Clouded in secrecy: presumptively Amazon- and Google-backed U.S. lobbying front (Coalition for Fair Software Licensing) sets new opacity record by not listing any members

In the previous post I quoted from the official complaints of three Members of the European Parliament (all of them well-respected experts in technology policy-making) alleging violations of EU transparency rules by Google, Amazon, CCIA (an entity funded by them as well as by others, such as Apple), Meta, and four smaller lobbying fronts. There are strong indications that some of the same organizations--the ones whose names I just put in bold face--are also involved, in one form or another, with a dubious lobbying entity based in Washington, D.C., named "Coalition for Fair Software Licensing" (CFSL). That one was launched only a couple of weeks ago.

The extent of astroturfing by some Big Tech companies is as appalling as it is becoming absurd. I will call them out, relentlessly.

The CFSL was started to advocate in the U.S. nine of the ten principles for software licensing in the cloud that have previously been espoused by Amazon-backed CISPE in the EU. The primary targets of both CISPE and CFSL are Microsoft and Oracle. CISPE has been trying for a while to instigate an EU antitrust investigation against Microsoft, but the latter's new software licensing terms create new opportunities for the very type of company CISPE pretends to speak for: European cloud service providers (CSPs). I just emphasized the word "pretends" for a couple of reasons:

• It's paradoxical that a group claiming to promote European digital sovereignty is primarily funded by Amazon, the biggest bully on the cloud services block. No company diminishes the business opportunity for European CSPs even half as much as Amazon does.

• Benjamin Henrion, who was a key player in the fight against the EU software patents directive, drew my attention via Twitter to a recent event in Brussels where the CEO of a key complainant--Nextcloud--said (via video) that he didn't want to work out a solution when Microsoft contacted him: he prefers to keep fighting.

  If I were an antitrust enforcer, I'd be unprepared to investigate a complaint by someone with that attitude. There's nothing wrong with having a set of values, but regulation is more like litigation than like legislation in the sense that if someone has a problem and the problem can be solved, a settlement is preferable--also from a public-interest perspective--over an unnecessary dispute. Mr. Karlitschek's belligerence raises the question of whether he's actually complaining as the CEO of a German open source company or as a sock puppet for Amazon. By contrast, the CEO of Epic Games is very serious about opening up mobile app distribution, but last year he testified under oath that if Apple had offered him terms that Epic would have considered acceptable, he'd have accepted them (which doesn't mean giving up one's policy positions). A smaller app developer, Kosta Eleftheriou, settled his U.S. litigation with Apple last month (previously he fended off Apple's motion to dismiss), yet keeps criticizing Apple's App Store terms and practices. Those who truly face a problem will be open to working out a solution.

  It's also remarkable that Nextcloud's CEO claimed to know that the EU Commission would soon launch an investigation. Not only may DG COMP--which has to prioritize wisely--very well conclude that Microsoft's modified licensing terms satisfactorily address any potential concerns, but even if an investigation was imminent, the Commission would communicate it through other channels than having a complainant reveal its plans at a small conference.

  Interestingly, right after Nextcloud's Frank Karlitschek, Quentin Adam--the CEO of Clever Cloud-- raised some issues that small European CSPs are more concerned about, such as Google's advertising business (against which the EC is reportedly preparing a Statement of Objections) and Amazon's pricing model being allegedly designed to complicate multiclouding (combining services from multiple CSPs).

It really looks like some who complain about unfair software licensing terms would actually prefer to divert attention away from their own terms and practices, hoping to use the regulatory process to cement their own market position.

That newly-created Coalition for Fair Software Licensing has an "About the Coalition" page--but it doesn't list a single company. There's a CV of the organization's executive director, a former Senate aide and tech industry lobbyist (Ryan Triplette). But not a single company is named that would say it has problems with Microsoft's or Oracle's software licensing terms.

The Register reported on the CFSL's launch, and was told that "customers are concerned about speaking out publicly for fear of 'retaliatory behavior from software providers.'"

That is a serious allegation, but can it be taken seriously? A plausibility check is in order.

Why would any of those companies believe that the targets of their complaint would try to silence critics? And what do they believe would happen?

The Register continues: "Nobody wants the compliance team from Microsoft or Oracle knocking at the door."

Why would that be so much of a concern? If a company meets its obligations under a license agreement, it doesn't have to fear an audit. And even if it had anything to hide, what would the consequences be? Presumably they'd just have to pay the difference between what they reported before and what they were actually using the licensed software for. How is that retaliation by any reasonable standard?

A potential audit is not a reason to hide one's identity. If potential complainants have to be afraid of something, it's that gatekeepers abuse their power such as by rejecting apps or delaying reviews. It didn't prevent me from bringing formal complaints over Apple's and Google's COVID-related app rules. It's not preventing dozens of app makers, large and small, from being publicly listed as members of the Coalition for App Fairness.

I have heard from two major app makers (one very, very large company and a medium-sized European one) that they don't want to publicly complain over Apple's App Store rules. The larger one considers Apple's terms unreasonable, but at least they have dedicated contacts in Apple's App Review department (as did Epic Games until it threw down the gauntlet) that help them get updates reviewed quickly. They don't want to lose that privilege, so they hope others will do the job of bringing about change. The medium-sized one has some rather conservative shareholders who fear that Apple might make their company's products less discoverable. So, it is true that fear of retaliation sometimes does prevent companies from officially complaining. But fear of an audit--in other words, that you might just have to abide by a contract you signed--is not a credible reason, when some other companies even speak out publicly against tyrannical gatekeepers who have the power to arbitrarily prevent you from reaching billions of customers, or to make your life miserable in other ways.

Who is footing the Coalition for Fair Software Licensing's bills?

According to information they published on LinkedIn, they have 11-50 employees. That means a multi-million dollar budget. Where is the money coming from?

