Flak for IBM Mainframe. A Microsoft déjà-vu?

‘Big fish’, ‘predatory pricing’, ‘monopolistic’ and ‘clarion call for CCI’. Words that pounce as javelins on to IBM as a strong report from ICRIER-Indicus raises concerns over the attempts by IBM to tighten its hold on the Indian market. Why these brickbats? And how fair is it call IBM unfair?

We ask this in an exclusive interview with Dr. Rajat Kathuria, a Professor at ICRIER, the mind who has spearheaded this report and an expert on regulation, economic policy and competition policy. The man has worked with Telecom Regulatory Authority of India (TRAI) during its first eight years (1998-2006) and gained hands on experience with telecom regulation in an environment changing rapidly towards competition entailing analysis of economic issues relating to telecom tariff policy, tariff rebalancing, interconnection charges and licensing policy. Till IBM comes out with a response, today he explains why IBM is being put on the altar, while he still respects the company as a smart, innovative and capable one. Enjoy this exclusive and comment if you agree (or disagree, of course).

Hi Dr. Rajat K. First of course is the curiosity-part of the question. Why this report out of the blue and why this bolt and rumpus at IBM?

To give you a proper perspective India is going to be a large IT market in future, with all major growth plans in the offing. And we see that the market has substantial benefits for users, affecting direct and indirect sectors simultaneously. We thus thought of analyzing this market and found that it’s tightly controlled by the big fishes – IBM, HP and Sun in the high-end server space.

Interruption here, but why IBM? And why not Sun and HP? If the report cites that India's high-end computer market is dominated by IBM (with 50 per cent market share),  with HP at33 per cent) and Sun  at17 per cent.

Our issue is with the unbundling tactic on the market. HP also uses HP Linux and Sun uses Solaris OS. But both are open standard versions and are not closed systems. HP, has apparently developed a customizable solution based on OS. Why IBM? The answer is simple. Because it’s closed and proprietary licensed.

What’s your main contention and recommendation?

Mainframes weren’t always a closed system. It was interoperable in the past when the hardware aligned for companies like Fujitsu and Hitachi and they used to run on the z operating system. In fact, IBM’s hardware too used to run on any operating system. It’s the bundling that has changed and affected the whole game. IBM is a very good player and the z operating system is specially an extremely efficient, secure one with reliable features. Our contention is that IBM should make it available on other alternatives too.

There’s a mention that this has been tried in international terrain already. Is that right? How?

Yes, IBM had signed an agreement with regulators in US as back as 1975 I guess where it agreed to license their operating system to other players. Today, it does not license it to alternate hardware providers which results in a market that would be less competitive if not for the bundling issue.

What you recommend is plausible?

Why not? Bundling is bad, is all we are saying. It restricts consumer choice and control over market along with the high-price factors. We are just saying two points. First, unbundle the OS from hardware. Second, make it interoperable on any other hardware. We are not saying to price it differently. And if such a format has existed in the past, so why can’t it exist today? It specially makes sense for the user who finds it difficult to get out of the product just because everything is bundled together.

The report talks about lending serious thought to issues of free and fair competition. Don’t you think asking a player to change its strategy is itself a step in the direction of restricting free market forces? Is it fair? And as someone has already asked, would it be a case of sour grapes?

When a company has large implications to users, it has obligations for customer welfare. This is right and relevant due to large public policy implications. Like we have seen in the past with the Microsoft-IE bundling case, yes, a company has all the right to allow consumers more choices. But it can not force a customer to do something. Today, IE has less than 60 per cent slice in US, down from the 100 per cent line in the days of bundling. It’s about changing the way one sells products. If the product is good enough, it will sell. Won’t it? Specially, in India the implications are high since major industries like telecom and BFSI run over mainframes. Hence, we think there is a case of light government intervention. We are not suggesting anything intrusive.

So what you recommend would benefit consumers or other small players vying for space in the IBM-dominated market? More than that, are these small players capable enough?

Competition has to be fair between a small player and a big player too. There are some small players in the market but not in the high-end bucket. They don’t compete with the Big Three. In this market today, incumbents enjoy competitive advantage and there are a lot of entry barriers. Meanwhile it would do good to change the conduct of the market and that’s a solution that has existed and operated in the past also. I guess in the US and Europe, courts will get into this and compel unbundling of software and hardware too.

As to whom will this recommendation help? Well, it will help consumers, clients and other hardware manufacturers too, since interoperability and unbundling are missing heavily. They would be able to use z OS by IBM. This will help businesses, help competition and ultimately help consumers.

Can the ‘Big fish vs. Small’ argument be applied to other segments in Indian IT market too? Would you pick something next?

IT in India does not have a sectoral regulator unlike sectors like Gas or Telecom. So it will be governed by CCI (Competition Commission of India). Like the prices regulated between two telecom operators, where TRAI regulates and intervenes when need be, the same can happen for IT.

When you say “light government intervention”, does CCI or anyone else has enough legal teeth to prescribe (or proscribe) action on something like this? Specially if the report states this - "During the MRTP days this would have been sufficient to launch investigations against IBM because of its size. Competition authorities, influenced by Chicago, no longer believe that the relation between a high market share and market power is obvious.”

CCI has all the power. It can prescribe certain practices. It can order certain remedies. Yes it can disengage IBM in India to enforce a line of conduct, to desist from certain practices and force them to unbundle. We have recommended the CCI to investigate the issue properly and they are well within their rights to do so if they choose to. We are suggesting so on the basis of prima facie evidence.

Are there any precedents to what you are suggesting for IBM? Or for that matter for the IT business landscape?

We have seen unbundling happen in case of utilities or the last-mile part of telecom sector. So why not for a vertically-integrated sector like IT? It only helps to make the market more competitive. While it may not have happened under CCI yet, it has surely happened in Europe and US. We are not making a novel suggestion. How many players can match the likes of  IBM and HP? Dell is another player but it still functions more on the low-end segment. Competition in terms of numbers is unlikely in this industry. Hence conduct part of the remedy, specially with the unbundling part, does apply.

With this report at least the argument of Mainframes being obsolete is brushed away now. Would you agree?

In fact our report talks about how mainframes have been tagged as dead off and on and yet how we have seen mainframes alive and kicking. Specially 97 per cent of mainframe business comes from existing users. On a fair note, I guess IBM have done tremendously here in the way they have reinvented themselves and made mainframes faster, more secure and more reliable. Mainframes are definitely staying.