IBM Mainframe Revenue Up

Cheap little servers handle so much of the Internet's dirty work that giant computers known as mainframes, which debuted 50 years ago and often cost more than $1 million, are supposed to be passe.

When Hoplon Infotainment, a startup video game company in Brazil, let it be known that it uses a mainframe to operate its signature online game, "People would actually take a step back and say, `What? Did I hear correctly?'" said Tarquinio Teles, Hoplon's CEO.

Yet mainframes are inspiring new ways of doing things at organizations like Hoplon. The trend is driven by and anxiously watched at IBM Corp., which makes the vast majority of the world's remaining mainframes and continues to be hugely reliant on them.

After dropping nearly 8 percent in 2005, IBM's mainframe revenue is up 10 percent this year. That includes a 25 percent gain in the most recent quarter. Mainframes were IBM's fastest-growing hardware segment after the microchip division, which is enjoying a nice ride making microprocessors for the top three video game consoles.

IBM does not release precise figures, but analysts estimate mainframe revenue at roughly $2.3 billion in the first nine months of 2006. While that is a small chunk of IBM's overall sales of $65 billion so far this year, mainframe revenue is especially precious because the machines drive huge software and maintenance deals, making them IBM's most profitable line of hardware.

Of course, the huge third-quarter boost is unlikely to be sustained. IBM is benefiting from having released two new mainframes in the past year, and sales eventually should taper until an upgrade comes, at least a year from now. Such ups and downs are typical: Unisys Corp., a much smaller vendor, has seen mainframe sales drop this year, but spokesman Brian Daly said the numbers strengthened in the third quarter with the release of a new model.

Still, for IBM to be having success with mainframes at all is somewhat surprising. Because if you were to break modern computing history into its simplest terms, it would go something like this: There was the centralized-mainframe era, and then there was the distributed-computing era. And the former ended a while ago.

Mainframes emerged in the 1950s as room-sized hubs that did it all. They crunched numbers, administered transactions, ran simulations and stored data.

By the 1980s and '90s, however, information technology was flourishing with flexible and smaller pieces of hardware that took on traditional mainframe duties. Cheaper server computers could calculate stuff and serve up Web pages. New communications gear ferried information around networks. Separate storage machines made more efficient use of memory. Millions of desktop computers flowered.

Sun Microsystems Inc., a leading maker of servers, denigrated mainframes as "dinosaurs," prompting IBM to call its next mainframe line the "T-Rex."

As mainframes ceased to be the center of gravity, they mainly lived on in government agencies, banks or complex networks like airline travel systems. Many such places needed mainframes' heavy-duty security and processing ability, but others were locked into the specialized programs they had written in mainframes' unique language.

"Where the mainframe still has a long-term home is running long-term code," said John Parker, chief information officer for A.G. Edwards & Sons Inc., a financial services firm that recently dropped its French-made mainframe but still runs key functions on a mainframe operated by a third-party hosting service. "Every industry has it, in my experience."

Since inertia is not growth, the market for mainframes and servers costing more than $500,000 dropped from $19 billion in 2000 to less than $12 billion last year, according to analysts at IDC.

One huge challenge has been the machines' old-school reputation. Programming mainframes still involves typing code on a green screen, much like early versions of DOS, the operating system that dominated PCs before the visual "windows" approach.

To try to encourage younger software developers to write programs for the machines, IBM recently announced a $100 million effort to simplify and modernize mainframe programming. Earlier it began encouraging customers to run Linux, Java and other low-intensity software on mainframes, in hopes of keeping the machines from falling deeper into specialized niches.

IBM also is trying to get creative in luring customers. In April it launched a "business-class" mainframe that costs $100,000 and up, targeted at smaller companies that want mainframes' high level of security and reliability.

One key pitch is that mainframes can do so many tasks at once that they are more energy efficient and take up less space than a comparable cluster of smaller servers.

"For every application, many times it takes five servers in a distributed environment," said Jim Stallings, who runs IBM's mainframe division. "Many customers are saying, `I can't deal with the complexity.'"

The University of Toronto recently bought a business-class mainframe to manage enrollment and other administrative functions. Eugene Siciunas, director of computing services, said the main attraction was flexible pricing.

The university saved money upfront by selecting a mainframe that runs at less than top capacity. Then on days when computing loads are heavier, the school can buy a short-term boost of extra processing power. Network managers call IBM, which remotely tunes the mainframe to deliver better performance.

Hoplon, the Brazilian company, is using a mainframe's processing might to build a complex "massively multiplayer" online game. But rather than shelling out precious startup capital to own a mainframe, Hoplon is remotely accessing one stashed in an IBM data center in Brazil. The same machine manages a retirement fund for IBM's Brazilian employees and handles operations for a building-tools manufacturer.

Charles King, an analyst with Pund-IT Inc., said IBM has had to adopt such sales methods to "maintain the platform's viability."

"The company has done a good job of continuing to gain leverage out of the mainframe," King said. "For a platform that a lot of folks have claimed is essentially moribund or headed into a very dark, bad future, it's got remarkable legs."


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