Why IMB’s mainframe solutions are the company’s moat


Jul. 9 2014, Published 11:45 a.m. ET

IBM dominates the mainframe market

According to Vox, 90% of mainframe applications use native IBM Corp. (IBM) mainframe operating systems and run on IBM hardware. BMC Software (BMC), a provider of management solutions to mainframe applications, conducted the Annual Worldwide Survey of Mainframe Users. It found that 90% of respondents voted for IBM’s mainframe as a long-term solution. Plus, 50% voted that it will attract new workloads.

Oracle (ORCL) acquired Sun Microsystems in 2009 to strengthen its position in the mainframe market, which is also shaped by HP (HPQ) and CA Technologies (CA). The mainframe or “system z” business of IBM is cyclical and follows a product cycle. The new mainframe is expected to launch in 2015.

The chart above shows you the increasing growth expected in the storage management software space. This space comprises mainframe and distribution.

The importance of the mainframe

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Mainframes are used by banks, governments, and large businesses for critical applications, bulk data processing such as census, industry, and consumer statistics, enterprise resource planning, and transaction processing. Due to their critical application use, they’re designed to support high volumes of transactions with very fast response times. They function almost all the time with minimal outages. Mainframes offer the highest availability, reliability, efficiency, and security. This makes them an ideal platform for high-volume mission-critical workloads.

High switching costs

Most of the company’s customers have used IBM’s mainframe for decades. So shifting to another system entails huge expenses and risks. Switching is quite impossible.

So the high switching costs associated with the mainframe explain why IBM maintains its market leadership. It regularly modernizes its machines, lowers prices, and improves performance. The IBM Enterprise Cloud System is a cloud-oriented system z (zBC12 or zEC12 mainframe) offering. It now sells for $75,000, compared to 2003’s mainframe model, the z990 T-Rex, that retailed for $1 million.

So mainframes and the business of selling the software and services that run on them remain a profitable business for IBM.

Increased use

Speculations that organizations are thinking of migrating from the mainframe don’t appear entirely true.

IBM’s mainframe has evolved. You can subdivide its mainframe to run Linux virtual machines, and it’s a suitable platform to run an enterprise private cloud. It’s likely to see adoption from public cloud service providers for Linux workloads. After all, mainframe functionalities seem to be increasing. You can see this trend through an increase in the shipment of MIPS (millions of instructions per second). These saw a 6% increase in 2013 compared to 2012. MIPS are a widely used measure of computing performance and associated costs. Increased MIPS reflect the relevance of the mainframe to IBM’s clients.


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