IBM Passport Advantage Software Virtualization Capacity Subcapacity Licensing

IBM Passport Advantage Software Name change to “Virtualization Capacity” § In recognition of the use of the word “Virtualization” becoming commonplace in the industry, IBM is changing the name of it’s offering from “Subcapacity” to “Virtualization Capacity” § You should expect these names to be used interchangeably for a period of time, after which “Sub-capacity will be phased out in favor of “Virtualization Capacity” 2 IBM Internal Use Only © 2008 IBM Corporation

IBM Passport Advantage Software Agenda § Background 4 Technology 4 Competitive landscape § IBM licensing strategy 4 Capacity licensing principles 4 Processor Value Units (PVUs) 4 Virtualization Capacity § Licensing examples 4 General, VMware, and IBM Power. VM § Licensing requirements 4 Summary 4 IBM License Metric Tool (ILMT) § Selling Virtualization Capacity licenses § Offering next steps 3 IBM Internal Use Only © 2008 IBM Corporation

IBM Passport Advantage Software Background - Technology § PA Software Key Facts – 54% of distributed revenue plan is PVU based – 60% of PVU based revenue is on x 86 (Intel / AMD) platform • 25% on IBM Power Systems – 70% of x 86 servers are 2 socket variety § Processor Market Facts – Intel new quad-cores will have 2 X capacity vs older quad-cores, GA’d in Nov ‘ 06 – Customers require fewer cores for a constant workload – Intel moving to quad-core exclusively on 2 socket servers, to GA in 4 Q 08 or 1 Q 09 § Virtualization Market Facts – – Customers virtualize to consolidate servers, and save electricity, space, admin cost x 86 virtualization is growing 2 X faster than RISC/Unix VMware holds 80 -85% market share for x 86 server virtualization Virtualization will drive processor utilization higher, historically at only 5 -10% Capacity and utilization increasing = footprint compression risk 4 IBM Internal Use Only © 2008 IBM Corporation

IBM Passport Advantage Software Background – Key Middleware Competitors Capacity Licensing Price Metric % middleware revenue Microsoft Oracle IBM One license per socket Fractional licenses per core PVU licenses per core <25% Majority Not eligible Yes, limited to hard partitioning only Yes, comprehensive (hard and soft) One socket minimum Not eligible (Oracle. VM only) One core minimum License Keys, with audit threat Trust model, with audit threat ILMT required, with audit threat Eligible Virtualization: RISC/Unix VMware on x 86 Compliance 4 MS minimum license is one socket, and number of offerings on per socket limited • Also, MS runs on x 86 only, and majority of middleware is priced per user (<25% per socket) 4 Oracle allows virtualization on hard partitioning only, and does not allow VMware IBM more comprehensive and granular = opportunity to win 5 IBM Internal Use Only © 2008 IBM Corporation

IBM Passport Advantage Software Licensing is based on Processor Capacity Available Licensing Principles 4 Price scales to value 4 Balance precision with simplicity 4 Price Competitively Price Processor capacity available (Number of cores X PVUs per core) 4 Why not charge based on processor usage or utilization? 4 A transition to processor usage or utilization would require prices to be reset based on average system utilization 4 Average system utilization is estimated @ 5 -20%, but every customer is different 4 Customers with higher than average utilization would pay more, and visa versa PVUs balance precision with simplicity 6 IBM Internal Use Only © 2008 IBM Corporation

IBM Passport Advantage Software Terminology § Multi-core chips have more than one processor core on the socket Single-core Processor Core 1 Dual-core 1 2 Chip Socket IBM requires PVU licenses per Core Oracle requires fractional licenses per Core Microsoft requires one license per socket IBM continues to license based on the number of cores 7 IBM Internal Use Only © 2008 IBM Corporation

IBM Passport Advantage Software Processor Value Units (PVUs) § Each middleware program has a unique price per PVU § PVUs are transferable among systems, by product, within the enterprise § Acquire the appropriate number of PVUs for each processor core Example PVU entitlements Processor Technology per processor core * IBM Power 6 cores 120 All Single-core and most RISC dual-core 100 x 86 Dual or Quad-core 50 * See PVU website for complete list of PVUs by processor technology § Provides flexibility and granularity 4 Fair price per core for software value on multi-core technology 4 Continue to deliver software price performance improvements on new processors 4 License transferability across distributed systems 4 Enables virtualization capacity licensing at processor core PVUs provide flexibility through granularity 8 IBM Internal Use Only © 2008 IBM Corporation

