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IBM Probed by EU Over ‘Abuse’ of Mainframe Market

IBM Probed by EU on Mainframes
IBM began developing mainframes in the 1940s and 1950s and is now among the few companies to offer the systems. Photographer: Daniel Acker/Bloomberg

July 26 (Bloomberg) -- International Business Machines Corp., the world’s biggest provider of computer services, is being investigated by the European Union over claims it abused its dominant position in the market for mainframe computers.

The probe will review claims IBM linked sales of its hardware to its software for mainframe computers and that IBM discriminated against competing sellers of services for the computers, the Brussels-based European Commission said in a statement today. IBM said the probe was the result of a campaign by “proxies” of competitors led by Microsoft Corp.

The commission, the antitrust regulator for the 27-nation EU, said the probe is partially in response to a complaint by T3 Technologies Inc., which Microsoft invested in. T3 makes software that transfers mainframe functions to servers that can run Microsoft’s Windows operating system.

Even as IBM has shifted away from hardware to focus on software and services, the mainframe has remained of central importance to the company. Though IBM gets less than 4 percent of its revenue directly from selling mainframes, the machines help generate sales of software, services and financing. Altogether, the contribution is almost a quarter of IBM’s sales and 40 percent of its profits, Sanford C. Bernstein analyst Toni Sacconaghi wrote in a report today.

IBM, based in Armonk, New York, said in a statement that “there is no merit to the claims being made by Microsoft and its satellite proxies.”

Microsoft Probes

“Certain IBM competitors which have been unable to win in the marketplace through investments in fundamental innovations now want regulators to create for them a market position that they have not earned,” IBM said.

Frank Shaw, a spokesman for Redmond, Washington-based Microsoft, said in an e-mail that the company invests in startup companies such as T3 to give customers greater choice. The company isn’t a party to T3’s complaint against IBM, he said.

“We do share T3’s belief that there needs to be greater openness and choice for customers in the mainframe market,” Shaw said. “Customers tell us that they want greater interoperability between the mainframe and other platforms.”

IBM added 3 cents to $128.41 in New York Stock Exchange trading. Microsoft rose 29 cents to $26.10 in Nasdaq trading in New York.

The EU has previously punished U.S. technology companies, including Microsoft, in antitrust cases. Last year, Intel Corp. was fined a record 1.06 billion euros ($1.37 billion) and ordered to stop using illegal rebates to thwart competitors.

T3

Microsoft last year settled an antitrust case with the EU over its Internet Explorer browser and has previously paid fines of 1.68 billion euros in EU probes.

The case was triggered by T3 and another vendor, Turbo Hercules, and involves IBM’s alleged tying of mainframe hardware to its operating system, the commission said.

T3, a company that builds mainframe computers and is mentioned in the CCIA’s report, made a similar complaint against IBM to the commission. Similar antitrust claims the company made against IBM in a New York court were dismissed in September.

“We’re pleased that the commission has taken this important step,” said Dave Anderson, a lawyer representing T3.

The second probe involves complaints of discriminatory behavior by IBM against competing suppliers of maintenance services for the computers.

“The commission has concerns that IBM may have engaged in anti-competitive practices with a view to foreclosing the market for maintenance services,” the EU today said in a statement, “in particular by restricting or delaying access to spare parts for which IBM is the only source.”

Newest Mainframe

IBM began developing mainframe computers in the 1940s and 1950s and is now among the few companies to offer the systems. The company announced its newest mainframe, the zEnterprise, last week. The model, up to 60 percent faster than its predecessor, uses IBM software to integrate it with smaller server computers.

The company comes out with a new mainframe every two to three years. After the introduction of the last five models, sales in its services division, more than half its total revenue, rose an average of 3 percent, Deutsche Bank analyst Chris Whitmore wrote in a report. Excluding the 2008 update, which came during a recession, the boost is 9 percent.

The mainframe, along with services and software growth, will help IBM raise total sales this quarter even with a currency impact, Chief Financial Officer Mark Loughridge said this month. Last week, IBM reported second-quarter sales that climbed 2 percent to $23.7 billion, with a $500 million hit from currency.

To contact the reporters on this story: Erik Larson in London at elarson4@bloomberg.net; Katie Hoffmann in New York at khoffmann4@bloomberg.net

To contact the editors responsible for this story: Anthony Aarons at aaarons@bloomberg.net; Peter Elstrom at pelstrom@bloomberg.net

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