By Jeff Gould, CEO & Director of Research, Peerstone Research

Here’s an interesting story about a guy who has had several horses shot out from under him by IBM, and has finally decided to shoot back.

Steven Friedman is the President of Tampa-based T3 Technologies, which has been in the business of selling IBM-compatible mainframe systems to low-end and midrange users for 16 years. For the first 14 of those years T3 worked hand-in-hand with IBM to build out a segment of the market that was too small for IBM’s own royally compensated sales force to bother with. In the mid 1990s T3 became the leading reseller of IBM’s innovative PC-based mainframe systems and was one of the very first certified members of IBM’s Business Partner channel program. In the early 2000s T3 started selling Fundamental Software’s FLEX-ES mainframe emulator in a bundle with off-the-shelf Intel-based servers. This system, dubbed tServer, wasn’t an IBM product, but it was based on an IBM patent license and filled a gap in the low-end mainframe market that IBM’s own product line didn’t cover. For every tServer that T3 sold, IBM collected a patent royalty from Fundamental Software, and then sold mainframe OS and middleware licenses to the end customer – since without IBM software the emulator was of course perfectly worthless. In many cases IBM even financed the customer’s purchase through IBM Credit Corp.

The customers who bought tServers were a mix of production users and developers. And though the machines typically produced a fairly modest 8 to 60 mainframe MIPS, not all of the users were small. One customer was the U.S. Air Force, which apparently still runs tServers to process data from its AWACS flying radar aircraft. Another was the French Air Force (check out this interesting snapshot of a French AWACS escorted by delta-winged Mirages).

But in the fall of 2006 IBM abruptly terminated its long-standing relationship with T3. The trigger seems to have been T3’s plan to launch another line of mainframe-compatible systems based on technology from a hot new VC-funded Silicon Valley startup, the now defunct Platform Solutions (aka PSI - see my earlier post entitled Goliath slays David). Leveraging intellectual property it thought it had legitimately acquired from plug compatible manufacturer Amdahl, PSI had developed an Itanium-based firmware emulator of IBM's mainframe instruction set. Although T3's new PSI-based systems weren’t intended to compete with the high-end of IBM’s z/OS mainframes, they offered more MIPS than FLEX-ES and could run the 64 bit versions of IBM’s software. For reasons that are not entirely clear this very modest competitive threat provoked a frenzied reaction from IBM. In the space of a few weeks Big Blue refused to renew its patent licensing agreement with Fundamental Software, filed suit against PSI for patent infringement, and announced that it would end its decades-old practice of selling its mainframe operating systems and middleware to users running non-IBM hardware.

Overnight T3 went from a booming business with over 600 installed customers worldwide to a company that literally had nothing to sell. Friedman was forced to layoff 40 of his 50 employees, keeping only the all-important engineering staff. Since the Department of Justice had already decided in 2001 to dissolve the famous Consent Decree which had for half a century compelled IBM to play nice with competitors, there was apparently nothing to prevent Big Blue from getting away with this egregious instance of squashing the little guy.

Personally I’m a little taken aback by the ferocity of IBM’s assault on such tiny and seemingly insignificant competitors as PSI, T3 and Fundamental Software (and really it would be more accurate to call them “coopetitors” because they were all paying royalties or commissions of some kind or another to IBM). What accounts for such overkill? The only half-way plausible explanation I’ve heard is PSI’s disclosure in one of its court filings that IBM’s actions had derailed a projected acquisition of PSI by HP. Given that PSI’s technology was based on Itanium and that HP is the only major server vendor still betting in a big way on Itanium, such a deal would have made a lot of sense. And I can certainly see why it would have scared the dickens out of a few people sitting in corner offices back in Armonk. Last May’s $14 billion acquisition of EDS was proof that Mark Hurd’s HP intends to give IBM a run for its money in enterprise IT.

But now that HP and PSI are out of the picture, Friedman’s T3 and his one-time supplier Fundamental Software (which seems to have gone into quiet mode lately) are just about the last holdouts against IBM’s drive to acquire total ownership of the IBM-compatible mainframe market. It’s worth noting that just a decade ago, when the Consent Decree was still in force, this market was hotly contested by such heavyweights as Amdahl, Fujitsu and Hitachi. But Friedman calculates that by 2006, with all the plug compatible vendors gone except for T3, IBM's share of the market had risen to 99.8%! Friedman says he was perfectly content to live with his 0.2% share, though one suspects he might have been happy to see it rise to, say, 0.4% or even 0.5%. But with T3 now on the sidelines, IBM's share has zoomed to 100%. Golly, where are those fire-breathing antitrust litigators from the Department of Justice when you really need them? I’m usually not a big fan of government intervention in private markets, and I thought DoJ’s attempt to stop the Oracle-PeopleSoft deal a few years back was thoroughly misguided. But 100% of the market is definitely taking a good thing too far. Especially since, as IT industry watchdog group CCIA points out, IBM is now in effect telling users of its mainframe operating systems and middleware that they no longer have any choice but to buy IBM’s own hardware, since all the competitors have conveniently gone belly-up. In antitrust lingo that’s called “tying” and it’s definitely naughty. Friedman agrees, because his company has announced that it intends to file a formal antitrust complaint against IBM in Europe. (He's already suing IBM in the U.S., the legal brief posted on T3's web site gives a rare public glimpse of what goes on behind the scenes in these cases.)

Ah, those Europeans, they can be tricky sometimes. Whenever they see a big American company that has been unusually successful – Microsoft and Boeing are examples that come to mind – they tend to see red. Whether or not their regulatory regard will be fearsome enough to scare off Big Blue remains to be seen, but this is certainly a story that bears watching.