Battle for the Big Iron

Arecent report titled The Issues of Competition in Mainframe and Associated
Services in India released by the Indian Council for Research on International
Economic Relations (ICRIER) along with Indicus and sponsored by
OpenMainframe.org, accuses IBM of resorting to monopolistic practices.

The report takes a very critical view on the current mainframe market
dynamics and ponders on IBMs monopoly. It says that although IBM has had a
history of anti-trust violations in the Europe and the US, the Indian mainframe
market is relatively young but growing rapidly. At the same time, the report
cautions that expansion in the installed base of mainframes with the proprietary
z/OS could lead to welfare losses like those reported for Europe. The
proprietary nature of the operating system of the IBM mainframe creates problem
for legacy mainframe workloads as these cannot switch to high-end servers. This
is because they are tied to an operating system (z/OS) that cannot run on these
servers because of IBMs restrictive licensing practices.

The report alleges that IBM is attempting to tighten its hold on the Indian
market by under pricing its products. This, in essence, is a clear effort to
monopolize the market, it says. It also calls IBM a big fish and not allowing
competition. Resorting to predatory pricing is not new, it has happened in the
US and Europe earlier. According to Rajat Kathuria, professor, ICRIER, who
spearheaded the study says, "First one needs to understand that we are not
anti-IBM and what we have said in the report is that the mainframe industry
needs to be driven by open standards. The overall installed base for mainframes
in India would be small right now, but as the volumes increase, there will be a
problem with a locked in approach if the present trend continues."

Counter reply of IBM in an email response to Dataquest, "This report was
written by OpenMainframe.org, an organization that is a front group for many of
IBMs competitors. So you must consider the source of these unfounded
accusations. OpenMainframe.org is bought and paid for by Microsoft and other IBM
competitors, so its hardly surprising that it would be making an anti-IBM
argument." IBM claimed that the report has no credibility.

IBM also claimed that the accusations in this report are not being driven by
the interests of clients, but rather by some of IBMs competitors.

"To call the IBM mainframe a monopoly is silly. IBM servers face vigorous
competition. IBMs system servers constitute less than 10% of all servers
revenue and 0.03% of the total server shipments globally," the spokesperson
clarified. "In fact, only a decade ago, the IBM mainframe was on the verge of
extinction because of competition from Wintel and other distributed platforms
that still heavily dominate the market today. But, by investing billions of
dollars in research and development, IBM improved the mainframe platform and
enhanced its competitiveness," claimed the IBM spokesperson.

On the pricing issues IBM says, "We regularly have lowered the prices paid by
the clients for doing work on the mainframe. As a result, IBM clients have
benefited from innovation on the platform, and an alternative to UNIX and
Windows has been preserved. Continuous quality improvements and reduced prices
are not what one would expect from a so-called monopoly."

At the center of all these accusations and counter-accusations is a big
opportunity in the Indian government sector. In fact, the ICRIER reports is
quite explicit about that. Openness and interoperability are likely to be the
basic requirements of developmental project like that of the Unique
Identification (UID)which is allocated Rs 1,900 crore in the Union Budget
2010-11 for a plan that envisages 600 mn people with UIDs within the next four
years and as the report puts that closed standards would create serious patent
and interoperability complications. z/OS is an example of such standards.

That pretty much explains the timing of the report.

ICRIER claims that this the first such study to examine structure and conduct
in the server market in the country. It suggest that the Competition Commission
of India (CCI) needs to be proactive in ensuring that the server market remains
open and competitive, and that no one player is able to abuse its dominance in
the relevant market segment. A single vendor lock-in would create a whole lot of
application interoperability issues.

Point-counterpoint

OpenMainframe.org, the agency that has been advocating in creating an open
market for IBM compatible mainframe solutions, which has been dubbed by IBM as
not credible says that there is a whole lot of facts one needs to consider in
understanding IBMs monopolistic practices. In an exclusive interaction with
Dataquest, Jeff Gould, editor, OpenMainframe.org and CEO, Peerstone Research
reacts rather strongly to IBMs reaction to the study.

Gould says, "IBM responds to the India Mainframe report by pretending that
mainframes are only a small part of its business and they almost went extinct in
the 1990s, so why get excited about them? This response is not truthful. The
reality is that mainframes are a huge business for IBM. In fact, mainframes
together with their associated software, maintenance and consulting services
remain by far the largest source of IBMs revenue and profit."

Gould says, "As per New York Times report, about 25% of its $104 bn annual
revenue comes from the sale of mainframes and associated products like storage
systems, software and services."citing AM Sacconaghi, a stock market analyst
with the Wall Street firm, Sanford C Bernstein.

Further he adds, "At Peerstone Research, our estimates are based on a careful
analysis of IBMs published financial statements which says that mainframes
together with other products and services sold to mainframe customers actually
represent as much as 80% of IBMs total pre-tax profit."

"If IBM claims that it does not have a monopoly in mainframes, what about the
fact that it is currently being investigated by antitrust authorities in the US
and Europe precisely on the grounds that it may have abused its monopoly in the
mainframe market? Therefore, criticism of IBMs mainframe monopoly cannot be
dismissed as bought and paid for by Microsoft," says Gould.

Gould also contends that most IBM mainframe customers cannot choose other
technologies. "It is true that the minority of IBM mainframe customers who use
Linux can choose to move their mainframe applications to other servers using
Linux without too much trouble. But, for the vast majority of IBM mainframe
customers who use IBMs entirely proprietary z/OS mainframe operating system, it
is virtually impossible to move applications to other servers using operating
systems such as Linux, Unix or Windows Server," he says.

The analysts say that it is just the beginning of such bitter debates as
India becomes a big opportunity. In the ODF/OXML debate, it was Microsoft; in
the mainframe debate, it is IBM that is the target. India as a country must take
very careful and neutral view of what would suit it, and not rely on which group
is saying what.

Shrikanth G

shrikanthg@cybermedia.co.in