IBM Passport Advantage Software Virtualization Capacity Licensing § Full Capacity Licensing – Customers acquire licenses for all the physical processor cores on the server § Virtualization Capacity Licensing – Customers acquire licenses for the lower of the Virtualization Capacity or the Full Capacity of the server, or group of servers (eg. VMware Cluster) § Customers need flexibility to license to the processor capacity available – Consolidate on large servers or server clusters to save electricity, space, admin – Minimum x 86 server size growing with multi-core: History of 2 socket X 86 servers 2004/5 Single-Core 2006/7 Dual-Core 2008/9 Quad-Core (100 PVUs p/core) (50 PVUs p/core) 2 cores 200 PVUs 4 cores 200 PVUs 8 cores 400 PVUs – Without virtualization capacity licensing, customers will be forced to acquire 400 PVU licenses, even if they only need 4 cores of capacity Virtualization capacity reduces the minimum capacity to license 9 IBM Internal Use Only © 2008 IBM Corporation

IBM Passport Advantage Software July 1, 2008 Announcement Highlights § Prior to July 1, 2008 § Sub-capacity available for some RISC/Unix IBM, HP, and Sun technologies § Customers must agree to terms, including use of ITLCM tool § Use of ITLCM temporarily suspended in April 2007 § Registration and quarterly reporting to IBM was eliminated in Nov, 2007 § July 1, 2008 Announcement Highlights § Eligibility for many VMware virtualization technologies § VMware ESX (current versions) for single server and server cluster § VMware VMotion mobility functionality for ESX § Eligibility for new Power VM technology § Power. VM multiple shared pool functionality § Announced availability of ILMT, install and business rules simplified (see page 19) Technology eligibility continues to increase, and ILMT simplified 10 IBM Internal Use Only © 2008 IBM Corporation

IBM Passport Advantage Software Virtualization Capacity Licensing § General § Equivalency concept between Virtual Cores and Physical Cores § Capacity of Virtual Cores can not exceed capacity of Physical Cores § Obtain PVU licenses based on Virtual Capacity, essentially the number of virtual cores restricted to a ‘subset’ of the server § Subset = LPARs, Partitions, Virtual Machines (VMs) § Licensing rules for each unique Virtualization Technology available on website § x 86 (Intel / AMD) virtualization technologies § Licensing simplicity is the top priority, given large volumes of smaller servers § For multi-core, count the number of virtual cores X 50 PVUs per core § RISC/Unix virtualization technologies § Licensing rules allow customers to optimize larger systems § Shared processor pools, dynamic partitions, micropartitions License to the lower of: Virtual Capacity or Full Capacity 11 IBM Internal Use Only © 2008 IBM Corporation

IBM Passport Advantage Software Full Capacity Example 1 Server 8 Physical Cores Server 1 Software Products MQ WAS 8 Physical Cores 4 Customers must acquire licenses for the Full Capacity (all physical processor cores) in the server available to the software products: Cores to License 12 Full Capacity MQ software 8 WAS software 8 IBM Internal Use Only © 2008 IBM Corporation

IBM Passport Advantage Software Virtualization Capacity Example (x 86 or RISC) 1 Server 8 Virtual Cores 8 Physical Cores Server 1 PAR 2 MQ MQ Software Products WAS Virtual Cores 4 Physical Cores 4 8 PAR (or VM) = Partition 4 Eligible Virtualization Technologies can be used to create ‘Partitions’ or ‘Virtual Machines’ (VMs) which restrict processor capacity (ie. virtualization capacity) available to a sub-set of the server or group of servers 4 License for the lower of Virtualization Capacity (using LPARs, Partitions, Virtual Machines) or Full Capacity available in the Server. PAR 1 PAR 2 Virtualization Capacity Full Capacity MQ software 4 4 8 8 WAS software 4 - 4 8 Cores to License 13 IBM Internal Use Only © 2008 IBM Corporation

