IBM and the mainframe market

Federico Etro

29 April 2010

a

A

After the end of the Microsoft saga, another important antitrust case may soon emerge in the “New Economy”, this time around a well known but largely undisturbed monopolistic position, that of IBM in the mainframe market. (For an evaluation of the Microsoft case, see Komninos and Czapracka 2010.)

Even if the mainframe represents a relatively small percentage of server shipments, a rigid demand for mainframes by corporate and government customers worldwide and technological peculiarities on the supply side make the mainframe market a largely separate and self-contained market, which provides products that are not substitutable with standard Linux, UNIX or Windows servers. For half a century – and not without large merits – IBM has been the leader of this market. But in recent years, by refusing to license its software for use on other mainframe computers and refusing to provide information and licenses to ensure interoperability with its architecture, IBM’s mainframe computers and operating systems have reached a position of near-monopoly, owning almost the entire installed base for IBM-compatible mainframes and losing any substantial entry pressure. It is calculated that around 90% of mainframe applications use native IBM mainframe operating systems and run on IBM hardware.

While a wide leadership is typical of markets characterised by network effects as many in the New Economy, such a dominance goes beyond the effects of standard network externalities for the lack of any residual entry pressure. In the past decades, mainframe customers benefited from the effective competition resulting from manufacturers of hardware compatible with the IBM architecture, as Hitachi, Amdahl, Comparex, PSI and T3 Technologies, and from the potential entry of other producers and software developers. But in recent years IBM has gradually moved toward a policy of bundling and integration of its hardware and software products becoming the only company selling IBM-compatible mainframes. This has allowed IBM to constantly increase its prices for mainframe solutions, against a declining trend in the rest of the industry.

The dominance of IBM has been closely observed by both the US and European competition authorities. The European Commission started to focus on IBM after the complaints by a small company, Platform Solutions, Inc. (PSI). In 2006, when Hewlett-Packard was about to buy PSI and enhance competition in the mid-range framework market, IBM stopped licensing PSI and filed a patent suit against it. To terminate the legal proceedings against PSI, IBM had to buy this company in 2008. However, at the beginning of 2009 IBM faced a second complaint from another smaller rival, T3 Technologies, which accused IBM of preventing the sales of rival mainframe hardware through bundling of its operating system with its hardware, and withholding intellectual property rights needed for interoperability. At the end of March of this year, the European Commission’s Director-General of Competition received a third complaint from TurboHercules, a Paris-based open-source company whose request to license z/OS was declined by IBM. Hercules is a “mainframe emulator”, that is a program that allows software designed for IBM computers to run on other types of computer hardware, including personal computers. The alleged abuse by IBM would be to prevent customers from using Hercules by tying IBM's mainframe operating system with IBM hardware. Finally, even the Department of Justice has started a broader preliminary investigation on IBM's dominance last autumn, citing also the experiences of T3 and Hercules. Given the absolute dominance of IBM in the market, the impossibility of entry and, for the European case, also the related precedent of the Microsoft case, it appears likely that these preliminary investigations will turn out into a new antitrust case of primary importance.

TurboHercules has accused IBM of abusing its dominant position in the mainframe market through bundling of its hardware and software to exclude entry on both sides and through refusal to license information for interoperability. The latter concerns the interfaces needed to allow other software to interoperate with IBM’s products and to run customers' applications on less expensive computers utilising multiple operating systems. According to Roger Bowler, the original developer of the Hercules project and chairman of TurboHercules, “Hercules is an innovative open-source technology that could benefit many mainframe customers. But IBM is preventing customers from using Hercules by tying IBM's mainframe operating system with IBM hardware. This conduct prevents TurboHercules from providing its product to mainframe customers desiring an open-source solution. We originally wrote to IBM requesting that it license its mainframe operating system to customers, on reasonable and fair terms, for use with Hercules in certain circumstances. Not only did IBM deny our request, but it now suddenly claims, after ten years, that the Hercules open-source emulator violates IBM intellectual property that it has refused to identify.” In reply, IBM has accused the French company of infringing almost two hundreds patents, including two that were in the famous list of 500 patents that IBM pledged not to use against open source developers since 2005. As a collateral effect, this opens new heavy doubts in the open source community on the credibility of the widely celebrated commitment of the largest patent holder in the world (IBM holds about 50 thousand patents) to support open source software.

In its complaint, TurboHercules is asking the European Commission to order IBM to end tying and make available its interfaces and protocols. The similarity with the issues at the basis of the recent Microsoft cases are all too evident (see Etro 2009). Nevertheless, two major differences should be noticed.

  • First, Microsoft was not accused of tying its operating system with hardware, but with two basic software applications already facing substantial competition in their respective markets: Windows Media Player is only one of the many media players available (as Flash, RealPlayer or Quick) and not even the most used one, and Internet Explorer faces many competing browsers and over the last years it has been losing market shares over Firefox and new entrants as Google Chrome.
  • Second, the interoperability information that Microsoft was recently forced to license by the European Commission was protected by intellectual property rights but never pledged to be shared with the open source community, as IBM did with some of its patents - at least until last March.

All this suggests that IBM may have a hard time with the recent complaint in front of the European Commission.

References

Komninos, Assimakis and Katarzyna Czapracka (2010), “IP Rights in the EU-Microsoft Saga”, forthcoming in Competition Law and the Enforcement of Art. 102, Oxford University Press.
Etro, Federico (2009), “A chance to move on from EU vs. Microsoft”, VoxEU.org, 8 October.

 

a

A

Topics:  Competition policy

Tags:  European Commission, Competition policy, Microsoft, IBM

Full Professor of Economics, University of Venice

Events