Toward a new IBM Antitrust Case?

April 20th, 2009

A new 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. Even if the mainframe represents a relatively small percentage of server shipments, rigid demand of mainframes by corporate and government customers worldwide along with 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, IBM has been the meritorious leader of this market. However, in the last few years, IBM has reached a position of near-monopoly by refusing to license its software for use on other mainframe computers and to provide information to ensure interoperability with its architecture. Indeed, IBM now owns almost the entire base for IBM-compatible mainframes and has virtually eliminated 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 characterized by network effects, dominance such as that exhibited by IBM goes beyond the effects of standard network externalities for the lack of any residual entry pressure. In past decades, mainframe customers benefited from the effective competition provided by manufacturers of hardware compatible with IBM architecture, such as Hitachi, Amdahl, Comparex, PSI and T3 Technologies, and from the potential entry of other producers and software developers. However, in the last several years, IBM has gradually moved toward a policy of bundling and integration of its hardware and software products, thereby 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 American and European competition authorities. The European Commission started to focus on IBM after receiving complaints from 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 to PSI and filed a patent suit against it. To terminate the legal proceedings against PSI, IBM had to buy this company in 2008. Moreover , 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 the intellectual property rights needed for interoperability. At the end of March of this year, DG 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”, which 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 to IBM hardware. Finally, even the Department of Justice has started a broader preliminary investigation of IBM's dominance last autumn, also citing the experiences of T3 and Hercules. Given the absolute dominance of IBM in the market, the impossibility of entry and, for the European case, the related precedent of the Microsoft case, it appears likely that these preliminary investigations will turn into a new antitrust case of primary importance.

Looking in more detail at the last European complaint, TurboHercules has accused IBM of abusing its dominant position in the mainframe market through the 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 hundred 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 about 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 underlying the recent Microsoft cases is all too evident. Nevertheless, two major differences should be noted. First, Microsoft was not accused of tying its operating system with hardware. Rather, it was accused of tying its OS to two basic software applications already facing substantial competition in their respective markets: Windows Media Player is one of the many media players available (such as Flash, RealPlayer or Quick) and is not even the most used one, and Internet Explorer faces many competing browsers and has been losing market shares to Firefox and new entrants such as Google Chrome over the last few years. Second, the interoperability information that Microsoft was recently forced to licence by the European Commission was protected by intellectual property rights and was never intended to be shared with the open source community. IBM, on the other hand, has pledged to share such information with the open source community, at least until now. D espite these differences between the IBM and Microsoft cases, the many similarities suggest that IBM may have a hard time defending its position against the last complaint in front of the European Commission.

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