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Obama's Don Quixote Swings, Misses (Analysis of DoJ's latest antitrust action against IBM)

A Rally of Hope over Fact (Analysis of Top IT cos' latest market and business performances)

EDITORIAL COMMENT

Updated 10/17/09, 9:30AM HIT, adds "Is Antitrust Dead?" (1989) excerpts

Analysis of Latest Antitrust Investigation of IBM

Obama's Don Quixote Swings & Misses

Christine Varney Should Stop Tilting at Armonk Windmills, Dismount Her Antitrust Rosinante, and Look for Better Targets Elsewhere

HAIKU, Maui, Oct 12 – When Don Quixote roamed the Spanish countryside on his nag Rosinante four centuries ago, tilting at windmills while believing to defend the honor of his beloved Dulcinea, words like "computer" or "antitrust" were not a part of human vocabulary.  Now the situation is reversed.  The past has become the present.  Last week, Obama administration's Don Quixote reincarnate Christine Varney (U.S. antitrust chief) mounted her wooden horse, and is now tilting at the windmills at the gates of Armonk.

What is she trying to achieve besides open herself to ridicule and plant another egg on the face of her boss?  Wasn't Obama's Nobel Peace Farce enough of an embarrassment?

To say that there is no merit to antitrust concerns regarding the IBM mainframes is to state the obvious.  To argue that Big Blue is once again a monopolist is to show ignorance or malice.  But for a government official to do so is to engage in a gross waste of taxpayers money.  Haven't we had enough of that already?

Even though the mainframe has experienced a revival of sorts (see "Poughkeepsie Spring," Apr 2005), this unit's revenues are still only a fraction of what they used to be at the start of the 1990s decade, as you can see from this chart.

Having peaked in 1990, the mainframe revenues have been declining steadily during that  decade.  They have bounced back in the last four-five years, thanks to IBM's creative design changes that made the mainframe "hip" again, in tune with modern times(Web, virtualization, zAAP engines, cloud computing, etc. - see zAAP-ed by IBM!, Aug 2007).  Nevertheless, they are still less than one-third of their peak revenues.

Market Share Games

Furthermore, market share pundits tell us that IBM's System z mainframes accounted for only 0.03% of global server shipments and less than 10% of total server market revenues.  By contrast, the x86 servers (Microsoft Windows-based) had more than 95% share of all servers shipped, and 52% of worldwide server revenues. 

Traditional antitrust theories hold that a company must have a dominant market share of about 70% or higher before it can be considered to hold a monopolistic position.  The IBM mainframe, therefore, fails that legal test by a wide margin.  This may be the first time in the history of antitrust laws that a company with less than 10% market share has been accused of monopolizing a market.

But even those market share figures may be misleading.  The IBM mainframe is both bigger and smaller than they imply.  It is bigger because, like the NASA aerospace inventions, the technologies the IBM mainframe has spawned have now permeated just about every walk of life in the IT industry, including the desktop.  It is smaller, because the mainframe's share of total IT shrinks the wider its use around the world, and therefore, the bigger the market.

The vendors offering Windows-based virtualization and related products, for example, are actually paying a backhanded tribute to the IBM mainframe which pioneered this concept (again, see "Poughkeepsie Spring," Apr 2005).  You know what they say... "plagiarism is a form of flattery." 

In other words, if one were to take a broader view of the IT industry in which mainframe-type technologies are being used these days, the mainframe market share would be even smaller than that pundits measure when counting only server sales and shipments.

IBM's Openness Is Beyond Question

Another "litmus test" for assessing antitrust behavior is how closed the alleged monopolist's products are to competition.  True enough, Big Blue was once one of the most closed companies in the world.  That is why IBM justifiably became the target of three massive antitrust government lawsuits (in the 1930s, the 1950s and the latest marathon 1969-1982), not to mention a spate of private legal challenges.

But that's all in the past.  IBM is a changed company now.  We've noted many times in the last five years that one of the key reasons for the mainframe and IBM's revival as a whole was its openness. 

As you can see from the right chart, the mainframe Linux is IBM's fastest growing server platform.  Its MIPS (engine power) grew 77% in 2008.  And even this year, when both IBM's and its competitors' server shipments have been sagging, the mainframe Linux market grew by 18% in the first half of 2009.  And you don't get much more open than Linux, an operating system that was born in the open systems era and continues to thrive in it.

Linux now represents about 15% of the System z installed base, according to IBM.  Over 40% of new clients in 2008 also installed Linux.  More than 70% of Big Blue's top mainframe clients are running Linux on their platform.

In short, IBM mainframes are being so successful again because they are OPEN. 

As one of the big mainframe customers put it back in 2005, when we did the research for that "Poughkeepsie Spring," paper:

"I think it’s been a good thing for IBM to do (to open up).  The irony now is that Microsoft is now the big bad proprietary vendor" (the attributes that used to be ascribed to IBM in the past).  And then he added, "guess what goes around, comes around.  It’s Microsoft’s turn now.”

