IBM posted less than stellar earnings last week, reporting net income of US$2.3 billion in its fourth quarter. That's down 10 percent from the $2.7 billion net income the Armonk, N.Y.-based company posted a year ago. IBM's chairman and CEO, Louis Gerstner, attributed the shortfall to declining PC sales and slow hardware sales. Even so, officials said the company completely sold out of its Regatta p690 servers, which debuted in October, and saw the first increase in revenue on mainframes in 11 years. Bill Zeitler, IBM's senior vice president and group executive for the server group, spoke with Computerworld about the company's new Regatta hardware, the Linux operating system, pricing issues and IBM's future hardware plans.
Q: IBM, and Hewlett-Packard Co. as well, recently lowered its Unix server prices to compete more aggressively against Sun Microsystems Inc. Do you see a price war coming?A: From my point of view, the price dynamics in Unix servers changed a couple years ago with (IBM's S80 Unix Servers), which brought a new set of cost advantages to the market. The costs are lower because they share processors across a variety of products, and they do two to three times the work per processor than (HP) could give at a better price/performance.
We've released our third generation since then, the Regatta p690. We shipped it (in) volume in the fourth quarter. We have had very strong market demand for this product and strong shipments in the fourth quarter. We shipped in volume considerably above plan, and we continue to see strong acceptance.
Q: What accounts for the strong acceptance that you're seeing?A: It's faster and more reliable, and it gives customers the advantage of running their work with half as many processors, which gives an enormous benefit when the customer is buying software where they charge based on the number of processors in the systems. It is truly (a) price/performance breakthrough and a technology breakthrough that's one-to-two times ahead of market.
Q: The Regatta is also heralded for its energy conservation features. We talked to one customer who shaved $100,000 off its electric bill after shifting to the Regatta. Is that the technology breakthrough you're talking about?A: The energy conservation comes from the chips and packaging. What we set out to do was to set a new standard for the Unix space. Five years ago, we started with Power4 chips, and that in itself was a breakthrough. It was the first and only Unix system to use that packaging. And as a by-product, when we package things like this, it takes considerably less power and environmentally it's a lot better.
Q: Hardware vendors, and Sun in particular, saw extraordinary sales during the dot-com boom but ran into problems when those companies went out of business and their servers flooded the market. When do you expect to see a recovery?A: Sun suffered a little more from the dot-com explosion because they benefitted more when it was going up. We didn't benefit as much when it went up, and we didn't suffer as much when it went down. There is a strong possibility that when we come out of the current slowdown, maybe in the second half of this year, the dynamic will likely be considerably different. The open movement, and particularly technology like Linux, will have a profound effect on the whole dynamic of how the industry operates. We're already seeing a strong substitution on clusters, things like RISC Unix being substituted for Linux on Intel.
Q: By open movement you mean Linux, since IBM sees Linux as one of its favorite operating environments?A: We are a Linux advocate. But we're mostly an open-movement advocate. We think customers are advantaged when they ... have an opportunity to make a choice on the basis of what performs better, is more reliable and is the easiest to manage. ... The business model that's based on capturing customers to your operating system is one without strategic sustainability.
Q: IBM has a number of proprietary operating systems. Are those going away?A: This is a very important point. The reason the z900 is doing so well is because we accommodated the Z-OS to do new Linux work or Apache work on the same system. And that gives the customer a deployment choice. There's a long life to the operating environment. But when new ones come in, we allow the customer to integrate with that one, so that they are critically advantaged.
Q: And what about IBM's mainframes?A: The z900 series mainframe was greeted with strong market acceptance one year ago. The most important thing about that is the idea that going forward, we allow Linux or Web applications to work and run on any of these platforms. That offers an attractive choice as people consolidate their work onto reliable and industrial-grade mainframes. The program going forward is to enhance these programs through time, because I think we're on the right track.
Q: Speaking of the competitiveness of the hardware market, do you think the merger of HP and Compaq Computer Corp. -- or these companies as separate entities if the merger falls through -- will have a negative or positive impact on the market?A: I won't comment on the merger. Both of these companies independently said that they would go to an Intel-based architecture, and that causes some concern among their customers -- not because it's a bad thing to do, but along the lines of how their current investment in HP systems is protected. Anytime there is uncertainty in the customer's situation, and this happens whether they merge or don't merger, it creates an opportunity. If you're looking at a Unix-based system, then the most likely (candidates on the) short list are IBM and Sun. If you're looking at (Windows) NT on Intel, the most likely short list would be Dell (Computer Corp.) or IBM.