Deja Vu at IBM: Return of the Trust Busters!

The week of January 12, 1969 was a momentous period in U.S. business history. Most of us who were alive at that time recall Super Bowl III, when Broadway Joe Namath led the New York Jets to the greatest upset victory in the annals of American football. The shocking defeat of the establishment NFL Baltimore Colts by Namath’s upstart AFL team demonstrated the parity of the two leagues; it later led to the merger that spawned what is arguably the economically strongest professional sport in the world.

But five days after that glorious moment, an even more noteworthy event shook the foundations of American business. Namely, the U.S. Department of Justice filed a federal lawsuit against IBM for monopolizing the business computer market. At the time, IBM was the sixth largest corporation in the United States, and the only computer technology company on Fortune’s Top Ten list.

The tug of war between IBM and the federal grovernment dragged on until 1996, when the firm and the federal government reached a final settlement and appeared to put the battle behind them. But earlier this week, the Department of Justice once again opened inquiries into IBM’s alleged monopolization of the mainframe computer market.

Mainframes? Again?

Now that was a surprising development! After all, we now live in a world of decentralized mobile technologies, where we wouldn’t be caught dead without our laptops, mobile telephones, GPS devices, and tablet e-book readers.

In fact, IBM itself has long been marketing its cloud computing services, and even its virtual reality facilities, as substitutes for obsolete mainframe based systems. So why would they even consider monopolizing mainframe computer systems, a technology that was once lionized in a 1957 romantic comedy featuring Katherine Hepburn and Spencer Tracy?

Although mainframe computers may seem like technological throwbacks to past eras, they remain useful for a wide number of business applications. And thus, like radio signals, railroad trains, and oil based internal combustion engines, they will probably continue to occupy a significant slice of the technology market for quite some time to come.

A Little History

It’s easy to forget how much IBM dominated the American computer industry when the Justice Department last investigated it for antitrust violations. Throughout the 1960s and 1970s, industry analysts routinely referred to the eight major mainframe firms as IBM and the Seven Dwarfs because IBM’s gaggle of competitors fell so far behind the market leader. And many movie critics assumed that the evil computer HAL in the 1968 film 2001: A Space Odyssey was modeled after IBM’s mainframe products because I follows H, B follows A, and M follows L in the alphabet.

It’s also easy to forget how vigorously the federal government prosecuted corporations that had grown into monopolies throughout most of the twentieth century. Republican presidents such as Teddy Roosevelt joined Democratic presidents such as Woodrow Wilson in supporting antitrust legislation. From the 1911 breakup of energy titan Standard Oil to the 1982 spinoff of AT&T’s local telephone businesses, such firms were aggressively prosecuted by federal regulators who sought to restore competitiveness in various market segments. The Department of Justice apparently suspects that IBM may have regained monopoly power in the mainframe sector.

But will the feds actually seek to impose a break-up or spinoff on IBM’s mainframe operations? Although the Obama administration has indicated that it intends to resume more aggressive antitrust enforcement positions, its recent track record in other industries does not appear to support this position.

Too Big To Fail

Instead, the Obama administration appears to be continuing the policies of the Bush administration, which contradicted decades of consensual bipartisan policy regarding antitrust law. After all, it was Republican President Teddy Roosevelt who was called a “trust buster,” due to his desire to shatter business monopolies into small pieces because they represented systemic risks to the American economic system. And it was Republican President Ronald Reagan who was in office when AT&T spun off its national local telephone monopoly to seven newly formed firms.

Such policies are diametrically opposed to the ones taken by Presidents Bush and Obama, Treasury Secretaries Paulson and Geithner, and Federal Reserve chair Ben Bernanke, who have chosen to bail out market leaders like Bank of America and General Motors under the principle that they are too big to allow to fail. To be sure, this comparison is not an analogous one because firms like Standard Oil were not in danger of financial failure; nevertheless, whereas Teddy Roosevelt sought to destroy monopolistic firms, George W. Bush sought – and Barack Obama is seeking – to save them.

Thus, it does come as a surprise that Obama’s Department of Justice has decided to investigate IBM for its dominance of the aging mainframe industry at the same time that his Treasury Department is frantically attempting to preserve the shaky dominance of firms like Bank of America and General Motors. The natural contradiction between these two policies is self evident; only time will tell whether one of these two will emerge triumphant.