IBM Passport Advantage Software VMware Virtualization Technology § Definitions (excerpt from website*) 4 v. CPU or Virtual CPU • Each Virtual Machine (VM) is assigned a v. CPU quantity • The processing capacity of a v. CPU cannot be more than one physical core • Each v. CPU is equal to one core for PVU licensing § Licensing Rules (excerpt from website*) 4 Single Server • License PVUs for the maximum number of v. CPUs (cores) in the VM(s) • Lower of the sum of v. CPUs or the Full (physical) Capacity of Server 4 Server Cluster (group of servers): • License PVUs for the maximum number of v. CPUs (cores) in the VM(s) • Lower of the sum of v. CPUs or the Full (physical) Capacity of Cluster * For complete licensing rules, visit the Virtualization Capacity License Counting Rules website Licensing simplicity for x 86 based Virtualization is the top priority 14 IBM Internal Use Only © 2008 IBM Corporation

IBM Passport Advantage Software Virtualization Capacity Example: VMware Server Cluster (this example is applicable for VMware Virtualization Technology only) 3 Servers 12 Virtual Cores 12 Physical Cores Physical Environment Virtual Machines VM 1 VM 2 VM 3 VM 4 Software Product MQ MQ 1 1 Virtual Cores (v. CPUs) 2 VM 5 Non. IBM 4 VM 6 Server 1 Non. IBM 2 4 cores Server 2 2 4 cores 12 Server 3 4 cores 12 Physical Cores 4 License for the Virtualization Capacity (v. CPU quantity in VMs) or Full Capacity available in a group of servers (Cluster) MQ software Virtual Cores 15 VM 1 VM 2 VM 3 VM 4 VM 5 VM 6 Virtualization Capacity Full Capacity 1 1 2 4 - - 8 12 IBM Internal Use Only © 2008 IBM Corporation

IBM Passport Advantage Software IBM Power. VM Virtualization Technology § License Rules (excerpt*) for Partitions, Shared Pools, and Micro-partitioning § for a dedicated LPAR, the highest number of cores allocated to the LPAR § for a Capped Partition, the highest amount of Entitled Capacity (EC) § for a Uncapped Partitions, the highest amount of VP (Virtual Processor Cores) § for a Shared Processor Pool, the lower of the sum of cores for each partition, or the processor core capacity of the shared pool § Aggregate fractional processor cores, apply shared pool capping rules, and round up at the server level to the next whole processor core § lower of the sum of the virtual cores or the server capacity * For complete licensing rules, visit the Virtualization Capacity License Counting Rules website Licensing rules allow optimization on larger RISC/Unix systems 16 IBM Internal Use Only © 2008 IBM Corporation

IBM Passport Advantage Software Virtualization Capacity Example: Power. VM Shared Pool (this example is applicable for IBM Power. VM Virtualization Technology only) 1 Server 16 Virtual Cores 8 Physical Cores Server 1 Software Products PAR 1 PAR 2 PAR 3 PAR 4 MQ MQ 4 4 4 License rule: the lower of the sum of each partition or the virtualization capacity of the shared pool 4 License rule: the lower of the sum of each shared pool or the virtualization capacity of the Server WAS Virtual Cores in Partitions 4 Virtual Cores in Shared Pool 4 6 Physical Cores Shared Processor Pool 8 4 License for the lower of the Virtualization Capacity based on number of virtual cores, the Virtualization Capacity of the Shared Pool, or the Full Capacity of the Server PAR 1 PAR 2 PAR 3 Sum of PARs 1 -3 Shared Pool Capacity PAR 4 Virtualizatio n Capacity Full Capacity MQ software 4 4 4 12 6 4 10 8 WAS software 4 - - 4 6 - 4 8 Cores to License 17 IBM Internal Use Only © 2008 IBM Corporation

IBM Passport Advantage Software Virtualization Capacity Licensing Requirements Summary § Most customers are using some virtualization already, not being aware of T&Cs. Have conversation with your customer, protect them from compliance issues § Customers must: § Agree to the terms of the Sub-capacity Attachment (see page 28) § Follow Virtualization Capacity License Counting Rules for applicable environment § Use Eligible Sub-capacity Products, with sub-capacity part numbers § Use Eligible Virtualization Technologies § Use Eligible Processor Technologies § Use the IBM License Metric Tool (ILMT) and maintain report documentation § Certain ILMT use exceptions may apply * Detail information for above requirements, including lists of eligible products and technologies, available on the PA Virtualization Capacity Licensing website IBM Internal Use Only You need to get familiar with these requirements 18 IBM Internal Use Only © 2008 IBM Corporation

