Back to the 1970s: IBM in mainframe antitrust suit again

International Business Machines (IBM) used to dominate the computer industry -- especially in the 1960s when mainframe computers were the only game in town. During the 1970s, that dominance gave birth to a lengthy antitrust lawsuit, which Ronald Reagan's justice department dismissed in 1982. Some 27 years later, Big Blue's mainframe business is in antitrust hot water again.

The antitrust laws are a uniquely American institution. They came into being in the 1890s with the Sherman Act, which prohibits the exercise of monopoly power. That's when a company that dominates its industry uses its power to keep out competitors. Antitrust laws pit the interests of small companies against those of big ones. And somewhere in there is the desire to protect consumers by giving them competitive markets, which are supposed to push down prices and boost quality.

The case against IBM -- U.S. v. IBM filed by the Justice Department filed in 1969 -- charged IBM with monopolizing the mainframe market for computers (a violation of section 2 of the Sherman Act.). The suit alleged that IBM eliminated new competitors offering services and peripherals by maintaining a single price policy for its machines, software and support services. It further alleged that IBM used such bundling to convince universities and other educational institutions to select IBM computers.

The U.S. also alleged that IBM blocked competition by prematurely announcing computers at unrealistically low prices and tight delivery deadlines. The U.S. alleged that IBM announced such systems -- like its System/360, which it claimed could do more than competing models and would be introduced fast -- just to block its competitors from the market. This, the government alleged, IBM did, even though it knew that its product was years from completion.

This brings us to the present -- when the New York Times reported that the U.S. is looking into claims by the Computer and Communications Industry Association (CCIA) -- backed by Microsoft (MSFT) and others -- that IBM blocked entry into the mainframe market. These competitors argue that IBM's decision not to license its mainframe software to companies that make cheaper machines has blocked them from gaining access to the mainframe market, which accounts for 25 percent of IBM's $104 billion in sales.

In a comment to Reuters, IBM pointed out that a court had dismissed a similar suit against IBM the week before by a mainframe reseller named T3. In a statement IBM said, "Just last week, a U.S. District Court dismissed T3's claims against IBM in their entirety. We understand the Department of Justice has asked T3 for documents from the litigation."

A lawsuit filed in 1998 -- U.S. vs. Microsoft -- alleged that Microsoft had used IBM's tactics from the 1960s -- such as bundling and vaporware -- to block PC-operating system competitors. So it is a bit ironic that Microsoft, through CCIA, is now suing IBM for blocking its entry into the mainframe market on similar grounds.

The original U.S. case against IBM was dismissed. It would be interesting to see not only how things have changed in the nearly three decades since then, but also how the feds handle antitrust allegations under an Obama Administration. If the CCIA case goes to trial, perhaps we'll find out.

Peter Cohan is a management consultant, Babson professor and author of eight books including, You Can't Order Change. Follow him on Twitter. He has no financial interest in the securities mentioned.

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