But tell that to Obama's Don Quixote at the Justice Department who is looking back, rather around or ahead, as she rides her Rosinante into a wall.

Who May Be Behind This Justice Move?

If the latest DoJ investigation of IBM on antitrust grounds is so soundly nonsensical as the above analysis shows, a logical question would be - why are they doing it?

Our best answer would be - for political reasons.  Someone with an anti-IBM bias and strong influence in Washington may be pulling the strings of the Obama administration behind the scenes to gain competitive edge against Big Blue.  Payback time for political support in the past?  If so, who might that be?

Well, the media have widely reported that the Computer and Communications Industry Association (CCIA) urged the U.S. Justice Department to launch this investigation.  CCIA is a small organization with just 22 members.  Most of them are direct competitors of IBM in various industry segments.  There are only two that compete with Big Blue across the board.  Only one of them does it on a global scale.  Only one of them is U.S.-based.  Only one of them has recently outbid IBM to acquire Sun Microsystems.

The same company is being run by a multi-billionaire CEO with megalomanic ambition to claw his way willy-nilly to the top of the IT industry's food chain.  The same person is a longtime supporter of the Democratic Party and of President Obama.

Okay.  Enough clues.  You'd probably have to have just arrived from another planet not to have figured out by now who we are talking about.  Yes, Larry Ellison, Oracle's chairman.

"I voted for President Obama, and I'll kind of confess to that right now," Ellison also said on Sep 21 in an interview.  He added that, "in general, I believe in free markets" in which government regulation is not necessary.

Hm... so why would CCIA, of which Oracle is a member, urge the government to take action against IBM if its members believe in free markets?

Because what's good for the goose is not always good for the gander.  Because some people talk out of both sides of their mouth. 

So we suspect that Big Blue may be used as a political football by one man with enough money, influence and ambition to reshape the IT industry.  It's only a guess, of course, but an educated one, as you can see. 

But don't take our word for it.  Let's tune in to Ellison himself...

In an recent (Sep 21) wide-ranging public discussion with Ed Zander, former Motorola CEO and former Sun Micro president, held at the Churchill Club (left), Ellison said that he intends to "develop Oracle into a technology powerhouse that provides not just software, but computing, storage and networking gear" (click here for a story on his remarks; click here for a full video of that event).

In other words, another conglomerate like IBM.  And just in case the listeners didn't get it on the first try, Ellison added: "I divide the computer industry into two groups. And I know for a long time I was constantly picking a fight with Microsoft. Now Oracle's constantly picking a fight with IBM. Because you've got to pick your enemies very carefully, because you're destined to become most like those enemies you select."

Bingo!  "You're destined to become most like those enemies you select." 

So Oracle wants to be like IBM when it grows up.  That's a lofty goal for its CEO who also said he would stay for another five years at the helm.  For, Oracle has a long way to go...

As you can see from our recent analysis of the Top 18 global IT companies, Oracle's revenues are less than a quarter of IBM's (right chart above).  Ellison's company generates less than half of IBM's profits (left chart).  And its market cap is about two-thirds of IBM's current undervalued stock price (bottom right chart; also for more details see "A Rally of Hope over Fact", Oct 2009). 

The only chart in which Oracle may be close to, or bigger than, IBM these days is one depicting the political influence in Washington. 

Summary

Of course, having lofty ambitions is no sin.  On the contrary, it is considered a virtue by many in corporate America.  The "sin" would come in if a company, or a group of companies, could muster enough political influence in Washington to cause the government to tip competitive scales in its/their favor.  That would be called influence peddling. 

And no money needs to pass under the table for that to happen.  One only needs to consider how IBM skillfully derailed the last federal government antitrust case against it to see how it's done quietly, below the radar screens of most analysts or the media (see "In IBM We Trust," a book draft about how the government abruptly ended its 1969-1982 antitrust case against Big Blue - cover art, right; and “Is Antitrust Dead?”, Mar 1989, an article which summarizes the book's concept - see EXCERPTS below).

Exchanging favors for favors is an old game in which politicians and business leaders of all creeds and colors willingly participate, hoping not to be found out, of course.  We do not know if that happened in this case.  We can only speculate that it might have because this Justice Department antitrust investigation of IBM is so completely devoid of merit that we cannot think of any other reason for it.  

After all, just last month, a federal judge threw out a private antitrust lawsuit against IBM filed by T3 Technologies, a former IBM mainframe reseller.  The Justice Department's latest investigation of IBM is riding on the coattails of that litigation.  Why would they be going up against a federal judge's ruling except for political reasons?

Well, now that Obama's antitrust Don Quixote reincarnate is out on public display as the laughing stock symbol of our justice system, perhaps the President should ask her to kindly dismount her Rosinante, and point her high horse in a direction which actually might do some good for the public.  Like looking into the price gouging of American consumers by the energy companies, for example (see Gouging the American Consumer, July 2009).  At least that would be taxpayers' money protecting taxpayers' interests rather than being wasted on private benefactors.

Happy bargain hunting!

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