Reading the IBM-DoJ Tea Leaves

Does the U.S. Justice Department's inquiry into IBM's activities mean Big Blue is too dominant in the mainframe market?

Earlier this month, IBM Corp. received some decidedly unwelcome attention. Long a dominant force in the mainframe market, Big Blue might finally have become too dominant.

The United States Department of Justice (DoJ) is now looking into claims that IBM abused its dominant position in the Big Iron space to effectively lock out potential competitors. The DoJ took the action at the behest of the Computer and Communications Industry Association (CCIA), which -- according to news reports -- was itself acting on behalf of at least one of Big Blue's competitors.

IBM has long had frosty relations with its competitors in the plug-compatible mainframe (PCM) segment. In late 2006, for example, Big Blue balked when PCM specialist Fundamental Software Inc. (FSI) -- developer of a prominent mainframe emulation offering called FLEX-ES -- wanted to renew its licenses for several of IBM's mainframe patents, including (crucially) patents for both 31-bit and 64-bit operation.

IBM declined to renew FSI's 31-bit patent and flatly rejected its application for a 64-bit patent. As a result, FLEX-ES -- which Big Blue had actively promoted (as an affordable mainframe emulation solution) in conjunction with its PartnerWorld program -- lapsed into limbo. That left users in the lurch (see http://esj.com/articles/2007/04/24/emulation-licensing-problems-put-flexes-shops-in-limbo.aspx).

Ironically, prior to that point, IBM didn't seem to have had much of a problem with FSI or FLEX-ES. However, in late 2006, a new PCM player, Platform Solutions Inc., appeared. PSI marketed a PCM technology based on hardware from Hewlett-Packard Co. (HP). (Fundamental Software used IBM's own System x hardware to power its FLEX-ES mainframes.)

On top of that, PSI had an oblique connection with Microsoft Corp.'s mainframe migration program.

IBM wasn't amused. It filed suit against PSI, alleging patent infringement, at about the same time that it declined to renew FSI's patent licenses. Insiders suggestedthat it was precisely IBM's suit against PSI that convinced Fundamental Software to cover both its 31- and 64-bit bases. Nor could Big Blue credibly license its mainframe patents to Fundamental Software while simultaneously proceeding with its lawsuit against PSI for patent infringement.

Then, as now, the principals aren't talking (see http://esj.com/articles/2007/05/01/ibms-fundamental-impasse-at-least-both-sides-are-still-talking.aspx). What's intriguing is that FSI and PSI -- which IBM acquired last summer -- aren't the only mainframe emulation or PCM vendors to have locked horns with IBM.

Earlier this year, PCM competitor (and longtime IBM reseller) T3 Technologies Inc. filed a complaint against Big Blue with the European Commission (EC), alleging that IBM had stymied T3's efforts to expand into the mainframe hardware business by "tying" sales of its mainframe software (including z/OS and z/VM) to the purchase of System z hardware. The result, T3 alleged, was that it couldn't find any takers for its PCM systems. T3 had earlier filed suit against IBM in U.S. district court; a federal judge dismissed that suit earlier this month.

Sources say the DoJ is merely investigating IBM's behavior in the mainframe market. Not surprisingly, industry watchers seem to be taking a wait-and-see approach to the news. All the facts are far from in, after all, and -- although Big Blue has jealously guarded its mainframe patents (and litigated to protect its mainframe customer base) -- IP policing isn't in itself an anticompetitive activity.

Nor for that matter is T3 a completely benign competitor, notes industry veteran Charles King, a principal with consultancy Pund-IT.

"[T3] … made headlines last November when it announced an undisclosed investment by Microsoft to help support the company's development of mainframe-to-x86 migration tools and solutions," he points out. "Reciprocally, T3's home page offers a link to Microsoft's Mainframe Modernization site," King continues, observing that Microsoft had made a similar investment in PSI.

King says the inquiry into IBM's mainframe market monopoly might just be a case of the DoJ's flexing its muscles -- after eight relatively somnolent years.