IBM Passport Advantage Software IBM License Metric Tool (ILMT) § The simplified new ILMT is now available for use (see page 29 image of main menu) § Existing customers have until Nov 30, 2008, to install and begin using ILMT § Must promptly install new versions, releases, modifications § To order the ILMT no charge product, see page 30 § Benefits § Helps customers measure PVU licenses required, by software product § Can help customers maintain an audit ready posture § Essential for optimization of RISC/Unix virtualization technologies § Recommended for Full Capacity PVU environments § Mandatory for PVU Virtualization Capacity environments, except when: § ILMT does not yet support an eligible Virtualization Technology (eg. VMware) § Enterprise has fewer than 1, 000 employees and contractors worldwide § Full Capacity measurement of all sub-capacity servers is less than 1, 000 PVUs § Deployed Tivoli License Compliance Manager v 2. 3 (with 4 Q 08 Fix Pack) § For above exceptions, customers must count manually using IBM template § ILMT and/or Manual calculation records Use must. Only be maintained for at least 2 years IBM Internal Recommended for Full Capacity, Required for Virtualization Capacity 19 IBM Internal Use Only © 2008 IBM Corporation

IBM Passport Advantage Software Selling the value of Virtualization Capacity § New license sales § Some customers may want to buy Full Capacity for licensing simplicity § Sell customers the capacity they need, avoid excess license entitlements § Excess license entitlements this year, means fewer license sales next year § Sell the value of Virtualization Capacity by lowering the discount vs Full Capacity § Customers can save money on electricity, space, and administrator costs § Improve utilization of their hardware, fewer software licenses vs Full Capacity § License conversions from Full Capacity to Virtualization Capacity § Manage conversions carefully (see considerations on page 31) § Currently, conversions are no charge (note: excludes compliance audits) § However, if full capacity licenses were acquired with high discounts, try to sell the value of conversions with lower discounts on new license sales § As of July 1, ‘ 08, only sales reps can authorize conversions (see rules on page 32) § Note: sales rep authorization is void if compliance audit is pending or in process IBM Internal Use Only Sell higher value of Virtualization Capacity by lowering discounts 20 IBM Internal Use Only © 2008 IBM Corporation

IBM Passport Advantage Software Offering Next Steps Raise awareness / Communication § Improve Training for IBM sales and BPs IBM Software Products § Make all PVU based products eligible for Virtualization Capacity Licensing Technology § ILMT support for VMware by end of 1 H 09 § Make other important x 86 virtualization technologies eligible § Microsoft Hyper-V, Citrix Xen. Server § Add new technologies from IBM, Sun, HP Awareness and broadening the offering are the next steps 21 IBM Internal Use Only © 2008 IBM Corporation

IBM Passport Advantage Software Virtualization Capacity Websites: Internal and External Internal XL site Passport Advantage Virtualization Capacity (Sub-capacity) Licensing http: //w 3 -103. ibm. com/software/xl/portal/viewcontent? type=doc&src. ID=XT&doc. ID=Z 693913 I 54286 V 29 External site Passport Advantage Virtualization Capacity (Sub-capacity) Licensing http: //www-306. ibm. com/software/lotus/passportadvantage/subcaplicensing. html Internal/External Customers must: (2) - Agree to the terms of the Sub-capacity Licensing Attachment PDF - Use Eligible Sub-capacity Products, with sub-capacity part numbers PDF - Use Eligible Virtualization Technologies PDF - Use Eligible Processor Technologies - Use the IBM License Metric Tool http: //www-306. ibm. com/software/lotus/passportadvantage/ibmlicensemetrictool. html 22 IBM Internal Use Only © 2008 IBM Corporation

IBM Passport Advantage Software Backup 23 IBM Internal Use Only © 2008 IBM Corporation

IBM Passport Advantage Software x 86 Virtualization Revenue Growing almost 2 X Faster Source: William Blair & Company, Virtualization Industry Report, January 15, 2008 24 IBM Internal Use Only © 2008 IBM Corporation