I have found two clues. The first one is so ridiculously hypocritical that it actually made me laugh (click on the image to enlarge):

There you have the so-called Computer & Communications Industry Association--which is actually, as I explained in a recent post, a Cash & Carry Industry Association--describing itself as a "longtime advocate for open systems and open networks." That's the same CCIA that supported its most influential member, Google, against the European Commission (fortunately the Commission has already prevailed twice in the EU General Court). It's also the same CCIA that is supporting Apple against Epic Games (the Ninth Circuit will hear Epic's appeal later this week). Presumably that's the #1 reason why Apple joined CCIA about a year ago.

CCIA doesn't give a damn about open systems and open networks or "competitive ideals." It's the enemy of open markets, of open systems, and of open networks. It's just a lobbying front for entrenched monopolists, and in the formal complaints I mentioned further above, three MEPs are accusing CCIA of having astroturfed for Google and Amazon: CCIA lobbied against legislation designed to open up markets and restore competition, and according to the complaints falsely claimed to do so on startups' behalf.

It's my sense of humor when a new lobbying entity springs up somewhere, claims to speak for a certain category of stakeholders it says are too afraid to reveal their identity (without any plausible reason why they'd have to be all that concerned)--and CCIA appears to have a hand in it. It reminds me of that Save Our Standards group that is also backed by CCIA (Despicably deceptive: Big Tech's Save Our Standards campaign presents small app developer as victim of standard-essential patent abuse though it NEVER had to license SEPs). Now all that's missing is ACT | The App(le) Association. But unlike CCIA backers Google and Amazon, Apple isn't in the CSP business.

While Google is not (at least not officially) involved with the CFSL's older European sister CISPE (unlike Amazon), it appears that Google is one of the backers of CFSL. On LinkedIn, Omid Ghaffari-Tabrizi (title: U.S. Federal Civilian Policy - Google Cloud) endorsed and amplified the CFSL's first statement.

Google and Amazon trying to harm the third large CSP, but hiding behind unnamed customers.

That cast of characters says a lot.

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UK antitrust authority gets basic facts wrong as it declines to approve Microsoft's purchase of Activision Blizzard on fast track: extensive review was expected, but reasoning is nonsensical

Post-Brexit the UK Competition & Markets Authority (CMA) has more responsibility and flexibility than ever. In some contexts, the CMA is a thought leader among antitrust authorities. In particular, its market inquiry into the situation surrounding mobile browsers and cloud gaming is a great initiative. Today, however, the CMA has shocked me. No, it's not surprising in the slightest that a $70 billion acquisition by a Big Tech company--here, Microsoft's purchase of Activision Blizzard--gives rise to an extended (Phase 2) review, as there has been an underenforcement in other contexts (such as Facebook's WhatsApp and Instagram acquisitions). What I find truly regrettable, however, is that the CMA risks its reputation as a competent enforcer of competition law in the technology industry by developing some theories that are partly just wrong on even the most basic facts, and where that is not the case, the theories still don't make sense for other reasons.

The CMA clearly can do better than that. The Microsoft-ActivisionBlizzard merger will (have to) be approved when all is said and done. Microsoft was the first client I ever disclosed on this blog (more than ten years ago); and back in 1995, I was the first person to work (on a freelance basis, but still) with Blizzard Entertainment outside the United States. After all that went wrong at Activision (no need to go into detail here), I do want the Blizzard brand--and especially those game brands to whose success I personally contributed (Warcraft, Starcraft, Diablo)--to find a safe and stable new home. But I'm an independent small app developer now, not a Blizzard sales & marketing consultant, and it is primarily because of the important role that I hope the CMA will play in the mobile ecosystem context that I'm worried about the CMA's credibility in light of today's decision.

In today's announcement, the CMA incredibly says it is "concerned that Microsoft could leverage Activision Blizzard’s games together with Microsoft’s strength across console, cloud, and PC operating systems to damage competition in the nascent market for cloud gaming services"--which I'll comment on further below--and believes an in-depth (Phase 2) investigation is warranted unless Microsoft and Activision Blizzard "submit proposals to address the CMA's concerns" on or before 8 September 2022. Frankly, I can't see why the parties should do that as the CMA has simply failed to state any such thing as a credible theory of harm. This means the process is presumably going to continue, but no one really expected the deal to be closed this year. It may not take until mid-2023 (as some believe), but it's certainly going to take time for political rather than legal reasons.

Let's start with something the CMA does not (as it cannot) claim: that there wouldn't be enough competition in the games market. The first question to ask about a merger is always whether it results in horizontal concentration. Other than Sony--the sole complainant whose opposition to the deal is publicly known at this stage by virtue of a pretty transparent process in Brazil--trying to define Activision's Call of Duty as a single-product market, there's no indication that anyone even tries to make that kind of argument. The Brazilian antitrust agency (Conselho Administrativo de Defesa Econômica, or CADE) received various response according to which there's going to be enough competition in the games market post-merger. Just think of Sony, Tencent, Electronic Arts, Epic Games, and so forth.

By contrast, there hasn't been a huge number of singificant players in the gaming console market for a couple of decades, as the CMA itself states. The CMA then expresses a vertical foreclosure concern "that if Microsoft buys Activision Blizzard it could harm rivals, including recent and future entrants into gaming, by refusing them access to Activision Blizzard games or providing access on much worse terms."

That is a non-issue. Right after the deal was announced in January, Microsoft made it clear that Activision Blizzard would support the PlayStation just like before. In a blog post published today, Microsoft Gaming CEO Phil Spencer reiterates that commitment and, once again, recalls that Minecraft, which Microsoft acquired eight years ago, "continues to be available on multiple platforms and has expanded to even more since [that acquisition]." In other words, Microsoft's words and its past actions prove that this transaction--which Microsoft has explained is very much about strengthening its position in mobile gaming--is not part of a scheme to harm Sony.

So, in order to find another excuse for the politically motivated decision not to grant unconditional fast-track clearance, the CMA decided to come up with a contrived and contorted theory of harm involving divergent markets:

"The CMA has also received evidence about the potential impact of combining Activision Blizzard with Microsoft’s broader ecosystem. Microsoft already has a leading gaming console (Xbox), a leading cloud platform (Azure), and the leading PC operating system (Windows OS), all of which could be important to its success in cloud gaming. The CMA is concerned that Microsoft could leverage Activision Blizzard’s games together with Microsoft’s strength across console, cloud, and PC operating systems to damage competition in the nascent market for cloud gaming services."

