Overall hardware sales rose to $6.7 billion, up by 10%, much of that fueled by a 34% increase in mainframe sales and a two-fold increase in blade server sales. IBM's overall profits rose by about 16% during the first quarter of 2004 to $1.6 billion. Revenues rose to $22.3 billion for the period, up by nearly 11% from the same quarter last year.

Let us know what you think about the story; e-mail: Kate Evans-Correia, senior news editor

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