The European Union (EU) has accused International Business Machine Corp. (IBM) of violating anti-trust guidelines and misusing its dominant position in the Mainframe computer market. The European Commission, the executive arm of European Union, has launched two anti-trust probes against IBM.
The first one follows complains by emulator software vendors T3 Technologies Inc. and Turbo Hercules. The companies have alleged that IBM is selling mainframe hardware along with its mainframe operating system. This creates mounting pressure on vendors who are selling emulation technology, which enables users to run critical applications on non-IBM hardware.
Both T3 Technologies Inc. and Turbo Hercules write mainframe emulation software programs such as Liberty 2.0, which allow mainframe applications to run on Windows-based servers. T3 had previously filed antitrust claims against IBM in federal court in New York, though its case was dismissed. The company is appealing against that decision.
The second one, started by the European Commission’s own initiative, probes whether IBM has violated anti-competitive guidelines by sidetracking its competitors in the mainframe services market. IBM is alleged to make it hard for competitors to access spare parts of which IBM is the sole manufacturer.
IBM denied the allegations and contends that the complaints are fueled by its competitors including Microsoft Corp. (MSFT). Microsoft provides a diverse array of emulation technology products that are available from T3 Technologies Inc. Microsoft also has a substantial investment in T3.
IBM is of the opinion that the providers of emulation software are infringing its intellectual property (IP). The company believes its competitors, especially Microsoft, is trying to gain market share through its Wintel servers, which are based on the Windows operating system and Intel Corp.’s (INTC) microprocessors.
IBM stated that it will co-operate with the investigation. If found guilty of the charges, the European Commission may fine the company.
Recently, the Computer & Communications Industry Association, which has Microsoft Corp. and Oracle Corp. (ORCL) as its members, filed an antitrust complaint in Europe against IBM.
Mainframe computers are generally used by large corporations and governments due to its powerful processors and huge data storage facility. According to the European Union, worldwide sales of mainframe computers and operating systems in 2009 were €8.5 billion ($11.0 billion), of which European sales were worth €4.0 billion.
According to research firm IDC, sales of mainframe computers account for less than 10% of the worldwide market for data center computers, which are estimated to be $49 billion for full year 2010.
IBM’s mainframe sales are projected to be $3.3 billion in 2010. We believe IBM remains the sole manufacturer of most of the spare parts and has a strong goodwill in the market, which will drive its profitability in the mainframe market on a long-term basis.
Moreover the company noted that it does not hold a significant market position in the mainframe computers as mainframes comprises of a very small share of the overall computing market. We do not believe these charges to have a huge repercussion on IBM’s profitability, however if proved could hurt the tech giant’s brand image.
IBM continues to severely compete with Intel based servers from Hewlett-Packard (HPQ), Dell Inc. (DELL) and Oracle Corp.
We maintain a Neutral rating on IBM on a long-term basis (for the next 6−12 months).
Currently, IBM has a Zacks rank of # 2, which implies a short-term Buy rating (for the next 1−3 months).
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