If the passage I just quoted doesn't convince you, or maybe doesn't even make sense to you, then that's consistent with my reaction when I read that part. The combination of "a leading [something]" (twice) and "the leading [something]" isn't necessarily a competition issue. The question is whether there's a risk of abusing market power in one field in order to unfairly gain market share in another. I then read the official summary of today's decision, looking for an answer to the question of why Windows and Warcraft--and Azure--belonging to the same company should raise concerns.

Paragraph 32 of that summary is--sorry to say so--completely off-base in the eyes of anyone who knows a thing or two about the technological and commercial realities involved:

"Microsoft already has a combination of assets that is difficult for other cloud gaming service providers to match. By having a large and well-distributed cloud infrastructure, Microsoft will be able to host games on its servers on preferential terms and reach gamers throughout the world without having to pay a fee to third-party cloud platforms. By having Windows, the OS where the vast majority of PC games are played, Microsoft can stream games to Windows PCs without having to pay an expensive Windows licensing fee and may be able to design and test games made for Windows more effectively than rivals. And by having an existing console ecosystem, Microsoft has an existing user base of gamers to which it can promote its cloud gaming services, as well as a range of popular games that it can offer."

That's just so wrong. It's like it comes straight from an alternative universe.

Amazon's AWS is bigger than Microsoft's Azure, and hosts many games. And as an app developer (who made and published two game apps) I'm well ware of how Google has been promoting its Google Cloud Platform to game makers. Also, a Google-Nintendo joint venture known for Pokémon GO uses Google's cloud infrastructure, and no one ever expressed antitrust concerns over that--or will the CMA now investigate Niantic's relationship with Google?

There's plenty of competition for game developers as cloud hosting customers, which means those services are available at competitive rates.

While the cloud part is weak, the worst is yet to come: the part about Windows: "By having Windows, the OS where the vast majority of PC games are played, Microsoft can stream games to Windows PCs without having to pay an expensive Windows licensing fee [...]"

This is simply absurd. How can a competition authority that respect itself say something like that?

Anybody can develop a game service client for Windows and publish it without paying Microsoft a cent. Well, for development and testing you do need Windows, but that's just one license each per developer, but you can then distribute your client to as many users--millions and millions of them--as you like, at no extra cost.

This is not the mobile world, where Apple and Google are gatekeepers and retain 30% of in-app purchasing and subscription revenues. Windows is not a walled garden.

What the CMA may have meant is something different than what it actually said. Maybe the CMA means streaming, and if you stream a Windows game, you need a Windows instance in the cloud--but you can also just write your game for another operating system, such as Linux, and stream it to a Windows PC. What you stream is just video and audio data, so you don't need the same operating system on both sides. You can stream a Windows game to an iPhone, or a Mac game to a Windows PC.

The sentence continues as follows: ". . . and may be able to design and test games made for Windows more effectively than rivals." Note the "may": they don't know. They just suspect. Yeah, let's just have a Phase 2 investigation, doesn't matter whether there is the slightest factual basis "because $70 billion and Big Tech."

As a software developer, I know this is ridiculous. I'm not aware of any Microsoft game ever having had a feature or other characteristic (such as superior performance) that was attributable to the fact that Microsoft owns Windows. Instead, Microsoft gives game developers access to PC hardware--which, again, is different from what Apple does on iOS. It's a level playing field. About 30 years ago, there were complaints by productivity software makers that Microsoft didn't provide all the documentation to them that they'd have liked to have. Maybe that was the case, or maybe it wasn't--but no one has made a credible claim to that in a couple of decades.

Finally, the CMA says that "by having an existing console ecosystem, Microsoft has an existing user base of gamers to which it can promote its cloud gaming services, as well as a range of popular games that it can offer." Sony also has an existing user base of gamers owing to its console, and keeps buying game studios. Interestingly, just like Microsoft's primary reason to buy Activision Blizzard has to do with mobile gaming, Sony announced a few days ago that it is buying a mobile game maker named Savage Game Studios.

A lot of companies have access to gamers. Console makers are one such category of companies. The CMA apparently can't raise any concerns that are really specific to this particular transaction.

I just checked on the ATVI stock price, and the UK announcement is not having a significant impact pre-market. Phase 2 was investors' operating assumption as I heard from Wall Street friends. My personal opinion here is that the glaring weakness of the CMA's "case" is actually good news for ATVI longs. It remains to be seen what other regulator will say, but so far all that is known is that the FTC's excuse for an extended review is centered around novel and unspecific theories, and the UK CMA's announcement today serves to confirm that there aren't any real issues. The takeover was announced 7.5 months ago, and during all of that time no one has given a valid reason for a blocking decision.

I heard that New Zealand's ComCom will also make its Phase 1 decision tomorrow. [Update] That one has been pushed back by a week. [/Update] I'm going to follow the process with great interest, as an app developer, as someone who has done consulting work for Microsoft as well as Blizzard, and as someone who loved Activision games like River Raid and Keystone Kapers (on an Atari 2600 in my early teens) and played Candy Crush up to level 1431 a few years ago as you can see in the following screenshot I just made:

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Whether Amazon instigates or draws antitrust scrutiny, it's always about avoiding price competition: abstract parallel between cloud software licensing and most-favored nation clauses

This is the promised follow-up to yesterday's post, New Microsoft software licensing terms to take effect on October 1: revisions designed to strengthen smaller cloud solution providers--and to address Amazon-orchestrated EU antitrust complaint.

There has been a steady trend in recent years for this blog to look at more and more tech industry antitrust issues. In the end, they always involve intellectual property in one form or another. At some point I stumbled upon Professor Frédéric Jenny's "analysis of potentially anti-competitive practices" with respect to cloud infrastructure services, a study commissioned by CISPE. In the previous post I commented on CISPE: it's striking that an organization seeking to promote European cloud sovereignty is primarily backed by Amazon.

