Financial Matters: IBM Pricing Strategies Fuel Used Processor Market

by Barry J. Graham
April 1, 2005

To illustrate the used processor opportunity, users looking for either a net new z900 processor (which will be a used system) or an upgrade to an existing z900 can today purchase such systems from third-party suppliers for around 600 euros or $750 per clothed MIPS. This is less than half the current IBM price. For new systems, this involves a supplier delivering a complete z900 system, but for upgrades, it normally involves replacing the installed system with a larger model—a two-truck upgrade as it is known in the trade.

To illustrate the potential savings, the following figures are from a recent situation where a user considered purchasing two new systems and wanted to evaluate the three-year costs. With the z990, the solution was based on models 302 and 304, with the 304 growing to a 306 over three years. For the used z900 alternative, z900 models 1C4 and 1C8 were chosen, with the 1C8 growing to a 113 over three years.

Despite maintenance and software savings with the z990, the used z900 solution from a third-party was still $1 million (5 percent) cheaper over the three years. But more important, even greater savings were seen in the first year, which is highly attractive to many users. With the IBM used z900 proposal, the three-year z900 cost was $3 million (14 percent) above the z990 cost, and even the one-year z900 cost was $1.8 million (20 percent) higher.

Any user requiring an upgrade rather than a new system is likely to save even more with a third-party used z900 solution due to the “book” pricing issue of the z990. For example, a user upgrading from around 1,250 to 2,000 MIPS would save more than $380,000 (28 percent) in the first year by opting for a second user z900 upgrade—although for some users, some of this savings could be offset by the lower software costs on the z990.

In this case, even a z900 solution direct from IBM would still have been less expensive than the z990 upgrade, but the advantage of the z900 would have been reduced to less than 10 percent.

While this has focused on the z900 used processors, a similar case could be made for a used z800. However, earlier CMOS processors offer little opportunity for all but the smallest users with no planned growth.