Is History Repeating Itself With Antitrust Battle?

As Microsoft defends its turf, IBM closes the final chapter on its own legal woes

Imagine a high-tech company so powerful that the only body that could rein it in was the U.S. government.

Federal prosecutors charged that the company used every trick in the monopolist's handbook to harm competition: price fixing, preannouncing products never intended to see the light of day, preventing its dominant product from interfacing with its rivals' gear.

Sound familiar?

Not so fast. Before Microsoft Corp. even existed, IBM dominated the computer business so completely that the only thing that could blunt its force enough to open markets to competitors was a set of restrictions stemming from a decades-long antitrust battle.

Although the major antitrust lawsuit against IBM, launched by the government in 1969, was dismissed in 1981, a consent decree harking back to 1956 is still partly in force. The decree, the final piece of which is due to expire in July, limits IBM's freedom to exploit its dominance of the server market.

An IBM AS/400 spokesman who asked to remain anonymous said the consent decree's expiration is just "business as usual." It has no impact on the company or its customers, he added.

But had it not been for the consent decree, things certainly would have been different, users and analysts said.

Imagine a world in which Bill Gates is just a senior software programmer and Larry Ellison a motivational speaker. In fact, there would be no EMC Corp., no Cisco Systems Inc. and no Sun Microsystems Inc. were it not for the decree, said Richard DeLamarter, an economist who worked for eight years with the U.S. Department of Justice (DOJ) on the antitrust case against IBM and later wrote the book Big Blue: IBM's Use and Abuse of Power.

Microsoft's ongoing legal drama has eerily replayed IBM's, said DeLamarter. Even some of the principal players have reappeared, including attorney David Boies, who once represented IBM but is now on the other side of the table, working for the prosecution.

Regardless of the outcome, the Microsoft suit, like the IBM case, has "already changed the dynamics of the industry," said DeLamarter.

For instance, it has kept Microsoft from crushing the upstart Linux movement, and Microsoft's rivals seem to have a better idea of how to compete against the company, he said. Microsoft refused to comment for this story.

As the World Turns

The world has changed quite a bit since IBM first came under attack. The mainframe has become a diminishing force in the industry due to flat profits and ferocious competition from high-powered, cheaper Unix boxes from Sun and other rivals.

According to a DOJ filing in 1996, "no IBM customer, and very few of IBM's competitors, voiced concern that decree termination would enable IBM to exercise any significant degree of market power. . . . In fact, many customers felt they had leverage over IBM."

Nevertheless, many IBM users said the consent decree actually benefited them by keeping the market more competitive. IBM even allowed competitors to write software for its crown jewel, the S/390.

"The requirement of open interface standards allowed the little fish to swim with the big guys and helped a lot of folks starting in their garage to participate in a fertile and growing market," said John Conway, who worked for IBM in the 1960s and 1970s and now tests real-time operating systems at Cambridge, Mass.-based VenturCom Inc. "In retrospect, I think it helped everyone, including IBM."

Reflecting this change, in January 1996, a federal judge opted to end most of the consent decree restrictions on nearly all of IBM's products and services. "Sunset provisions" on the S/390 mainframe and AS/400 midrange server lines remained in effect because the judge felt IBM still had considerable control in those markets.

But the last pieces of the decree affecting the AS/400 expired last summer. All that's left are restrictions on the S/390, and those are set to expire in July.

"I'm not sure what impact it will have. . . . My guess is that will be minimal, if at all," said Charley Massoglia, president of Common, a Chicago-based independent AS/400 users group. When the consent decree was agreed upon, IBM owned 90% of the market; that's certainly not the case anymore, he said.

"I don't think IBM will now be a threat. Right now, the Department of Justice thinks Microsoft is," said Massoglia. "I don't see it becoming an issue with IBM in the future."

Sam Albert, founder of Sam Albert Associates, a Scarsdale, N.Y.-based IT industry consultancy, agreed. Despite whether remnants of the decree are in place, IBM is largely free to pursue its strategies, which tend to involve e-business and are heavily skewed to services, he said.

"I don't think the formal ending of the 1956 consent decree will have very much meaning, since much of the decree applied to a different information age and landscape," Albert said.

Monopolies in the high-tech trade and its predecessor, the tabulating machine industry, are nothing new.

In 1914, before the birth of IBM, Big Blue founder Thomas Watson was indicted, tried and convicted on charges of antitrust behavior while working for the National Cash Register Co. (NCR).

Watson, then head of sales at NCR, proclaimed his innocence but was found guilty and fired. In 1915, the conviction was set aside and the matter settled with a consent decree in which NCR agreed to not engage in unfair behavior.

But by that time, Watson had gone on to join Computer-Tabulating-Recording Co. (later to become International Business Machines), which replicated many of NCR's techniques. For instance, IBM would only lease machines, not sell them, preventing customers from buying used machines from one another, rather than from the company.

In 1952, the DOJ claimed that IBM, then under the stewardship of Watson's son, Thomas Watson Jr., held a monopoly on tabulating machines. The DOJ filed suit against Big Blue and in 1956 made it sign a consent decree that, among other things, forced it to both sell and lease its machines.

But in 1969, the government launched a larger suit against IBM. Despite a huge court tussle, the suit was finally dismissed by the very pro-big-business Reagan administration in 1982. But it had planted the seeds of IBM's decline.

Under Scrutiny

According to DeLamarter, the case "absolutely" led to the rise of Microsoft and the PC. Big Blue certainly had the cash to buy out Microsoft as a budding young firm, but it didn't dare to. The government was watching very closely.

"The case was such an unpleasant experience for IBM," said DeLamarter. "Once they ducked the bullet, they didn't want to do anything to provoke another antitrust suit. It's hard to believe [that] if there weren't any antitrust laws, IBM wouldn't have taken care of Microsoft."

Microsoft's tussle with the federal government has already done the company some damage. DeLamarter predicts the colossus of Redmond will go the way of IBM.

But let the buyer beware in both the Microsoft and IBM cases, he warned.

"I wouldn't go so far as to say IBM has no power," said DeLamarter. "Whether the consent decree expires or not is not so germane. You should watch the competition and listen to the competitors."

Copyright © 2001 IDG Communications, Inc.

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