Without a doubt, Professor Jenny--an economist--is a prominent figure in the French antitrust community. However, that report he authored for CISPE last year is just a piece of rather unscientific advocacy. What one would normally expect from a competition economist is a clear causal chain and, especially, numbers. Instead, the "evidence" adduced in that paper is just anecdotal. It's like "one customer said" and "oh wait, another customer also said."

That reminded me of a passage from Qualcomm's reply brief in support of its Ninth Circuit appeal of the district court's FTC decision:

"See United States v. AT&T Inc., 310 F. Supp. 3d 161, 211 (D.D.C. 2018) (in weighing evidence of competitive harm, 'competition authorities and courts . . . refus[e] to take the views expressed by customers at face value and insist[] that customer testimony be combined with economic evidence providing objective support for those views'), aff’d, 916 F.3d 1029 (D.C. Cir. 2019)."

In other words, it's old news that customers prefer to get more and pay less. For the avoidance of doubt, the relevant passage is found in a court ruling, but is a quote from a treatise: Ken Heyer, Predicting the Competitive Effects of Mergers by Listening to Customers.

Professor Jenny did the very opposite of what that passage proposes: he took--presumably selective--customer quotes at face value and did not provide any objective support.

The objective of that study isn't totally clear. In no small part it's actually legislative advocacy, suggesting that the EU's Digital Markets Act should also treat software companies like Microsoft, Oracle, and SAP as "gatekeepers." The DMA is huge, but it can't be all things to all people. The reason why some companies must be subjected to special gatekeper rules is their control over platforms, not their ownership of software copyrights. An open letter that CISPE--together with other organizations--addressed to EU competition chief Magrethe Vestager in February urged at a late stage of the legislative process (as the letter even concedes) a "clarification" that would result in the designation of Microsoft, Oracle, and SAP as "monopoly software gatekeepers":

"We cannot wait for a revision of the DMA in five years, nor for a pyrrhic victory in antitrust litigations in 10 years or more when the competitiveness of the market will not be recoverable.

That's what they wrote in February, but by now what they want is a formal antitrust investigation of those companies, initially Microsoft. After yesterday's announcement of new licensing terms that pay heed to the valid ones of the concerns raised by European cloud service providers, regulatory intervention doesn't appear necessary, much less does it seem urgent.

There are major issues to be addressed with respect to mobile app ecosystems: the app tax; the app review tyranny; App Tracking Transparency; access to NFC functionality (for payment systems and other important applications). There's Google's search monopoly and (apart from iOS) superdominant market position in browsers. And Amazon's own conduct.

Amazon would benefit in two ways if CISPE's antitrust initiative resulted in full-blown investigations: by harming a competitor and by defocusing the Commission from other issues that include what Amazon itself has been doing.

The most well-known issue surrounding Amazon's business is a most-favored nation clause: third-party sellers using Amazon's platform are prohibited from "[s]etting a price on a product or service that is significantly higher than recent prices offered on or off Amazon." This is called a "most-favored nation" (MFN) clause and means that vendors cannot offer lower prices elsewhere, be it through direct distribution or on other platforms. The District of Columbia filed an antitrust lawsuit (PDF) over this in May 2021. In 2017, the European Commission accepted commmitments from Amazon on e-books that also involved the MFN topic. As the Commission noted, "[t]he clauses may have led to less choice, less innovation and higher prices for consumers due to less overall competition [...] in e-book distribution" (emphasis added).

Interestingly, Professor Jenny's study discusses the potential competitive effect of cloud service providers who also make software, such as Microsoft, offering customers particularly attractive terms if they buy cloud services as well as software licenses. As I wrote further above, there aren't really hard facts and numbers in that study. But let's assume--just for the sake of the argument--that this is right. It means a company like Amazon with its AWS cloud service could compete, but it would have to charge less for its own services so the total cost of ownership (TCO) for the customer won't be too high.

If a competition authority actually barred Microsoft and others from offering attractive prices for the combination of cloud services and software licenses, the net effect would be that AWS gets to charge customers more than otherwise.

With Microsoft having fleshed out the implementation of its European cloud principles, all of CISPE's members but one--Amazon--have nothing left to complain about that could reasonably give rise to antitrust investigations. The customers of small European cloud service providers will be just fine with the licenses they already have secured from Microsoft (or with new ones that they can optionally obtain through those CSPs). Amazon is obviously free to file an EU antitrust complaint of its own. But to do that, Amazon would have to argue that it can't compete, which is simply not credible based on market share.

As things stand, regulatory intervention doesn't appear imminent. But presumably Amazon won't give up anytime soon. It has the resources to keep on trying.

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New Microsoft software licensing terms to take effect on October 1: revisions designed to strengthen smaller cloud solution providers--and to address Amazon-orchestrated EU antitrust complaint

This is only the second time in more than ten years for this blog to comment on enterprise software licensing. The first instance was about two years ago when I expressed skepticism regarding EU antitrust complaints by certain SAP customers. Now I have seen an announcement by Microsoft that deserves a closer look. Microsoft's policy team (Microsoft On the Issues, @MSFTIssues, a Twitter account that I follow and vice versa) retweeted the following:

Today, we’re sharing changes to our licensing terms that will benefit cloud providers and their customers. To learn more about the changes, why we’re making them, and what hosters and customers can expect, check out our partner blog https://t.co/MCG4Rsv6Y9

— Judson Althoff (@judsonalthoff) August 29, 2022

Today's announcement by Microsoft's Chief Partner Officer Nicole Dezen is a follow-up to a May 18, 2022 blog post by Microsoft President Brad Smith, Microsoft responds to European Cloud Provider feedback with new programs and principles. I will look at the specific licensing changes in more detail and comment on them tomorrow. For now, I'd just like share a few thoughts and observations:

• The backdrop is that a group named Cloud Infrastructure Services Providers in Europe (CISPE) has been alleging for a while that Microsoft engages in an "anti-competitive tying of productivity suites with cloud infrastructure services." What they essentially claim is that smaller European cloud service providers can't compete on a level playing field with Microsoft's Azure cloud because many enterprise customers rely on Microsoft software (such as Windows, Office, and SQL Server) and can't bring their existing Microsoft licenses to third-party cloud services as easily as CISPE believes should be the case.

