IBM's ( IBM - Get Report) launch of a new line of mainframes may ultimately have a bigger impact on its software rivals than on Big Blue itself. The debut on Friday of several models of the new System z9 mainframe culminates the company's three-year, $1.2 billion development effort. (The remaining models should be available in November.) The new line should reverse what was a double-digit decline in mainframe revenue last quarter, which held hardware sales for the Armonk, N.Y., tech giant to a modest 5% increase. It also should help dispel the notion that the mainframe is a dying breed. "We've seen a major resurgence of interest in the mainframe," says Colette Martin, IBM program director of System z9 strategy and marketing. In 2004 IBM's zSeries mainframes gained 4.1 percentage points in market share (based on revenue) in the market for servers costing more than $250,000 in 2004, while both Sun Microsystems ( SUNW - Get Report) and Hewlett-Packard ( HPQ - Get Report) saw a decline during the same period. IBM's zSeries mainframes won nearly one-third of the overall market in 2004. IBM is touting the new security features of its latest line, as well as its ability to process twice as many transactions a day as its predecessor. The company already has received orders for the z9, which also is being positioned as a tool to manage corporate IT networks, Martin says. But although the product is important, it may not have as big an impact on IBM's revenue as its predecessor, the z990 -- also known as the T-Rex -- had, according to Pacific Crest Securities analyst Rich Petersen. Despite what Petersen calls a "promising start," the cycle in mainframes "doesn't look like it's going to be as big as the last," he says. That's true, Petersen explains, for a few reasons that include the length of time between releases being even longer for the T-Rex, and the T-Rex having even greater architectural improvements over its predecessor than does the z9. Petersen has a sector perform rating on IBM, and his firm hasn't done banking with the company.
IBM doesn't disclose mainframe sales figures, but it did say that they fell 24% last quarter as customers awaited the release of the z9 series. Petersen believes that the company's mainframe sales generally range from $1 billion to $2 billion a quarter; IBM's total revenue for the year ending December 2004 was $96.3 billion. The analyst is forecasting mainframe sales to fall 5% in the fourth quarter, to increase in the low single-digits in the first quarter, and then to climb about 5% in the second and third quarters. That's a far cry from the big gains driven by the T-Rex, which helped propel a 34% increase in zSeries sales in the first quarter of 2004 and a 44% jump in the second quarter of 2004. But in addition to their impact on hardware sales, mainframes also drive software sales for both Big Blue and third-party software vendors. Computer Associates ( CA), BMC Software ( BMC) and Compuware ( CPWR) are the major software makers for mainframes -- other than IBM -- and could also benefit from the new z9 series. In a note last month, Piper Jaffray senior analyst David Rudow says the z9 release should be an overall "long-term positive" for BMC and Compuware, the two companies in the sector he covers. Rudow has outperform ratings on both companies and his firm hasn't done banking with either company. Petersen expects those third-party software vendors to begin reaping benefits from the z9 in the first quarter, but overall he's more downbeat about their prospects. "We think this cycle is going to be a little bit more negative for some of the software competitors, just because IBM has been, in our opinion, more aggressive trying to take some market share from its software competitors," Petersen notes. In particular, IBM has been bundling more software with each mainframe release, as well as reducing its software prices, explains Petersen, who has underperform ratings on CA and BMC and doesn't cover Compuware. His firm hasn't done banking with either company. "It's a shrinking market for software players," he says.