IBM is rapidly transforming after the acquisition of Red Hat. This transformation is deemed necessary if IBM wants to survive in the future where they have to compete in the hyperscale cloud world with Microsoft, Amazon and Google. Earlier this year IBM announced a drastic revision of the pricing structure for legacy single product licenses, which significantly impacts IBM customers. This revision is designed to stimulate customer demand for the new strategic offerings, which is key in IBM’s strategy.
What is behind this change?
The acquisition of Red Hat by IBM is one of the largest IT acquisitions of all time. It also underlines the high ambitions from IBM with Red Hat’s portfolio, which will play a major role in IBM’s hybrid cloud strategy going forward.
It is not difficult to foresee that customers will eventually end up with multiple cloud environments, including a private cloud to run their applications. With this hybrid structure it should be easy and safe for organizations to move data and applications from cloud to cloud. This task is simplified if applications are containerized and this is exactly the reason why Red Hat’s container platform, OpenShift, will play a crucial role in IBM’s (and its customers’) future strategy and transformation.
Understandably IBM wants its customers to adopt this new strategy instead of going with solutions from other vendors. IBM has repackaged their legacy software in new bundles and included OpenShift in these bundles for this exact reason.
The commercial impact to legacy license options
These new bundles are called Cloud Paks and will be the way forward for most of IBM’s software offerings. This brings us to the reason for the price change of the legacy license options. In order to incentivize customers to the Cloud Paks, IBM has removed volume discount level pricing for the products that are also available in Cloud Paks. This goes for new license offerings as well as for renewals. The impact can be significant because the highest discount levels were approximately 20%. This now makes Cloud Paks financially more interesting compared to the old single license products.
It is very simple, Cloud Paks are bundles of multiple IBM core products. There are multiple Cloud Paks available. For example, the Cloud Pak for Integration includes MQ, APP Connect, API Connect along with other integration products. A Cloud Pak is licensed per Virtual Processor Core (VPC) and each product has a conversion ratio value. Let’s have a look at the conversion ratios for MQ:
One VPC Cloud Pak equals
MQ - Non Prod.
MQ Advanced - Non Prod.
The interesting thing is that Cloud Paks have different calculation values for production and non-production environments. For multiple products, including MQ, a non-production SKU isn’t available in the single product license model. This means you will only receive a non-production discount if you are able to do a successful negotiation. This requires good knowledge of IBM’s processes and negotiations. Many customers weren’t able to negotiate successfully resulting in high yearly costs, which makes an upgrade to a Cloud Pak a financially attractive alternative. Another advantage is the flexible model. If you are planning to decommission a product you are able to use those licenses for another product in the bundle.
What does this mean for a customer?
A customer wanting to adopt a new IBM solution should always consider the Cloud Pak option regardless of their intention to actually use OpenShift or the flexibility. Why? It is the way forward for IBM. While the other options remain available it is very likely you can get a better price for a Cloud Pak option and it could very well be that IBM will remove the availability of the “old” models eventually.
On the other hand, many existing customers aren’t ready to transition to this model. For those customers the pricing structure of their preferred model changes, which can have a major impact. Additional new license demands will be 10% to 20% more expensive depending on the discount level (RSVP-Level) of the contract. A renewal will also be more expensive, which IBM compensates with a special bid. However, if you are experienced with IBM’s renewal process you’ll know this gives challenges with the yearly indexation and partial renewals. It takes a lot of experience to deal with these challenges and end up with the desired renewal costs.
More to come?
Cloud Paks are the strategic way forward and it is expected that more Cloud Pak bundles or equivalents will be released. IBM will also discourage customers to purchase the old single product licenses or renewals. Another development is that IBM will promote term license models. This gives customers more flexibility, but also guarantees recurring revenue for IBM. On top of that, third party support providers can’t take over these contracts because a customer doesn’t have ownership of a license.
These changes are a logical consequence of the current market situation. IBM is still very strong with their customer base with high quality and reliable software and cloud offerings, which have very high security standards. However, the very large account set below the top accounts are still mostly on the legacy applications from IBM and are only making their first steps in their cloud strategy. The question is whether these changes can convince this group of customers to go with the IBM strategy. Or will it play into the hands of the competition?
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