IBM faces huge antitrust probe

Antitrust and International Trade Commission probes in the U.S. tend to focus on tech companies such as Microsoft (MSFT), Qualcomm (QCOM) and IBM (IBM), and now the Justice Department is making another visit to IBM to investigate whether it has employed monopolistic practices in its mainframe business. IBM is said to have invented the mainframe; the company launched its System 360 line in 1965 and many of today's most powerful computers are decedents of that product.

The Computer & Communications Industry Association, which is operated primarily by IBM competitors, received investigative requests from the Justice Department recently -- most probably asking for data about IBM's practices in the mainframe industry. As The Wall Street Journal points out, "Antitrust lawsuits often hinge on how a judge construes the relevant market." The paper goes on to say that servers may be considered direct competitors to mainframes, which muddies the waters.

A look at the IBM 10-Q shows that IBM's Systems and Technology revenue was $3.9 billion in the second quarter, a drop of 26% from the same quarter a year ago. The business had gross margins of 37 percent. What IBM does not disclose in any detail is how much of this revenue comes from mainframe sales and how much from servers.

One element of the evolution of complex computing that may help IBM is the emergence of virtualization, which allows a number of operating systems and software packages to run on one server -- in essence, making that server more powerful. This market is dominated by VMWare (VMW) and Microsoft. It may be that virtualization has done enough to increase the efficiency of servers to partially undermine the market for mainframes.

IBM's case may indeed come down to whether mainframes are a discrete business, or part of a larger technical ecosystem. As is true with many antitrust cases, that issue could take months to resolve, both with the Justice Department and potentially in the federal courts.

Douglas A. McIntyre is an editor at 24/7 Wall St.


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