IBM's New Mainframe Computers Are Intriguing, But Slowing Intel's Advance Won't Be Easy
Inside IBM.

Like many prior IBM Corp.  (INTC) mainframe launches, Big Blue's latest refresh for its age-old, high-end enterprise hardware line shows a good understanding of what traditional mainframe clients in verticals such as financial services, healthcare and government are looking for. The big question is whether this is enough to halt a slow, gradual decline in IBM's mainframe franchise, as cheaper systems featuring Intel Corp. (INTC) Xeon CPUs grow in popularity, and Xeon evolves from being just a line of chips to a versatile enterprise hardware platform.

The IBM Z mainframe, unveiled ahead of IBM's Tuesday afternoon second-quarter earnings report, represents the company's first mainframe refresh since January 2015, when it launched its z13 system. In the wake of dozens of high-profile enterprise and government data breaches over the last three years, IBM is making security the primary selling point for Z, which features a $500,000 starting price.

With the help of what IBM claims is a 300% increase in the amount of silicon dedicated to processing cryptographic algorithms, the company promises Z mainframes will be able to "pervasively encrypt data associated with an entire application, cloud service or database in flight or at rest with one click." The systems also features "tamper-responding" hardware that causes encryption keys to be invalidated at any sign of an attack -- they can then be securely restored -- and allows programming interfaces (APIs) that let mainframe apps interact with apps on other systems to be encrypted for the first time.

There are also the usual hardware advances that come when a product line has been upgraded for the first time in 30 months. The Z mainframe is said to support three times as much memory as the z13, as well as three times as much I/O connectivity bandwidth. It can handle 35% greater workloads, supports faster application response times and is said to be capable of handling over 12 billion encrypted transactions per day or 1,000 concurrent NoSQL unstructured databases.

Though dismissed as dinosaurs many times over in their history, mainframes are still quite popular for certain demanding, mission-critical workloads. IBM claims that 92 of the world's 100 biggest banks use its mainframes, and that they handle 87% of global credit card transactions, 29 billion annual ATM transactions and four billion annual passenger flights. But a look at industry sales trends makes it clear that Intel Xeon systems continue steadily taking share from costlier, proprietary alternatives.

Though quarterly data from research firms IDC and Gartner pointed to server industry revenue declines throughout 2016, Intel's Data Center Group, whose sales are dominated by Xeon chips, saw its revenue rise 8% last year to $17.2 billion. Some of this stems from the popularity of complementary solutions, as well as Xeon's share gains in non-server fields, but enterprise server share gains are also a factor, as is the fact that cloud giants such as Amazon (AMZN) , Microsoft (MSFT) and Alphabet's (GOOGL) Google have been relying almost solely on Xeon systems.

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It's tough to gauge the performance of IBM's mainframe business based on a single quarter's numbers, since the business is very cyclical -- sales typically surge in the year following a new mainframe's release, and then tail off. But a look at multi-year trends does point to share loss for both mainframes and IBM's Power high-end server business, which features systems relying on the company's proprietary Power CPUs.

Gartner estimates IBM had just a 6.6% server revenue share in Q1, down from 9.7% in Q1 2016 and 14.1% in Q1 2015. Mainframe cyclicality is certainly a factor here, but it doesn't seem to be the only one. That's especially true when one considers IBM had an estimated 19.8% server share in Q1 2014, and perhaps a 13% to 14% after backing out its x86 server business, which was sold to Lenovo later in the year.

Q1 2014 was also a cyclically weak mainframe quarter -- mainframe revenue was down 40% annually -- yet IBM's adjusted server share seems to have been around twice as high as it was in Q1 2017. Power server share losses definitely played a role, but mainframes appear to have played a role as well.

A big culprit behind these share losses is how high-end Xeon systems have steadily chipped away at the advantage proprietary systems have historically possessed in areas such as scalability, security and reliability. In 2014, HP Enterprise Co. (HPE)  updated its top-of-the-line Superdome server family with Xeon systems that can scale to 16 CPUs, and in 2016, Huawei launched the first 32-CPU Xeon system for mission-critical workloads.

And just last week, as part of the anticipated launch of its Xeon Scalable CPU line, Intel unveiled a pair of powerful new security features. One relies on Intel's QuickAssist processing engines to all but remove the performance overhead traditionally caused by encryption, while another protects encryption keys by keeping them from being placed in a system's main memory.

Meanwhile, AMD Inc.'s (AMD)  recently-launched Epyc server CPUs support the ability to fully encrypt a server's memory or virtual machines. And last month, HPE updated its Xeon-powered ProLiant server line to support a slew of security features that rely on custom silicon.

Such advances won't necessarily convince IBM's die-hard mainframe customers to jump ship, especially given the massive mainframe-related hardware and software investments they've made over the years. But they do collectively serve to curtail the mainframe's addressable market, and will likely lead more enterprises to decide that systems relying on Intel and (to a lesser extent) AMD x86-architecture CPUs are "good enough" to handle the security, performance and reliability needs of newer apps and services that they're deploying.

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