"That the Obama DOJ is acting more proactively is hardly a surprise given the strong support for business and market regulations voiced by the President and his supporters … and the hash of the economy and markets that unregulated entities recently wrought," he writes.

"However, it also illuminates the degree to which competition and antitrust could well become moving targets which measurably increases the challenges companies currently face," King continues. "[T]he complaints against IBM could eventually qualify as a litmus test of the Obama administration's broader attitudes toward business and market competition. If the DOJ acts in a careful, measured way it could repair a reputation damaged by eight years of laissez faire excesses."

King is skeptical of the CCIA's claims, which he labels "essentially baseless."

Longtime industry watcher Joe Clabby, for his part, is downright hostile.

"For the DOJ to make an anti-trust case, it will need to prove that mainframe customers are truly locked in [to IBM]," says Clabby, a principal with Dubai-based Clabby Analytics. He says there's healthy competition in the overall server market -- where Big Blue controls about one-third of revenues -- and argues that there's no lack of competition in the high-end space where Big Iron competes.

In this regard, Clabby cites the marketing programs of HP, Oracle Corp. (presumed steward of Sun Microsystems Inc.), Fujitsu, NEC, Unisys, and other rivals. These companies promote their high-end RISC-Unix, IA64, SPARC, or x64 systems as bona-fide mainframe alternatives. (Unisys ships both x64 and proprietary microprocessors in its ClearPath mainframe systems.)

"IBM mainframe customers have other alternatives. Unix-based RISC and EPIC servers can be configured to challenge mainframes in terms of processing capacity. And monster x86-based clusters can be created that can also provide mainframe-equivalent computing capacity," he writes, noting that "such systems have already come to dominate super-computing." Similarly, Clabby claims, because mainframes can host Linux, Java, or SOA-enabled workloads, customers aren't necessarily "locked in" to IBM.

"[I]f customers want to run their applications on other hardware, there is nothing to stop them from doing so. In fact, they can minimize the role of the mainframe in their organizations and surround the mainframe with distributed servers, if they so desire. Or they can migrate off of a mainframe entirely, if so desired."

That's true, as far as it goes, but it's also somewhat disingenuous.

The CCIA's brief -- and the notional trajectory of the DoJ's inquiry -- isn't that customers don't have equivalent-but-non-mainframe alternatives, it's that Big Blue has sought to depress competition in the IBM mainframe segment, either -- as T3 Technologies has alleged -- by tying sales of its z/OS or z/VM software to the purchase of a System z mainframe, or (as the former PSI claimed, prior to its being acquired by IBM) by being tightfisted with its intellectual property.

What's more, many mainframe customers run workloads such as CICS or IMS (to say nothing of other "legacy" workloads, such as IDMS or Datacom) that can't easily be replicated in (much less offloaded to) non-Big Iron environments.

The salient point, Clabby argues, is that the DoJ's inquiry raises questions that are bigger than either Big Blue itself or the IBM mainframe market.

"[C]ompelling IBM to allow other vendors to use its own operating system against it raises … [a number of] concerns," he points out, noting that such an arrangement would amount to the legal system -- or the federal government -- dictating in which markets IBM (or any other vendor) can compete.

There's an even thornier issue at stake here, too. "Is it right for the legal system to force a company to use its own intellectual property against itself and to undermine its own strategies?" Clabby asks.

He favors a laissez-faire approach, citing evidence that market pressure -- chiefly from HP, Oracle, and other would-be mainframe replacement players -- has already helped drive down mainframe hardware prices.

"The CCIA's complaint is aimed at driving down mainframe hardware pricing. But this is already happening -- driven by natural market pressures, including UNIX servers moving up into traditional mainframe markets … [which] are forcing IBM to become more competitive in mainframe pricing," he concludes, citing Big Blue's recent mainframe "Solution Edition" promotion -- i.e., pre-packaged System z bundles that address specific workload requirements -- as an example in kind.

"[I]t can be argued that IBM is already taking action to reduce its mainframe price structure -- which is the whole reason for the CCIA's complaint. This solution set argument should also serve to show the DOJ that the market can take corrective actions by itself -- without government intervention."