On the last day of the Bush administration, a U.S. company ironically feels compelled to go to Europe to seek the antitrust redress unavailable for last eight years in the United States. In reaction to news of the antitrust lawsuit filed against IBM in Brussels today, a tech association that has historically advocated for competition policy is asking the incoming Obama administration to direct the FTC and the DOJ to once again be watchdogs to preserve competition in the technology sector.
IBM has been accused of reverting to its past illegal practices by T3 Technologies, one of the last standing competitors to IBM in the mainframe marketplace. T3 filed a formal antitrust complaint today against IBM with the European Commission (EC) alleging anticompetitive conduct. They accuse IBM of “tying” — making the purchase of their mainframe operating system contingent on the customer also purchasing IBM’s hardware. The suit also accuses IBM of attempting to block interoperability to prevent current customers from moving applications and data to other platforms.
“This filing is so indicative of the competition enforcement vacuum we have had, that on the very last day of the Bush administration yet another company had to go file an antitrust case overseas because U.S. antitrust authorities have been unreliable for the past eight years,” said Ed Black, President and CEO of the Computer & Communications Industry Association.
“Preserving competition in the mainframe marketplace should be a priority of the new administration because the costs impact all Americans as consumers and as taxpayers who must foot the bill for all the government computer systems running on IBM mainframes,” Black said.
Some History on IBM
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. By IBM’s own estimates, $5 trillion of corporate and government data and applications are stored on mainframes. Mainframe computers are 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. It is vitally important that competition not be illegally snuffed out in this critical economic sector.
As a result, IBM’s market power is tangible. CCIA, which has been an antitrust advocate for 35 years, says prices for mainframes, software and consulting services from IBM have remained higher than costs for other open platforms based on UNIX, Linux or Windows, which have fallen over the years. The price for 1 gigabyte of mainframe memory is $8,000-10,000 while the price for 1 gigabyte of memory for Intel or AMD-based servers running Linux or Windows is less than $100. While prices throughout the computer industry fall, IBM is able to raise the cost of mainframe solutions 10-15% annually.
“IBM is able to leverage its large customer base and the high costs associated with switching off the platform to price gouge its locked-in customer base, which includes major financial institutions, Fortune 500s, governments and non-profits around the world. Currently, the evolution of computing power has made it possible for other platforms to handle the loads placed on IBM mainframes. However, IBM’s anticompetitive campaign against businesses and organizations seeking interoperability and migration options has given its customer base no viable alternatives. This campaign has included lawsuits and threats against companies that threaten to break its hold on the mainframe. In some cases, IBM has turned to the outright acquisition of competitors in deals structured to avoid thresholds that trigger antitrust scrutiny.”
The process of “etying” – the purchase of software to hardware – is forbidden by antitrust law when companies possess the type of market power IBM currently exhibits in the mainframe market. In fact, this behavior has gotten IBM into trouble before with antitrust enforcers. IBM has a long track record of anticompetitive behavior dating back to the 1950s and their practices surrounding early punch-card electronic accounting machines.
In a consent decree with the U.S. Department of Justice, IBM agreed to cease tying of their software and services to the purchase of IBM hardware. This helped spur competition and innovation in both the hardware and software markets and paved the way for the modern computer industry. When the Justice Department lifted IBM from the consent decree in 1997, they specifically warned the company that the terms of the decree would be revisited if IBM resumed their tying practices. No one expected that antitrust oversight would evaporate in the next administration.
“When it comes to antitrust violations, IBM has demonstrated that they are an unrepentant recidivist. IBM’s actions are clearly in violation of Europe’s Article 82 and antitrust statutes in the United States. It is imperative that antitrust authorities in both jurisdictions take note of IBM’s anticompetitive actions and act accordingly,” Black said.
T3 Technologies Inc. is a US-based computer supplier, which specializes in building high-quality, lower-cost mainframe solutions. With over 15 years of experience in the mainframe market, T3 has sold mainframes to 1,000 customers in 28 countries. Its offerings are based on commodity hardware using innovative software technologies that allow mainframe system software and applications to run unmodified on its substantially lower-cost platforms. T3 is the last remaining manufacturer of IBM plug-compatible mainframes outside of IBM.
Mainframe Marketplace History
This complaint comes a little more than a year after PSI filed a complaint with the EC accusing IBM of engaging in similar anticompetitive behavior to what T3 is a contending. However, IBM purchased Platform Solutions instead of risking an adverse antitrust decision that could loosen their lock on the lucrative mainframe.
“Although the mainframe marketplace is opaque to ordinary Americans, it remains a vital behind-the-scenes component of the U.S. and world economy,” Black said. “The world can ill afford to let a huge corporation, no matter how flashy their PR campaigns, hold so many crucial industries and government institutions hostage with a covert anticompetitive campaign aimed at maintaining their exorbitant prices. The worldwide recession makes this matter more urgent.”
The fate of this ruling is all the more critical given that T3 is among the last standing mainframe competitors to IBM. In July 2008, IBM absorbed Platform Solutions Inc., which had filed a similar lawsuit in Brussels. That suit was pending when IBM bought PSI last year.
“The ramifications of the Commission’s actions will reverberate well beyond the walls of tiny T3. Without action by the European Commission, competition in the sector could be completely extinguished. But, more importantly, the hope for future competition will be snuffed out as well. IBM mainframes are positioned to become a critical underlying component of “Cloud Computing,” which is likely to be the next groundbreaking paradigm shift in IT and computing. It is important to handle this problem now before IBM and its proprietary mainframe become the de facto standard at the heart of the future of computing,” Black said.
In order to provide usable solutions that can interoperate across vendors, customers have called on Cloud Computing solution providers to adopt industry standards and enable seamless interoperability across all solutions. While IBM has promoted itself as a proponent of open standards and interoperability, its actions in the mainframe space have demonstrated that it will use any tactic to keep the mainframe platform closed and exclusive to IBM. However, it is in the best interests of business and government customers around the world to ensure that not only is the traditional mainframe market opened up to fair competition but future mainframe solutions be allowed to flourish and not be constrained by IBM’s desire to extend its monopoly position into the Cloud Computing space.