IBM is rapidly transforming after their acquisition of Red Hat. This transformation is necessary for IBM to survive in a future where they have to compete with Microsoft, Amazon, and Google in the hyperscale cloud world. In 2020 IBM announced a drastic revision of its pricing structure for legacy single-product licenses which significantly impacts you as an IBM customer. This revision is designed to stimulate your demand for 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 emphasizes the ambitious goals of IBM as Red Hat’s portfolio will play a major role in IBM’s hybrid cloud strategy going forward.
It is not difficult to see 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 one cloud to another. This task is simplified if applications are “containerized” which is 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 its legacy software in new bundles and included OpenShift in these bundles for this exact reason.
Paving the Way forward with Cloud Paks
The new bundles are called “Cloud Paks” and are the way forward for most of IBM’s software offerings, bringing us to the reason for the price change of the legacy license options. In order to incentivize customers to start making use of Cloud Paks, IBM has removed volume discount level pricing for the products that are also available in the Cloud Paks, both for new license offerings and for renewals. The impact of this change could be significant since the highest discount levels were approximately 20% whichmakes Cloud Paks financially more interesting compared to the old single-license products.
What is a Cloud Pak?
It is very simple: Cloud Paks are bundles of multiple IBM products. There are multiple Cloud Paks available. For example, the “Cloud Pak for Integration” includes the IBM products 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:
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 whether the intention is to actually use OpenShift or to make use of the flexibility of the model. Why? It is the way forward for IBM. While other options remain available, it is very likely you can get a better price for a Cloud Pak option. In addition, it is expected 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. This change 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 so-called “special bid”. However, if you have experienced IBM’s renewal process before, you’ll know of the challenges with the yearly indexation and partial renewals. It takes a lot of experience and insights to deal with these challenges and end up with the desired renewal costs.
Is there More to Come?
Cloud Paks are the strategic way forward and it is expected that more Cloud Pak bundles, or equivalents, will be released over time. It is also likely that customers will be discouraged from purchasing the old single-product licenses or to renew single IBM products. Another development we see is that IBM is promoting term license models. This gives customers more flexibility but is also a guarantee for recurring revenue. On top of that, third party support providers can’t take over these contracts because the 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 and high security standards. Nevertheless, the majority of IBM’s large accounts are still on the legacy applications and are only taking their first steps in their cloud strategy. The question is whether these changes will convince them to go with the new IBM strategy. In case you need support to understand your current licensing, don’t hesitate to reach out to us.