• CISPE is largely funded by Amazon, whose AWS is the world's largest cloud service (I used it for the backend of two mobile games). The other members are smaller European cloud hosters. It is undoubtedly a challenge for anyone to compete with the behemoths in a business characterized by major economies of scale, but some of CISPE's members--and various significant European cloud service providers who are not CISPE members--prove that there are opportunities for innovative, creative, and flexible players. The part that I struggle to understand is that those smaller European companies view Amazon--the biggest bully on the block--as a political ally. Let's face it: if you're in the cloud business, particularly in the Infrastructure as a Service (IaaS) and Platform as a Service (PaaS) segments, your top three competitive challenges are

  1. AWS,

  2. AWS, and don't forget:

  3. AWS.

• CISPE is complaining not only about Microsoft, but also about Oracle and SAP. And in at least one of the papers they also voice concerns over Google. In other words, they're against everyone except themselves and... AWS.

• Microsoft hasn't acknowledged an antitrust violation per se. The message in May was that there is enough substance to some of the concerns that Microsoft deems it appropriate to amend its software licensing terms with a view to outsourcing and hosting.

• The European Commission hasn't launched full-blown investigations of a formal complaint filed by OVHcloud, a French company, in March. And it may never have to if Microsoft's new licensing terms satisfactorily address the issues. The measure of a competition authority's effectiveness is not how many investigations it launches or the fines it levies: it's all about safeguarding the competitive process. In some other antitrust contexts, particularly those involving Apple and Google, voluntary changes fell far short of what was needed, so DG COMP had no choice but to launch formal investigations. But Microsoft has a fundamentally different attitude than the two companies I just mentioned. After the antitrust cases they dealt with 20 years ago, they've been careful to avoid regulatory scrutiny.

• Here's a quick first look at the "three primary goals" Microsoft (re)stated today:

  1. "Make it easier for customers to bring their software to the partner’s cloud."

     An example of what was criticized is that license fees in a multitenant environment (one server, multiple customers) were based on physical CPU cores, while cloud services are all about virtual machines. Microsoft says "[e]xpanded use rights [now] allow customers to run their software, including Windows 11, on hosters’ multitenant servers and more easily license virtual machines for Windows Server."

  2. "Ensure partners have access to the products necessary to sell cost-effective solutions that customers want"

     The blog post describes this as creating "more opportunities for partners to work with more customers, to sell the solutions they need, and to run them where they prefer."

  3. "Empower partners to build hosted solutions with speed and scale"

     Microsoft's partners will be better enabled to "build hosted desktop and server solutions to help directly fulfill customers’ hosting needs." The new program, is called "Cloud Solution Provider -- Hoster" (CSP-Hoster) and enables both license-included hosting (the CSP sells a service to its customer along with the prerequisite software licenses) and BYOL ("bring your own license") solutions.

• While it appears that Europe is the only jurisdiction in which a formal complaint had been brought, today's blog post says "[t]hese changes will be applicable worldwide." The timing of the announcement (after European business hours) underscored that this is not just about Europe--and globally consistent terms are another notable difference between Microsoft and the likes of Apple and Google, who favor piecemeal resolution and make commitments only jurisdiction by jurisdiction.

• The new licensing options are available to all cloud service providers except a set of Listed Providers. That is no surprise as it is consistent with what Microsoft said in May. A footnote again clarifies today that "Listed Providers include Alibaba, Amazon Web Services, Google, and Microsoft, and any outsourcer using a Listed Provider as part of the applicable outsourcing service. Customers that want to use a Listed Provider for outsourcing can acquire licenses directly from the Listed Provider."

  In other words, all of CISPE's members except for the driving force behind those complaints--Amazon--get the benefit of the terms announced today. This ups the ante for CISPE to credibly claim that the organization is all about better enabling small European cloud service providers to compete...

  I also interpret this as a denial of there being any anticompetitive harm when it comes to AWS, Google, and Alibaba: there is no indication that those major players can't compete with Microsoft.

Tomorrow I'll do a follow-up to this post and comment in more detail on the licensing terms Microsoft unveiled today, and on CISPE's grievances, such as a "study" by a French competition law professor.

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Pokémon GO infringes cloud architecture patent: Munich court ruling puts pressure on Niantic (Google/Nintendo) to settle with licensing firm K.Mizra

A few hours ago, the Munich I Regional Court's Seventh Civil Chamber (Presiding Judge: Dr. Matthias Zigann) announced its decision in K.Mizra v. Niantic: the wildly popular Pokémon GO mobile game infringes EP2433414, a patent on "servers for device identification services" that resulted from the research efforts of a reputable and sizeable Dutch organization named TNO (Nederlandse Organisatie voor Toegepast Natuurwetenschappelijk Onderzoe; Netherlands Organisation for Applied Scientific Research). The case numbers are 7 O 13977/21 and 7 O 10368/21. The defendants are Niantic entities in the U.S., UK, and Germany.

Thus far, US-based licensing firm K.Mizra hasn't sought an injunction--only a finding that is entitled to a damages award--but it could do so anytime. For the Pokémon GO community I hope this can be avoided, but as Juve Patent explained yesterday, "nothing has changed" about Germany's automatic injunction rule in patent infringement cases.

The court's press office has thankfully provided me with an anonymized version of the dispositive part of the ruling (the order in a narrow sense). Here's a screenshot of a key passage (click on the image to enlarge):

This comes as no surprise. At the end of the July 14 trial, Judge Dr. Zigann strongly encouraged Niantic--a Google/Nintendo joint venture, with Google's technology being particularly at issue in this case--to negotiate a settlement. Niantic has the right to appeal the decision to the Munich Higher Regional Court, but K.Mizra's infringement argument is rather strong (based on what was discussed at the trial), and the prior art cited by Niantic doesn't really seem to come close to the patented invention.

