IBM Defends Its Big Iron

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Last year, 25% of the mainframe processing power that IBM sold was for use with Linux, which costs customers a lot less than traditional mainframe software.

IBM has also sacrificed software revenues to gain new customers. For instance, it offers corporations lower-priced software and processing charges if they run the newer applications on so-called specialty processors tuned to run those programs, and which can be installed in mainframes.

Latest Threat: Neon's zPrime

Other companies are looking at IBM's customer base and angling for a piece of the profits. The latest threat to IBM's mainframe profits comes from Neon Enterprise Software of Sugar Land, Tex., a niche mainframe software maker. On June 30, Neon introduced a software program, zPrime, that makes it easier for corporations to run applications on IBM's specialty chips.

Neon predicts its product will make it possible for customers to shave about 20% off their mainframe budgets. "It helps them avoid hardware upgrades and avoid software charges," says Neon Chief Executive Lacy Edwards.

IBM says it's withholding comment on zPrime while it gathers information about how it works. Meanwhile, Neon claims to have rounded up 58 customers already. "It's an opportunity for us [to save money]," says Mark O'Gara, vice-president for infrastructure management at health insurance company Highmark, which is testing the software.

Will zPrime crimp IBM's profits? Brad Day, an analyst at Forrester Research (FORR), says it might. But the competition could also help bolster the mainframe franchise. "IBM likes anything that keeps the mainframe in place," says Day. "They want customers to stick with the mainframe, and this makes it more affordable."

Big iron lives on. But it will require constant innovation and risk-taking by Rosamilia and his colleagues to bring this franchise back to a healthier state.

Hamm is a senior writer for BusinessWeek in New York and author of the Globespotting blog.

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