IBM

Mainframe Monopoly

IBM’s record of run-ins with antitrust authorities predates even the electronic computer itself, stretching as far back as the days of its dominant mechanical punch card systems.

Consent decrees and other legal actions in the 1950s, 1960s, and 1970s were important chapters in the evolution of high-tech markets. In fact, it was only when IBM was prevented from tying its hardware to its software that independent software makers flourished and the modern computer industry as we know it was born.

Although the mainframe market is not perceptible to the average consumers, these large expensive computer systems power most fortune 500 companies, governments, and financial institutions. IBM plug-compatible mainframe (PCM) computers, which have been in use for over a half a century, are the most popular platform for business computing today. It is estimated that $5 trillion of corporate and government data and applications are stored on mainframes. They serve as the backbone for 70-80% of the world’s computer-based transactions involving ATM sessions, airline bookings, tax filings, health records, and other essential services.

IBM’s almost unassailable lead in mainframe computers led the Justice Department to open that market to competition in the 1970s through a series of actions that compelled IBM to make available technical specifications that would let other manufacturers’ computers exchange data with theirs. Details of interfaces and other technical data, including patented technologies, made possible a small but profitable aftermarket in IBM-compatible mainframes and accessories.

The exit of Fujitsu and Hitachi from this market in the late 1990s left IBM almost alone. It stayed that way until the early 2000s, when Platform Solutions, Inc. began work on servers based on Intel microprocessors that, despite their low cost, could mimic the behavior of significantly more expensive IBM mainframes.

Given the legal assurance provided by the agreements between IBM and Justice Department, PSI repeatedly requested copies of IBM’s operating system and certain technical information on reasonable and non-discriminatory terms; however, IBM refused. Rather than recognizing the legal obligations still incumbent upon it, IBM claimed it had no responsibility to license either operating systems or patents to PSI. For years IBM declared its willingness to license any patent in its portfolio on reasonable and non-discriminatory terms. Interestingly enough, it made similar promises to PSI in 2001, 2003, and 2004.

IBM reneged on that promise in 2006, and a short time later filed suit against PSI. IBM asserted that licenses PSI had already purchased from Amdahl, a division of former mainframe competitor Fujitsu, violated licenses for IBM intellectual property. The November 2006 suit was met with a countersuit by PSI that laid out the anticompetitive impact of IBM’s actions in plain terms. Instead of letting the legal proceedings play out, IBM decided that it was in their best interests to purchase one of their last remaining competitors in the mainframe arena. In early July, IBM announced they had purchased PSI in a deal that was structured to avoid specific thresholds that would trigger an automatic antitrust review. In return PSI dropped its lawsuit and withdrew its complaints to regulatory agencies.

Despite PSI’s disappearance, the European Commission announced that they would continue their investigation of IBM. Shortly thereafter, T3 Technologies, another small mainframe competitor to IBM, announced that they were in the process of filing a formal complaint against IBM in Europe for the same type of behavior alleged by PSI. T3’s complaint corroborates PSI’s accounts of IBM’s anticompetitive actions. As a former IBM reseller and partner, T3 Technologies started out on friendly terms with IBM; however, when T3 tried to branch out and provide smaller products for the lower end of the market, IBM turned hostile, failed to renew T3’s patent licenses, and threatened T3’s customers with lawsuits.

It is important for regulators to pay close attention to this vital market. Although this case may seem relatively unimportant, its ramifications are far reaching. IBM’s actions have walled off vital corporate and government applications and data from the rapidly evolving high-end server market. Having large swaths of mission critical data locked into one platform presents a wide array of problems and retards innovation. It is vitally important that competition not be illegally snuffed out in this critical economic sector.

IBM Background Resources

IBM

Mainframe Monopoly

IBM Background Resources

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