While it's unclear how protracted this litigation will become or whether it may even extend to other jurisdictions where members of this patent family have been registered (and which would take note of the Munich court's findings), K.Mizra is also asserting a patent against Samsung in Dusseldorf, targeting what is clearly an Android operating system functionality. That patent, too, was originally obtained by TNO. The Samsung case will go to trial in less than a year.

This is another significant win for the Wildanger firm. K.Mizra's winning lead counsel is Dr. Alexander Reetz, who handled matters in a calm but strategic and persuasive way. It was easy to follow his clearly articulated arguments. K.Mizra's lead patent attorney is Dr. Thomas Hell of Bosch Jehle). He and Dr. Reetz played and won as a team. I guess we'll hear about their work more often in the future.

Niantic is being represented by Quinn Emanuel's Dr. Marcus Grosch, who recently got mixed press, one of the reasons for which is that QE is the only patent litigation firm in Germany never to bring patent attorneys along to hearings and trials. That said, I wouldn't attribute QE's defeat in this case to its ironclad rule concerning patent attorneys: K.Mizra seems to have a pretty clear case, and this plaintiff's outside legal team apparently did everything right, so it may just have been impossible to defend Niantic here. But just last month QE also lost an appeal in a Netflix case. And it was two years ago to the day that the first of four German patent injunctions came down on QE client Daimler (the other three followed over the course of only 11 weeks). For a firm that states on its website that it has won 86% of all trials and arbitrations (not long ago they even claimed a 91% rate of success), the German patent litigation track record may very well be substandard. However, Wildanger may really have a hit rate at that level, or at least that's what I've recently seen in the cases I follow (examples: 1, 2).

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Munich court believes Pokémon GO infringes cloud tech patent, Judge Dr. Zigann encourages Google-Nintendo company Niantic to settle with K.Mizra licensing firm

When I learned about K.Mizra v. Niantic two months ago, it intuitively seemed like a very interesting non-standard-essential patent case to me. That first impression was more than validated by today's Munich patent infringement trial. The accused technology is the multi-player mode of Pokémon GO, which is operated by a Google-Nintendo joint venture named Niantic and the world's most popular game in the augmented reality (AR) genre. The patent-in-suit is EP2433414 on "servers for device identification services." The plaintiff, K.Mizra, is a patent licensing firm that has been assigned patents by major operating companies like IBM as well as a reputable and sizeable Dutch research organization named TNO (Nederlandse Organisatie voor Toegepast Natuurwetenschappelijk Onderzoe; Netherlands Organisation for Applied Scientific Research).

The panel is composed of Judge Dr. Zigann (Presiding Judge of the Seventh Civil Chamber of the Munich I Regional Court), Judge Benjamin Kuttenkeuler (the rapporteur in this case), and Judge Dr. Hubertus Schacht (who sometimes fills in to preside over hearings, which among other things led to the affirmance of the first Munich anti-antisuit injunction).

After scheduling a patent infringement ruling for August 18, Judge Dr. Zigann warmly encouraged that Niantic--the Google-Nintendo joint venture company that operates Pokémon GO--take a license, given that K.Mizra's complaint was hardly going to be rejected.

In all likelihood, the only question at this stage is whether K.Mizra will prevail

• on one or more method claims

  or

• on both its method and system claims.

The first scenario is the one Judge Dr. Zigann outlined during the first part of the hearing. K.Mizra's lead counsel--Wildanger's Dr. Alexander Reetz--subsequently gave the court potential reasons to conclude that the asserted system claim is indeed infringed within the territory of the Federal Republic of Germany. Territoriality is a non-issue for the method claim. The court did not indicate whether it might change mind about the system claim, but one way or the other, K.Mizra is on the winning track. If not for Germany's "loser pays" rule for the allocation and potential recovery of fees, the system claim's fate wouldn't even matter.

Niantic's counsel from Quinn Emanuel raised three claim construction arguments that are unavailing:

• The claim language refers to an application server and a correlation server. The application server in this case provides a game, and the correlation server identifies users who are standing next to each other and wish to play together. Niantic wanted the term "server" to be understood in the sense of a separate piece of hardware, but the court concurs with K.Mizra that it's all about the function. In today's cloud computing world, the distinction between logical and physical servers is key, and it makes even more sense in light of the description that says "the distinct server units may be [which means they alternatively "may not be"] constituted by servers having separate casings" (emphasis added)

• Niantic also disputed infringement because a "match message" does not go directly from one server to another (but through an end-user device). However, neither the claim language nor the specification supports that narrow reading.

• Yet another attempt by Niantic to narrow the scope of the patent-in-suit related to the digital messages. Niantic argued that the initial message involved a UUID, but later in the process something else would be sent.

  Dr. Reetz and his team (also including patent attorney Dr. Thomas Hell of Bosch Jehle) deserve credit for having convinced the court of their proposed claim constructions and infringement theories through their pleadings. Let there be no doubt about their strong performance at today's trial either. But it was Judge Dr. Zigann who made the best point in the claim construction context. He noted that it's not practical to require such messages as the one at issue in this case to be an identical bit sequence throughout a given process, pointing to the court's experience with codec patents. What a great example. It is indeed in the nature of codecs that the bit sequence changes (as a result of compression and decompression), which doesn't mean that there isn't some substantive continuity. That's an excellent analogy to today's patent-in-suit. (Munich is an increasingly popular enforcement venue for codecs.)

For now, K.Mizra is "only" seeking a judgment on the merits, which will entitle it to an accounting, subsequently to the receipt of which K.Mizra can calculate its damages claim and sue for a particular damages award. But as Judge Dr. Zigann noted, K.Mizra can at any point in time now bring an additional claim or injunctive relief. If K.Mizra did so with the lower court (instead of amending its complaint to that effect on appeal, which would be an option in Germany), it would have to bring an additional complaint, and Judge Dr. Zigann warned Niantic against the cost implications of such a case that K.Mizra would predictably win.

Niantic's invalidity arguments didn't get traction. To the extent that I was able to follow, it seemed that none of the prior art references came reasonably close, nor does there appear to be a case for intuitively combining two or more of them.

