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Kneale: Obama, IBM and How to Kill Silicon Valley

The Obama Posse is hellbent-for-leather on a misguided crusade to rein in the one clear growth engine of the American manufacturing economy: high-tech.

There's no other way to explain the news today that IBM is in the cross-hairs of Justice Department anti-trust cops, who are suspicious of the grip it holds over a dinosaur business:

mainframe computers.

This is the latest boneheaded move in the new administration's sudden spate of meddling in Silicon Valley, the most competitive market in the world, where tech titans collide and start-ups mushroom overnight, where prices fall preternaturally and consumers gain from all of it.

Elsewhere, the Federal Trade Commission is investigating Intel in microchips, Justice lawyers are questioning Google's online deal with book publishers, SEC lawyers helped push Google's Eric Schmidt off the Apple board, and the FCC wants to force AT&T and Verizon the open up their privately funded wireless networks to all comers.

Try reciting that cacophony of crackdowns in a single breath. I am sure we will hear of even more.

Here's the biggest problem: How are consumers getting hurt by any of this? Not at all: The price of computing power drops 15% to 20% a year. The price of data storage plunges 30% to 40% a year.

We also get tons of technology free of charge—Google search power in exchange for enduring online ads, ever more "free" software bundled in with your new laptop, even free cell calls to your favorite friends and family. We also now can choose from a vast array of rival brands and designs and services.

So what we have is an Imperial Bureaucracy in Washington scrutinizing tech’s most powerful players merely because they have succeeded in grabbing major market share. The Obama Posse wants to punish them for their success.

This anti-capitalist crusade is especially wrongheaded—and utterly ridiculous—in the case of IBM . It shows a naïve disconnect with the past.

Background music, maestro: Let’s recall that by the early 1990s IBM—which at one point had 75% of all worldwide high-tech profits and 51% of all sales—was on its deathbed. It mulled breaking itself up into parts, just as the old Justice Department had done to the old AT&T (and had backed off from doing to IBM).

IBM’s mortal wound at the time: the mainframe computer business. The off-the-shelf cheap revolution (ever more powerful PCs at lower prices, a new wave of mid-range machines and client-server networks, and cut-price software) was roiling the fat margins and lack of choice in IBM’s core business: Systems costing $250,000 or more.

Big Blue survived by throwing out old proprietary, closed-design gear in favor of off-the-shelf chips and software. In the past decade IBM cut the price of its mainframes by 50% to 90% depending on the set-up. And customers are hurt by this how, exactly?

Competitors continued to eat into IBM’s business anyway, and the once-invincible giant retreated or bailed out entirely from an array of rapidly growing markets: PC’s and related software, disk storage, networking. IBM invented the database but largely lost out to Oracle Corp.

So, um, IBM is a rapacious monopolist in need of anti-trust inspection? Please!

The feds are focusing on where IBM remains especially strong, in its back-from-the-boneyard mainframe business. Yet even here, IBM is far less dominant. In the early 1980s IBM mainframes held 80% of the total computer market. Today IBM’s biggest boxes comprise just 0.03% of all server shipments, says International Data Corp.

Still, comma . . . among the most powerful machines, those priced at $250,000 and above, IBM commands a 58% share of the revenue.

Yet today corporate accounts can forgo IBM to buy cheap racks of “blade” servers from Hewlett-Packard and Dell and others. They can get plenty of power from Unix boxes made by Sun and HP. In the latest iteration, they can simply lease computing time from “the cloud,” services provided by such entrants as Google and Amazon (and IBM).

Amdahl and Fujitsu pulled out of the IBM mainframe market in the late 1990s, deciding it wasn’t worth the investment. IBM, meanwhile, spent billions on research and development--$1.5 billion over five years for its newest mainframe, the System z series; $6 billion a year in total R&D.

And for the sin of this moxie, the Obama Posse wants to rein in Big Blue.

IBM’s critics say the company abuses its hold over big corporate accounts, which can ill afford the hassle and cost of scrapping IBM gear and switching to new and incompatible rival wares. They say IBM soaks corporate customers on software upgrades, services fees and maintenance charges.

Why is it, then, that this whole anti-trust assault grew out of a complaint filed not by IBM’s customers---but by its competitors? Even worse, the Justice lawyers descend on IBM just one week after a federal district court judge in New York threw out a related anti-trust case against the company.

An outfit called T3T Inc. had argued, unsuccessfully, that IBM’s refusal to license its own mainframe software to let it run on copycat systems was illegal and anti-competitive. The judge flatly stated that this IBM stance “does not constitute anticompetitive conduct” under federal law.

Furthermore, the judge, Lewis A. Kaplan, ruled that T3T lacked any legal standing to sue and that “its claims would fail in any event.” Anti-trust laws don’t restrict the right of a maker to freely choose which parties it wants to do business with, the judge said, citing a 90-year-old precedent.

Despite the federal judge’s rejection, T3T’s plaint likely is the core focus of the Justice longriders now pursuing IBM. And guess what? T3T actually is partly owned by IBM’s most bitter rival: Microsoft.

The Obama folks sound more and more like . . . the anti-U.S. regulators of the European Union, who fined Intel $1.4 billion (and withheld exculpatory evidence in Intel’s favor) and are now meddling in Oracle’s takeover of Sun. That Intel fine, too, was stoked by a complaint that came not from an Intel customer but from a rival: Advanced Micro Devices.

The Obama Administration’s hard-eyed view of tech giants is horrible policy at a time of economic turmoil and when the U.S. manufacturing base is under siege from cheaper markets around the globe.

IBM’s mainframe biz employs 9,000 workers in the otherwise depressed Hudson Valley area of New York. The company has paid some $8 billion in federal taxes in the past five years. And now, Washington wants to mess with that. What are these guys thinking?

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