Does IBM's mainframe business constitute a monopoly?

The U.S. Department of Justice is investigating IBM for antitrust violations to determine whether IBM's business practices constitute a monopoly. The reality, according to one expert, is that while IBM doesn't have a monopoly on business computing, it may seem that way to captive mainframe customers.

There's been a lot of sound and fury recently in the mainframe world. Along with discussions about specialty engines and software prices, some companies are suing IBM for predatory business practices. Now the Department of Justice (DOJ) is investigating IBM for antitrust violations. But, in these days of accelerating technology and an overcrowded field of manufacturers, does IBM constitute a monopoly?

IBM's antitrust history
In the 1960s there was a double-handful of computer manufactures, most of which were faring badly because of IBM's System/360 juggernaut. With the 360 machines, IBM came to dominate business processing, although success would come at a cost.

In 1969, the DOJ sued IBM for perceived efforts to monopolize general-purpose business computing. This dragged on for 13 years until the DOJ dismissed the case in 1982 as being "without merit." Despite the lack of action, there were some concrete results. First, IBM unbundled software and software support from the hardware. In addition, some analysts believe the lawsuit made IBM more cautious about its market behavior.

As time wore on, other computer companies found their own niches and went through several rounds of consolidation. What mainframe hardware competition IBM did have came from plug-compatible manufacturers like Amdahl and Hitachi. Although those companies had a small slice of the market, Amdahl served as a lower-priced, faster alternative to IBM. Unfortunately, it could not keep up and eventually bowed out of the plug-compatible business in 2000, when IBM introduced the 64-bit mainframe. Hitachi, after developing some hardware with IBM, also decided to stop.

IBM stands alone as mainframe vendor, but still faces competition
IBM didn't rest easy after ending up as the last mainframe company standing. IBM saw the biggest threat coming from the distributed world, with commodity processors and low software costs. Distributed computing took away much of the small to medium-sized company market from IBM and is chipping away in large enterprises too.

To some extent, IBM's mainframe hardware has to compete with itself when it comes out with new processor lines. Each leap forward in hardware technology also creates a huge dump of the older machines into the used market. A company content to stay off the leading edge can pick up relatively cheap processors that continue to run satisfactorily for many years to come.

Then recently, Neon Software introduced zPrime, which enables previously ineligible workloads to run on IBM's specialty processors. Not only is this a threat to mainframe hardware sales, as it gives enterprises the option of running more workloads on specialty processors instead of upgrading general CPs, it also reduces IBM's software revenue because specialty engines don't figure into most capacity-based license agreements.

IBM's response to mainframe competition
IBM has aggressively countered claims that distributed computing is cheaper with its green initiative and in-depth case studies. Although this may fail to convince many skeptics, it does give customers food for thought before taking on the big conversion.

IBM also meddles in the used processor market, buying old machines and sending them to the IT equivalent of a glue factory. Indeed, when some enterprises upgrade to newer models, IBM helpfully offers to buy the old hardware or offers discounts based on their trade-in price.

Some of IBM's other actions have been a little unsavory. In 2006, Platform Solutions Inc. (PSI) announced it had created an x86 emulator that could run IBM's z/OS platform. IBM responded by suing PSI for copyright infringement. PSI countersued, alleging antitrust violations. A couple years later, IBM bought PSI, thereby quashing one hardware competitor and making other manufacturers think twice before trying.

Reality: IBM does not hold a monopoly in business computing, but it can feel that way
As mentioned above, IBM can fairly claim that it no longer holds monopoly power in the business computing market, as companies have the option of moving to smaller platform. If there's one thing Windows and Unix folks agree on, they have a common enemy in the mainframe and are intent on ridding the data center of them, root and branch.

However, for companies with existing mainframe applications, the reality is a little different.

Imagine you're the CIO of a medium-sized shop running a handful of IBM mainframes. It's time to renew your agreement with IBM, and it added a couple amendments to the contract. The first amendment modifies the terms of specialty processor use, forbidding the use of zPrime or similar software. The second change holds your company in violation of the contract if you run any Z system software on non-IBM hardware.

Your bargaining positioning is weak. IBM knows you have several mission-critical applications running on its hardware that would take millions of dollars and dozens of man-years to convert to another platform. Although IBM may refuse to remove the contract amendments, it will make minor concessions of free software (that will have to be paid for in the next contract) or education. At this point, at this time, you have no choice but to sign.

IBM may not be a monopoly in the strictest sense, but it certainly feels that way to the captive market.

ABOUT THE AUTHOR: For 24 years, Robert Crawford has worked off and on as a CICS systems programmer. He is experienced in debugging and tuning applications and has written in COBOL, Assembler and C++ using VSAM, DLI and DB2.

What did you think of this feature? Write to SearchDataCenter.com's Matt Stansberry about your data center concerns at mstansberry@techtarget.com.

This was first published in December 2009

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