Under the circumstances, the only surprise today was that Dr. Reetz said Niantic had not sat down with K.Mizra yet to negotiate a license agreement. It actually seems that Google would have more than one reason to work constructively toward a solution. As I found out last month, K.Mizra is asserting another patent--which was also originally obtained by the Dutch research institute I mentioned further above--against Samsung, and if Samsung's phones infringe, then it's actually Google's Android mobile operating system that implements the patented technique.

Niantic was granted leave to file a post-trial brief, but the fact that the ruling is scheduled for five weeks from now--and three weeks after the deadline for that filing--shows that it's not really a difficult case for the court to decide. Come August 18, I'll try to find out more from the court.

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Wall Street sees 20%-25% regulatory risk for IBM's envisioned acquisition of Red Hat

Last Sunday, IBM and Red Hat announced a merger agreement under which "Big Blue" (NYSE:IBM) would pay $34 billion, or $190 per NYSE:RHT share, to acquire the company that once started as a Linux distributor.

I may very well talk about the strategic ramifications of the proposed transaction some other time, but the focus of this post is exclusively on what the stock market appears to think of the deal.

On Monday (October 29), Bloomberg already reported on what was then a 12% spread, "among the highest for North American deals." The article quoted a portfolio manager who said he didn't want to bet on a deal that may be about a year away from closing, and IBM CEO Ginni Rometty as denying "any regulatory inhibitors," which she obviously had to say.

The time frame certainly affects demand, given that risk arbitrageurs could in the meantime use the money they would spend on RHT shares now to bet on a couple of other mergers, provided that those other deals would close more quickly and happen sequentially. But there's more to it. The spread does indicate that merger-focused investors are far from convinced that the deal will materialize.

On Friday (November 2), RHT closed at $172.24. If the deal went through, those investing now would then rake in a profit of more than 10%. Even if it took a year, a 10%+ gain would be a great deal. The only explanation for why there isn't stronger demand, at a higher price, is skepticism. Since I can't imagine anyone doubts that IBM is a serious buyer, the reason must be concern about the merger review process in the U.S. (DoJ), EU (European Commission, DG COMP), and China (MOFCOM). While China prevented Qualcomm from acquiring NXP, IBM reportedly claims it's not critical for the Red Hat deal. I haven't formed a definitive opinion on it yet, but for now I'll take IBM's word for it.

Without going into detail (yet) on the issues presented by the transaction, we can "reverse-engineer" the stock price in order to get an idea of how likely the deal is--in the eyes of sophisticated Wall Street investors--to go through or fall through. Let's start with the roughest and simplest approach, and then fine-tune it a little bit to take the time value of money into account.

The potential upside based on Friday's closing price is $17.76. Theoretically it's even greater since someone else might try to outbid IBM, but that doesn't appear to be considered too likely by anyone.

The potential downside here would not realistically be a complete loss of the investment. Red Hat is doing too well to go out of business anytime soon. The closing price over which IBM offered a premium of about 60% was $116.68, pretty much at a level with RHT's 52-week low of $115.31 (an intraday price as far as I can see).

If the deal falls through, it's a reasonable assumption that Red Hat's stock price will go back to that level, though it's obviously hard to predict what the market environment would be at that point in time somewhere in the second half of 2019. In order to keep things simple, let's not consider that investors might think they could mitigate their loss by getting out once there's a serious negative sign, such as a powerful Statement of Objections (SO) by the European Commission.

Assuming that the pre-merger-announcement closing price is where the price would fall, the potential per-share loss is $55.56 ($172.24 - $116.68).

If the likelihood of closing is estimated to be 76%, and the risk of things falling apart is (consequently) 24%, then there would be an equilibrium (76% x $17.76 is at a level with 24% x $55.56).

Let's fine-tune this by assuming a financing cost of $4.00 per share (roughly the Fed rate, assuming that you have this cost for 12 months). In that case, the potential gain (by placing the right bet on the deal going through vs. doing a far safer investment that would have a 2.5% yield) is $13.76, and the potential loss increases to $59.56. There would then be an equilibrium if the risk of the deal being blocked (or remedies being imposed with the effect of the deal falling through) was estimated at 19% (19% x $59.56 is at a level with 81% x $13.76).

Even in the aftermath of Qualcomm-NXP, that is a fairly skeptical perspective, given that mergers of this kind normally go through.

I've received a couple of independent invitations to meet portfolio managers in New York to discuss the deal, plus various calls and emails. Investors used to follow my coverage of the Google-Motorola process with great interest, and many still remember my vocal opposition to Oracle's acquisition of Sun Microsystems in late 2009 and early 2010. It was funny for me how the numerous Wall Street people I talked to always called the company "JAVA" (based on the stock ticker symbol). Java--the programming language--wasn't an issue at the time; MySQL, the open-source database, was the reason for which the European Commission conducted a Phase II review and issued an SO. It's about open source again, and this time around, Java will be part of the discussion.

As a matter of transparency, Red Hat contributed to my NoSoftwarePatents campaign in late 2004 and early 2005 (two other companies, including one far smaller than Red Hat, were much bigger supporters of the campaign), but there hasn't been any business relationship with Red Hat since. I've never had any relationship with IBM, other than having the greatest respect for the work of its patent department.

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A gold rush for big iron?

The European Commission's recent decision to launch two parallel antitrust probes of IBM's suspected abuse of the mainframe monopoly raises hopes that this huge market may open up in the not too distant future.

The mainframe business is a gigantic opportunity. For now, no one in that area can compete effectively with IBM, which leverages its mainframe monopoly to sell not only hardware but especially software and services.

The numbers and the strategic implications

IBM owns about 40% of the $24.5 billion market for mainframe software, which is roughly twice the size of the market for Linux-based software. In the total of hardware, software and services, IBM generates approximately 25% of its revenues and more than 40% of its corporate-wide profits in the "big iron" business. That's a profit figure somewhere north of $5 billion (easily), and it's anything but a business in decline.

Companies formerly foreclosed by IBM’s conduct will now want a piece of the action.