IBM Passport Advantage Software Oracle’s Approach § Oracle approaches virtualization as an advanced form of partitioning – Characterized as Hard Partitions vs Soft Partitions – “…soft partitioning is not permitted as a means to determine or limit the number of software licenses required for any given server. ” Sources: http: //www. itweek. co. uk/itweek/news/2196283/virtualisation-pricing http: //www. oracle. com/corporate/pricing/partitioning. pdf 25 © 2008 IBM Corporation

IBM Passport Advantage Software Oracle’s Approach Sub-Capacity § Hard Partitioning – Static Hard Partitioning Full Capacity – Sun Dynamic System Domains (DSD w/ DR) – HP Integrity Virtual Machines* – HP Secure Resource Partitions* – Sun Solaris 10 Containers* – AIX LPAR and DLPAR – Micro-Partitions* – HP v. Par, n. Par § Soft Partitioning – Solaris 9 Resource Containers – AIX Workload Manager – HP Process Resource Manager – Affinity Management – VMware – Oracle VM * capped partitions only * Oracle appears to allow sub-capacity pricing in soft partitioning with their Oracle VM 26 * * Source: http: //www. oracle. com/corporate/pricing/partitioning. pdf © 2008 IBM Corporation

IBM Passport Advantage Software Microsoft’s Approach § Microsoft provides sub-capacity pricing across server portfolio – Operating systems priced per physical or virtual instance – Per Processor-based products are not capped at physical server • Minimum size of capacity to license is one socket, not granular enough • Each v. CPU for VMware requires one socket license Source: http: //www. microsoft. com/virtualization/licensing. mspx 27 © 2008 IBM Corporation

IBM Passport Advantage Software Sub-capacity Attachment § Ensure customer has accepted PA sub-capacity terms § Use Fast. Pass to check: https: //fastpass. lotus. com/fphome. nsf/default? openform (eg. on p 34) § If not, provide customer with current Sub-capacity Attachment § http: //www-306. ibm. com/software/lotus/passportadvantage/subcapacityattachments. html § Until revised Attachment becomes available, you may need to point customers to: § History of 2007 suspension of terms (click here) § November 2007 announcement letter (US ALtr #207 -173 dated 11/06/07) § July 2008 announcement letter (US ALtr #208 -197 dated 07/01/08) § Acceptance of sub-capacity terms for PA customers is accomplished by (re)-submission of PA Enrollment Form (for PA Express, all transactions carry sub-capacity terms) § http: //www-306. ibm. com/software/lotus/passportadvantage/paenrollments. html § For more info: http: //www-306. ibm. com/software/lotus/passportadvantage/howtoenroll. html § Revised Sub-capacity Attachment (Z 125 -7174 -02) will be available soon § English version available now via special bid approval (Sub-capacity Licensing/Somers/IBM@IBMUS) § Translated versions (full set of additional languages) available for PA by end of August § Continue using current version in interim IBM Internal Use Only as soon as possible § SAP update for Passport Advantage Express available § 90 day notification of new terms to all existing PA customers who have accepted sub-cap terms 28 IBM Internal Use Only © 2008 IBM Corporation

IBM License Metric Tool Main Menu 29 © 2008 IBM Corporation

IBM Passport Advantage Software ILMT Ordering § While ILMT is required for many sub-cap customers, any active PA/PAE customer can order the tool to monitor both sub and/or full capacity server environments P/N Part Type Description D 561 HLL License IBM License Metric Tool Sub-capacity Processor Value Unit License and Software Subscription and Support 12 Months E 027 NLL Renewal IBM License Metric Tool Sub-capacity Processor Value Unit Software Subscription and Support Annual Renewal D 561 ILL Reinstatement IBM License Metric Tool Sub-capacity Processor Value Unit Software Subscription and Support Reinstatement 12 Months BJ 0 P 7 ML Media Pack IBM License Metric Tool V 7. 1 Media pack -- Multilingual § Original ITLCM for IBM SW part numbers above have been renamed to ILMT – no need for existing customers to migrate to new part numbers – they can now download ILMT after 07/03/08 and/or order new ILMT media pack P/N after 08/01/08 § Part number details also available via DSW Price Book and PA Online § https: //w 3 -117. ibm. com/software/sales/passportadvantage/dswpricebook/Pb. Cfg. Internal? E 0=0 § http: //www-306. ibm. com/software/lotus/passportadvantage/pacustomers. html IBM Internal Use Only § CF/CSO will no longer force the addition of ILMT to sub-cap part number orders 30 IBM Internal Use Only © 2008 IBM Corporation

