IBM (NYSE:IBM) sold off large portions of its hardware business in 2014. The company no longer sells the Intel-based servers that dominate the data center, and it no longer manufactures its own processors. Despite this shift away from hardware, IBM remains committed to its mainframes, the hulking, expensive computer systems that centralize computing instead of distributing it across a large number of inexpensive Intel-powered machines.
Earlier this month, IBM announced its newest mainframe, the z13. IBM spent $1 billion and five years designing the system, which it calls the most powerful and secure mainframe ever built. Aimed squarely at providing the back end necessary to process the deluge of transactions made from mobile devices, the z13 can process 2.5 billion transactions per day, offering both real-time encryption and embedded analytics. The system's price tag wasn't disclosed, but IBM's high-end mainframes can cost hundreds of thousands of dollars or more.
With vast arrays of relatively cheap Intel servers becoming the norm, why is IBM still cranking out hugely expensive mainframes?
The mainframe is far from dead
Many companies still rely on IBM's mainframes, and it's not just the hassle of switching to an alternative that keeps them with Big Blue. Mainframes are built specifically for mission-critical applications, such as processing banking transactions, where both reliability and security are paramount. The systems are designed with redundancies and backups built in: if a component fails, it can be swapped out without affecting the system. Due to this design, IBM's mainframes have a mean time between failure measured in decades.
IBM's mainframes have also kept up with the times. The systems have long supported Linux, and they also support OpenStack, a popular open-source cloud computing platform. This means a private cloud can be run directly on a mainframe, with the z13 supporting up to 8,000 Linux virtual machines simultaneously. IBM claims that running a private cloud on the z13 comes with a 49% lower total cost of ownership than a comparable private cloud running on an array of Intel servers.
While mainframes have a higher up-front cost than Intel servers, given the right workload they can deliver significant savings. A recent New York Times article cited Radixx International, which operates the computerized reservation systems for 40 small and midsize airlines, as an example of a company that saved money by switching to IBM mainframes. The company's CEO said the total cost of ownership of the new mainframes is about 50% lower than that of the company's sprawling server farm.
Nationwide Insurance also saved money with IBM's mainframes. In 2005, the company was faced with the prospect of building a new data center in order to accommodate growth. Instead, it switched to using the virtualization technology available on IBM's mainframes, allowing Nationwide to save millions of dollars per year. Additional cost savings were achieved through the reduced need for floor space, networking hardware, etc..
Companies have shifted from managing their own infrastructure to outsourcing to public clouds operated by companies such as Amazon.com. However, mission-critical workloads that typically run on mainframes aren't a good match for public clouds, because mainframes are far more reliable. Public clouds such as Amazon's Amazon Web Services sometimes undergo unscheduled outages, and often the system must be rebooted in order to apply security patches or upgrades. For companies that require 100% uptime, public clouds simply aren't feasible.
Most companies that buy a new z13 mainframe will likely be existing IBM customers upgrading their systems, but IBM might win some converts as well. While mainframe hardware sales account for a small portion of IBM's revenue, the software and services surrounding the mainframe account for as much of 35% of the company's operating profit, according to an analyst from Bernstein Research.
IBM's mainframes play a key role, one that is extremely unlikely to be usurped by cheap commodity hardware. Industries continue to rely on mainframes because they are genuinely the best option, in terms of reliability, security, and often cost. IBM's $1 billion investment in the z13 aims to keep it that way.
Warren Buffett: This new technology is a "real threat"
At the recent Berkshire Hathaway annual meeting, Warren Buffett admitted this emerging technology is threatening his biggest cash-cow. Buffett's fear can be your gain. Only a few investors are embracing this new market, which experts say will be worth over $2 trillion. Find out how you can cash in on this technology before the crowd catches on, by jumping onto one company that could get you the biggest piece of the action. Click here to access a free investor alert on the company we're calling the brains behind the technology.
Timothy Green owns shares of International Business Machines. The Motley Fool recommends Amazon.com and Intel. The Motley Fool owns shares of Amazon.com, Intel, and International Business Machines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.