FRAMINGHAM (07/07/2000) - A combination of several long-standing software pricing issues and word of an earlier-than-expected release of a new generation of IBM mainframes later this year contributed to the disastrous quarters Computer Associates International Inc. and BMC Software Inc. announced this week.
But their woes aren't necessarily indicative of a broader industrywide mainframe sales slowdown, analysts said.
Both CA and BMC stunned Wall Street last week with dramatically reduced earnings forecasts. Islandia, New York-based CA, which was expected to report first-quarter earnings of 55 cents per share, lowered its estimates to 26 to 31 cents per share. Meanwhile, Houston-based BMC said it would earn 18 to 21 cents per share, compared with expectations of 46 cents per share.
Both companies blamed their results on lower-than-expected mainframe software sales - particularly in Europe - and on their inability to close several major contracts.
Several short- and long-term issues may be contributing to that situation, said users and analysts, such as the following:
- Software prices that continue to grow steeply even as hardware prices are dropping. Corporations spend up to 10 times more on mainframe software than on S/390 hardware upgrades, said Colin Rankine, an analyst at Cambridge, Massachusetts-based Giga Information Group Inc. As a result, there is a growing reluctance among corporate customers to enter into long-term (five- to seven-year) software licensing deals.
- A temporary slowdown in mainframe hardware sales in anticipation of IBM's next-generation 64-bit mainframes - code named Freeway - which are expected to ship in the fourth quarter. The systems will not only provide nearly twice as much performance as current systems but should also generate more attractive software licensing and bundling schemes.
"Freeway may have put a hold on decision-making while companies evaluate the change [in the pricing and performance] scenario," said David Floyer, an analyst at ITcentrix Inc., a mainframe consultancy in Mountain View, California.
"People are trying to see what [the new mainframe technology is like] and which vendors are going to play with" new pricing schemes for the systems, said Dan Kaberon, parallel sysplex manager at Hewitt Associates LLC, a human resources outsourcing firm in Lincolnshire, Illinois.
The slowdown in mainframe software sales may also indicate that users are finally pushing back against capacity-based licensing schemes that force customers to pay for software based on the size of their mainframe complexes rather than on their actual use of the software, Rankine said.
"There is some civil disobedience going on for sure," he said. "People are canceling products and are negotiating much more aggressively" than before.
Connecticut Natural Gas in Hartford, for example, is slowly shifting its applications off of mainframes and onto client/server systems. Driving the move is a shortage of new mainframe applications, coupled with the rising cost of maintaining legacy software, said Joe Quinn, manager of financial and administrative systems at the gas distributor.
Slowing MIPS sales as users absorb the excess capacity they installed in preparation for Y2k may also account for the depressed software sales, said Mike Egan, a mainframe software contract specialist at Stamford, Connecticut-based Meta Group Inc.
For example, Egan negotiated 25 mainframe software licensing deals last September. This quarter, he handled only six deals.