SWG Sub-capacity Licensing Announcement Seller Considerations for Sub-Cap Conversions Conversion is not a customer entitlement… § July 1, 2008 announcement retracted previously announced conversion policy, now limited to special circumstances only § Software sellers have the delegation but should consider circumstances for which original full cap license entitlements were sold before offering conversion, for example: – Conversion could result in excess entitlements, impacting future sales • • Original deal sold as full cap with deeper discount because customer really only needed sub-cap i. e. customer needed four cores worth of PVUs on their 8 -way server but we sold them eight @ 50% discount to avoid sub-cap terms and/or the prior tool (ITLCM) – S&S renewal discounts should be reduced in recognition of higher value of sub-cap flexibility, especially if original discounts were inflated to avoid sub-cap – Customers using full cap license entitlements in sub-cap environments without sub-cap terms are out of compliance • Conversion is not an amnesty tool, engage your compliance sales rep for guidance § AYCE true-ups should be based on PVUs deployed in sub-cap environment – Ideally, original contract was based on Sub-Capacity offering terms, however – If not, do not over-entitle by giving customer full cap entitlement at true-up -- instead leverage subcap terms 31 © 2003 IBM Corporation

SWG Sub-capacity Licensing Announcement Passport Advantage Sub-Capacity Conversion Process CONVERSION – PA/PAE CUSTOMERS § Conditions for Conversion Customers who wish to convert existing full capacity license entitlements to sub-capacity terms must meet the following conditions: 1) Agree to IBM International Passport Advantage Agreement Attachment for Sub-Capacity Terms (Z 125 -7174), and comply with eligible products and technologies 2) Complete hardcopy enrollment forms (PA only) and IBM Sales or BP must submit to CF/CSO by fax. 3) Be current on Software Subscription & Support for full cap entitlements being converted to sub-cap 4) Customers who are not in compliance or who have been notified of or are actively involved in an IBM compliance audit are not eligible for conversion 5) No refunds, rebates, or credits for full capacity licenses that are not deployed after conversion are allowed Ordering Resources § IIPAA Attachment for Sub. Capacity Terms and Enrollment Forms: IBM reps: Xtreme Leverage; BPs: www. ibm. com/software/passpor tadvantage and select “Passport Advantage Program Page” from right navigation bar § Check customer’s enrollment status or ILMT status by calling your CF/CSO contact § Sub-Capacity Conversion Form: § Process Steps for Conversion 1) IBM Sales Rep completes Sub-Capacity Conversion Form and submits to CF/CSO 2) CF/CSO will convert products to sub-capacity part numbers 3) CF/CSO will issue new license Proof of Entitlements to customer for reduction in full capacity entitlements and increase in subcapacity entitlements 4) For customer’s initial sub-capacity order, IBM Sales or BP places order for ILMT (D 561 HLL) § Any exceptions to the above must be approved by SWG WW Pricing (via Sub-capacity Licensing/Somers/IBM@IBMUS) 32 © 2003 IBM Corporation

IBM Passport Advantage Software Eligible Virtualization Technologies § A high level summary list of Eligible Virtualization Technologies: § IBM Power Systems, System p, System i Power. VM (with AIX and i. OS) § LPAR, DLPAR, Shared Processor Pools, Micro-Partitioning § IBM System z (with Linux): LPAR, z. VM § Sun Micro and Fujitsu servers (with Solaris) § Dynamic System Domains, Containers/Zones inside Dynamic System Domains and node OS § HP Integrity and 9000 Servers (with HPUX): n. Par & v. Par & Integrity VM § x 86 (Intel / AMD) based servers, using the following virtualization technology: § VMware Single server, Server Cluster, and VMotion IBM Internal Use Only For a detail listing of Eligible Virtualization Technologies, see website 33 IBM Internal Use Only © 2008 IBM Corporation