Monday, August 2, 2010

Western civilization runs on the mainframe

The EU's latest antitrust investigations target a market that's way more important than some people believe. The mainframe is far from dead.

The demise of "big iron" has been predicted many times. Those "experts" were consistently proven just as wrong as those doomsday prophets huddled on a hill with their sectarian faithful on whatever day they expected the end of the world to come.

Most of the time, IBM doesn't want people to know that the mainframe ("System z") is its core business from a financial point of view. It suggests better growth prospects to position oneself as a cloud company. More importantly, with formal probes in the EU and preliminary investigations in the US, IBM wants to give the impression that regulators shouldn't bother. The EU is absolutely right to care a great deal, and the US Department of Justice has probably also found out by now that the mainframe matters enormously.

At the recent launch of its new mainframe generation -- the biggest event of its kind in 20 years -- Tom Rosamilia, IBM's general manager for System z, was so exuberant that he forgot about antitrust and told a group of UK journalists the truth: "Western civilization runs on this system."

All of us are mainframe users -- albeit unknowingly

The IBM executive didn't exaggerate. There are estimates that 80% of the world's data are processed by mainframes. Banks, insurance companies and governmental departments still use them for their most mission-critical purposes. If you enter a bank transfer, chances are that your bank and the recipient's bank will process the transaction on their respective mainframes. If you get a social security statement anywhere in the industrialized world, the data will almost certainly come from a mainframe.

The New York Times most recently described mainframes as "the expensive, complex computing devices that still run most of the critical operations of big businesses and governments" and mention "a resurgence in the use of mainframe computing, which little more than a decade ago was widely dismissed as expensive and increasingly irrelevant in a market dominated by personal computers. Over the last decade, demand for mainframes has increased almost fourfold, according to data released by I.B.M."

Customers are locked in. They have invested many billions of dollars/euros in mainframe infrastructure, including purchased as well as custom-developed software. Most of that legacy software is written in COBOL, a programming language few people learn anymore. The total amount of mainframe code still in use amounts to an estimated 200-300 billion lines of source code.

It's easier said than done to migrate such huge and mission-critical applications to newer platforms. And there are still new organizations, especially in emerging markets such as India, adopting the mainframe for such purposes.

The mainframe software market is twice as big as the Linux market

What the mainframe monopoly means to IBM in economic terms is often underestimated. Even the European Commission's press release on the new antitrust probes talked only about mainframe hardware and operating systems, a total market (totally owned by IBM) of €8.5 billion worldwide in 2009 (€3 billion in the European Economic Area). That's an important part -- but only a part -- of the overall business.

There's a huge software and services market. In terms of software, the average mainframe customers spends about $1 million in annual licensing fees. The total mainframe software market according to IDC amounts to about $24.5 billion. That's twice the size of the Linux software market.

IBM leverages its monopoly to sell lots of non-operating-system software licenses and services. Of the mainframe software market, IBM owns approximately 40%. You can bet that if IBM sells a mainframe, the database will hardly be Oracle. It'll be DB2.

Huge margins for IBM: annual mainframe profits in excess of $5 billion

Everything mainframe is horribly expensive. For a given amount of memory, you'll pay about 60 times as much as for your PC. While mainframe components are built for extremely long mean times between failure (MTBF), that kind of difference is beyond justification.

A Hewlett-Packard executive compared IBM's mainframe business to heroin trafficking and estimated that "IBM gets 75 percent of its gross margins from mainframe software. It is not going to give you a truthful answer. It can’t."

The bottom line: squeezing those locked-in mainframe customers -- when counting hardware, software, services and financing -- "accounts for nearly 25% of total revenues and 40% plus of total [IBM] profits" according to Toni Sacconaghi, a financial analyst with Sanford C. Bernstein.

In 2009, IBM generated a net income of $13.4 billion. So last year the mainframe business generated north of $5 billion -- if not more than $6 billion -- in profits for IBM. That's mindboggling. Especially since we all pay for that mainframe tax, indirectly.

A platform in decline? Not so fast

Very recently, eWEEK Europe conducted an online poll, asking its highly professional audience what its organizations planned in terms of mainframe investment and disinvestment. The result is quite interesting: One third of respondents work for companies that can't afford a mainframe because they're too small. 30% plan to increase their mainframe spending, 20% plan to reduce, and only 10% said they got rid of their mainframes over the years. That 10% figure is really small when considering that mainframes were considered moribund more than a decade ago. By those famous doomsday prophets.

The mainframe is like Mark Twain, who famously said: "The rumors of my death have been greatly exaggerated."

I originally took interest in this antitrust issue because of IBM's patent bullying against TurboHercules. The more I familiarized myself with the topic, the more I understood that the mainframe market is an issue of major economic relevance. It's imperative to open up this strategically important market before IBM transforms its mainframe monopoly into a cloud-related monopoly.

The European Commission took the right decision by launching formal probes, and so did the US Department of Justice when it started a preliminary investigation in 2009. All of Western civilization -- which as you now know runs on the mainframe, even according to IBM itself -- will benefit from a good outcome of those competition cases. Free and open source software also stands a lot to gain, as I'll explain soon.

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