Kneale: Obama, IBM and How to Kill Silicon Valley

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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