AnAlysis

19 September 2010 / www.egovonline.net / egov

Tying is a case for trying

Big Blue is under an EU scanner for allegedly shutting out its operating system to non-IBM big irons

By Stacy Baird

n late July, the European Union launched two antitrust investiga-tions into the business practices of IBM. While issues in the EU might seem distant, Asian countries

should take an interest as they increasingly develop as knowledge economies. Local com-panies need to know that they have the right to compete without fear of lock-out and that there are laws that protect them.

The European Union, U.S. and most developed markets have antitrust laws, also called ‘competition law’ in Europe, on the books. Indeed, the EU has worked with governments in Asia to enforce antitrust laws. Governments will step in to protect consumers and ensure a fair marketplace when a company uses contracts to impair competition, for

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example, by fixing prices or restricting access to sources of supply. In one investigation, the EU is examining whether IBM uses its control of the availability of spare parts to impair competitors from servicing IBM mainframe computers.

A government will also step in where a company unfairly uses its market dominance or monopoly position to keep competitors at a disad-vantage or out of the marketplace all together.

There are many situations that may be an abuse of a market dominant position: unfair contract terms such as exclusivity; predatory or discriminatory pricing (imposing an unfair buying or selling price); refusal to give access to essential facilities; or, as is the case in the second investigation of IBM, “tying.”

Tying is where a company conditions the sale of a product (the tying product) on the

customer’s purchase of a second product (the tied product). For example, computer printer manufacturers often design their printers (the tying product) to accept only ink cartridges manufactured according to certain patents owned by the printer manufacturer (the tied product). The printer’s manufacturer, in control of who manufactures the ink cartridges through licensing, or in this case, not licensing, precludes competitors from making compatible ink cartridges. So in order to use the printer, a customer must buy the printer manufacturer’s ink cartridges.

An early case often used to illustrate tying to business and law students around the world involved IBM in 1936. At that time, punch cards were used to enter data into a computer. IBM had something close to a monopoly in comput-ers. They required their computer customers to also buy IBM punch cards, which they sold at a higher than market price. By tying punch cards to the sale of computers, IBM was able to keep competitors from entering the punch card busi-ness. Although IBM claimed the requirement ensured quality, IBM lost its case.

The EU will be examining allegations that IBM engages in tying sales of its operating systems to its sale of mainframe computers. The case will examine whether the alleged tying locks out competitors that offer operating system emulators that makes it possible to run applications written for IBM mainframes on non-IBM (e.g., Windows and Linux) servers.

Tying can make a market more efficient by providing consumers more complete packages of products—or enable a company to maintain high quality—but when a business with a dominant market position or monopoly ties products, antitrust law may kick in.

Given IBM’s ubiquity in the mainframe computing business throughout the world, the critical nature of mainframe applications in large and public sector enterprise, and the growing importance of IT integration and interoperability particularly in light of cloud computing, those of us in Asia interested in a vibrant, competitive IT marketplace should watch developments in the EU investigation of IBM closely.

the author

is former advisor to members of the U.S. Senate

and House of Representatives and author of the

book ‘Government Role and the Interoperability

Ecosystem’