IBM wheels and deals on servers

It's good to be your own bank


The engineers and marketeers have got the servers out and polished up their sales pitches, and now it is time for Big Blue to bring in the bankers to close the deals.

By virtue of its strong balance sheet and squeaky clean credit rating, IBM can borrow money and therefore lend it at rates much lower than most other companies, and certainly at much lower rates than individuals. And that is why the relatively small IBM Global Financing unit of the company has a big influence on the servers, storage, and software that the company peddles each quarter.

IBM refreshed portions of its Power Systems lineup with Power7 processors in February and April and begins shipping its entry and high-end boxes next week. The System x and BladeCenter product lines have been refreshed with Intel Xeon 5600 and Xeon 7500 processors during the spring and summer and IBM even begrudgingly put an Opteron 6100 box in the field last week. The iron is ready, but now IBM has to make the IT budget willing in a still jumpy economy.

To help grease the deals, IBM has announced two different finance programs, one aimed at getting customers using Unix boxes from Oracle, Fujitsu, and Hewlett-Packard to make the switch to big Power7 boxes running AIX, and another that gives customers a technology upgrade option in the future if they lease IBM Xeon-based blade servers today.

The Unix system poaching is an important business each quarter for IBM, not so much because of the revenue it generates - each HP or Oracle customer who jumped to IBM Power iron averaged a little more than $1m in revenue for the company in 2009 - but because of the upgrade sales IBM gets from these new customers in successive years. That first sale is difficult, and very likely not particularly profitable. But those upgrades down the line are where the gravy comes in.

IBM this week launched a new financing deal for customers buying Power7 iron if they are switching from HP and Oracle gear (the company said Sun gear, but there is no doubt that the deal applies to Fujitsu iron as well). Under this deal, which you can see here, IBM is deferring payments until 2011 to customers who make the swap to a Power 770, Power 780, or Power 795 server and who use Global Financing to lease the gear instead of buying it outright. Customers have to lease the new machines under a 36-month contract with a fair market value payout at the end of the lease, and the value of the deal has to exceed $75,000. Customers who ink a deal and get the box installed before the end of September, IBM will defer lease payments by 120 days; if you do the deal between 1 October and 31 December, IBM only defers the payments for 90 days.

By the way, this deferred financing deal can be combined with the existing Power Systems trade-in program, which gives customers trading up old Power Systems iron or non-IBM gear to a Power 770 or 780 up to $40,000 in credits good toward the purchase of other IBM products and those buying Power 595 and 795 machines up to $240,000.

There is no question that IBM has other means of working a deal to take over Oracle or HP accounts that are not written down like these deals are. And there is also no doubt that IBM's own customers who want to buy these new systems and get rid of older kit can argue - and receive - the same financing terms if they make a fuss and have good credit.

In the first quarter, with the Power7 systems impending, the pace of IBM's HP and Oracle Unix takeouts slowed, with the company only doing 170 deals and bringing in only $125m from the sales of Power-based systems. For all of 2009, IBM did 574 deals and brought in $600m in revenues from competitive Unix takeout deals. The pace in the second quarter of 2010 was more in line with the historical trends and seems to be accelerating a bit, with Big Blue doing 225 competitive Unix takeouts and generating $225m. About two-thirds of the takeouts in the second quarter were at former Oracle/Sun server shops.

On the x64 server front, IBM has just announced a financing program called the System x Technology Exchange Option that builds a hardware upgrade into the lease. Under the deal, you lease IBM's Xeon 5600-based HS22 or HS22V blade servers or its Xeon 7500-based HX5 blade servers under a 30-month fair market value lease. After 30 months, you can upgrade to whatever the then-current equivalent blade server technology is from IBM. Customers have a 30-day window to extend the lease by another 31 months to cover the new iron (and under fair market payout terms for the new iron) and IBM will keep the lease payments exactly the same on the new iron as it charged for the old iron.

Companies that like regularity may find these terms comforting. Those who want to always be able to negotiate every deal and push hard for the best bang for the buck will probably be allergic to thinking so far ahead.

The System x Technology Exchange Option is really aimed at fairly large customers. The deal only applies to customers who spend $500,000 or more on the x64-based blade servers. Also, if you read the fine print, you can only finance the same amount of iron on the second half of the deal as they did on the first half. So it is not a blade-for-blade swap at the same price as the wording in the announcement seems to imply. It is a dollar-for-dollar swap. ®

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