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IBM’s Mainframe Costs Bring Third Party Companies Out Of The Woodwork

ibmsWith processors, where there is typically only one unit to several dozen DASD devices, the ‘spare’ unit approach was not practical so IBM did not need to provide three years warranty to exclude competition. Instead it just made its processors less able to be ‘cannibalized’ by including many processors and items such as memory and channels on a single board that cannot be dismantled (although taken to extremes as with the zSeries, this has hurt IBM itself as noted in previous articles).

As a result the third party maintainer disappeared, leaving IBM able to increase maintenance charges almost at will. And surprise surprise, the IBM mainframe processor maintenance cost did increase in this era. Over the years the maintenance price of a processor has varied in line with market influences and processor design. For example, in the era of the ECL processor a third party maintainer could buy a used processor and then ‘cannibalize’ it to provide parts to maintain other users processors. This allowed extremely competitive offerings to maintain processors that were more than two to three years old, but didn’t really allow big price reductions on processors newer than this.

To compare these costs over time I use a constant of the percentage of the purchase price per year. For processors, this has varied over time from as little as 3% up to as much as 25%. Part of this variation is, as with the zSeries profitability problem, one that is self inflicted by IBM with its annual purchase price reductions. This is because once set, the maintenance price for a product rarely changes. So a 100 Mips product introduced at $100,000 costs $1,000 per Mips with an annual maintenance charge of $50 per Mips and starts off with a maintenance cost per year of $5,000 or 5% of the purchase price. If the product is replaced after one year, then the new product is likely to cost the same $100,000, but deliver say 25% more performance or 125 Mips. It will also typically have the same maintenance cost of $5,000 or 5% of the purchase price, but this is a lower maintenance cost per Mips of $40.

DIFFERENCE IN SAVINGS

Any user replacing the initial product with the new one pays the same maintenance charge, although this is lower per Mips, so his budget doesn’t change. The difference comes when a product is not replaced for, say, three years and the purchase price is reduced at, say, around 30% a year. In the third year, the $100,000 system now costs just $50,000 but the maintenance price is unchanged and still costs $5,000 a year, but this is now 10% of the purchase price. A user growing at 30-40% a year will now have two of these products (or one of twice the power) and be paying $10,000 a year for maintenance–double what he would be paying if the product was replaced annually by IBM with a new one. So, a longer product life has no real impact on the purchase price over time, but it does increase the maintenance expenditure and in particular the percentage of the processor cost that this represents over time.

The reason is simple. If IBM reduced the maintenance cost for a processor when it reduced the price, it would have to do so for all the products already installed, reducing the revenues from those users who had already contracted to pay the higher price–not a good business move.

With the zSeries, and its DASD products, IBM was at the beginning of a new era and had the opportunity to ‘reset’ the base. For the DASD, it has taken this opportunity and set the maintenance prices at a relatively low level.

The zSeries processors, however, are very different, and in this case IBM has not taken the opportunity to reduce maintenance costs back to the more reasonable historic levels of 5-6% of the purchase price per year. For example, with the IBM zSeries 2084 the annual maintenance cost today is typically 15-23% of the purchase price and will add 60-92% to the five-year cost of ownership if one year’s warranty is included. For the z900 it is closer to 25% per annum.

A brief history of the monthly maintenance charges for IBM’s CMOS processors from 1995 (the RX3) shows how the maintenance cost has relentlessly increased as a percentage of the purchase price–if anything speeding up since the withdrawal from the market of the PCM competition.

From the very low levels of 3-4% a year in the early days, exceptionally low to encourage 9021 users to move into CMOS despite its performance limitations at that time, the annual rate had increased to 15% or more with the zSeries by 2001, as shown in the following table:

As noted above, when no new products are introduced but prices decline, the annual cost when expressed as a percentage of the purchase price accelerates rapidly. For example the 15% noted above for the 2064-112 at first customer ship had increased to 23% within 18 months.

Of course, IBM will argue that the maintenance cost per MSU for the zSeries 2064-112 was only 63% of that for the 9672-RX3 at first customer ship. But the fact is that the target purchase price per MSU for the 2064-112 was only 11% of our target purchase price per MSU for the RX3 back in 1995. Ask IBM why maintenance costs have not reduced in line with the purchase price. After all, IBM claims that the zSeries is more reliable and easier to maintain than any previous generation.

9021 COSTS CLOSER TO 20%

The reality is that only the maintenance cost of a 9021 back in 1995 was even close to the 20% plus of the purchase price being seen today. This was because the 9021 had been around for nearly four years at that time and purchase prices had been falling rapidly–but not the maintenance cost (for the reasons noted above). No such reason exists today. IBM introduced the 9672 to replace the 9021 but, for most users, it was just too slow–a one-off event in the history of the mainframe. IBM therefore charged very low maintenance costs, purely to help displace the aging 9021s by showing massive savings in this area. Once the 9021s had been replaced, IBM again started pushing up the maintenance charges with each new generation, since it had no competition in the processor maintenance market.

So we are now back to the pre-CMOS levels of maintenance costs–as a percentage of the purchase price–and the artificially high ones that resulted from the extended 9021 product life. Hence a resurgence in third party maintenance.

HOW TO CUT PROCESSOR COSTS BY 25%–WITH NO REAL EFFORT AND NO NEGOTIATING

The above maintenance cost issue has once more created an opportunity for third parties to maintain IBM mainframe processors. For the z900 they can do this for half the IBM price (even after all of IBM’s discounts).

If you take the figure of 25% of the purchase price per year for IBM maintenance on a z900, a quite normal situation today, then the five year cost of ownership is 200% of the purchase price–after allowing for a one year warranty, 225% if no warranty is being offered. A third party maintainer offers the same cover for half IBM’s price, or 12.5% of the purchase price per year. This means the five year cost is now 150% of the purchase price (with warranty) or 162.5% without. A 25-28% saving over the five year period.

1 Comment

  • By Amaya, February 10, 2016 @ 12:00 pm

    The reason is simple. If IBM reduced the maintenance cost for a processor when it reduced the price, it would have to do so for all the products already installed, reducing the revenues from those users who had already contracted to pay the higher price–not a good business move.

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