Those numbers reflect merely a part of the overall opportunity. Just the largest 10% of mainframe customers have collective annual revenues of $21 trillion, exceeding the GDP of the European Union and the United States.

Mainframes are only a part of their IT budgets. Those top 10% of mainframe customers have an estimated total annual IT budget between $800 billion and $1 trillion based on typical percentages in the relevant industries. If only half of that goes to external vendors and service providers (now or in the "cloudy" future), that's a $400-500 billion opportunity for the industry, or roughly 30% of global IT spending.

IBM does a lot of cross-selling (of Power CPU and Intel-based systems) to many of those customers, benefiting from the privilege position it owes to the mainframe monopoly. If and when the market opens up, IBM will lose its exclusive mainframe gatekeeper status and other vendors will compete more effectively for those accounts.

I've seen the slides of an IBM-internal presentation. "Account control" (in terms of controlling customers) is central to IBM's strategy, and the mainframe monopoly is the key to it. The 40%+ figure of IBM's corporate-wide profits doesn't even include the effects of that. That percentage relates just to sales of mainframe hardware, software and services, irrespective of upselling.

This is all the more important as the IT sector is undergoing a major transformation toward the cloud computing model. There hasn't been a similar need and (especially) opportunity to stake the claims in IT for quite some time.
In this recent posting I described how IBM's new mainframe generation -- the zEnterprise -- is designed from the ground up to "assimilate" (as a journalist put it) Intel-based platforms in the corporate data center. So what I previously called "upselling" (of non-mainframe offerings) is now about to become part of the "data center in a box", or "system of systems", that IBM calls its new mainframe.

Potential strategic investors

It's a given that various IT industry giants will rush to secure a piece of the action, if they think that IBM’s abusive conduct to protect its monopoly will come to an end. They need the regulators to open up the market, but they won't wait until the end of the process. In anticipation of positive things to happen, everyone will try to secure the pole position through strategic investments.

The fact that the regulatory process has only just begun will, of course, be factored in when determining company valuations.

These types of situations and processes aren't unfamiliar to me. I co-founded one of the first online gaming startups in Europe, and we had strategic partnering inquiries from different telecommunications and media companies. One of those talks resulted in the acquisition of our company by Telefónica in early 2000. Subsequently I became involved with MySQL AB as an adviser to the CEO and early-stage shareholder in the company, and later saw the likes of Intel and SAP come in -- and finally, MySQL's acquisition by Sun.

I'd just like to describe from my vantage point after 25 years in the IT industry which players I would imagine to consider investment opportunities in connection with a future competitive mainframe market. The list below is ordered alphabetically. I'd like to clarify that at the time of publication of this posting, I do not own stock (or related derivatives) of any of the companies mentioned.

BMC: This $2 billion company does a large part of its business on the mainframe. When the cards get reshuffled, it won't want to be left behind.

Dell: This computer maker is more diversified than most people know and recently experienced an increase in profitability due to strong sales of enterprise hardware (server, storage and networking products).

Intel: Previously invested in mainframe emulation company Platform Solutions, Inc. (PSI). Can supply high-performance CPUs to power software emulators and could also play a role in hardware emulation.

HP: A natural IBM competitor with a strong foothold in the enterprise market.

Micro Focus: This company is also publicly traded and offers Visual COBOL, a .NET-based implementation of the programming language in which most mainframe legacy software is written. Emulators could run legacy programs on the same servers as Visual COBOL programs, making a gradual migration of workloads a more viable option for customers than it is today.

Microsoft: Invested in PSI (like Intel) and in T3 Technologies. For Microsoft's enterprise software division, improved interoperability with mainframe legacy workloads is essential. I'm not worried for free and open source software: if Linux couldn't compete in such a server-based context, it would never be able to compete with Windows. Customers should have all options. Compared to IBM's monopoly, competitive pressure from Microsoft and its partners would definitely be an improvement. By definition, there can never be two monopolies in the same markets.

Oracle: In its core business (relational database management systems), Oracle misses most of the mainframe opportunity due to IBM's stranglehold on the market. The standard mainframe database is IBM DB2. In a more competitive market, Oracle would be able to sell 11g and its enterprise software to a larger number of IBM's customers. Furthermore, Oracle's hardware division (formerly named Sun Microsystems) could play a key role in connection with emulation (similar to what I wrote above about Intel).

SAP: While not nearly as disadvantaged by IBM's practices as Oracle and others, SAP would also benefit from an open market. Its recent acquisition of Sybase is a cornerstone of its enterprise cloud computing strategy. The integration of mainframe legacy workloads with mobile and other cloud-related technologies will create new opportunities for SAP.

Obvious economic motivations

All of the companies I mentioned, and presumably a number I didn't even think of in this context, know that there is a lot of pent-up demand in the market for more competitively priced solutions for the execution of mainframe legacy workloads.

I wouldn't be surprised to see significant activity in the wake of the launch of antitrust probes. In my experience, such deals are often negotiated in a matter of weeks. Some take longer. But I can't see how the industry would forgo such an opportunity.

It's unhelpful that IBM always tries to use actual or suspected activities of other companies to deflect attention from the serious issues that need to be addressed in the course of the regulatory process. There's no denying the jugular importance of the mainframe to the world economy. IBM maintains its absolute control over this strategic platform with threats, intimidation, FUD and generally anticompetitive behavior, all of which stifles innovation.

Those are the problems. More competition is the solution.

So when the deals happen, let's let IBM cry. Its customers -- who are locked in and get overcharged -- have suffered long enough.

If you'd like to be updated on patent issues affecting free software and open source (including but not limited to the antitrust investigations against IBM), please subscribe to my RSS feed (in the right-hand column) and/or follow me on Twitter @FOSSpatents.

IBM's cloud grab: the next generation of the mainframe monopoly

In July, the European Commission launched its antitrust probes of IBM's conduct in the mainframe market only four days after IBM's presentation of its new mainframe generation, the zEnterprise.

The Commission took its decision four months after French open source startup TurboHercules had lodged its complaint. That time span is the Commission's goal under its best practice guidelines.

So the EU didn't mean to spoil the party, but there is an important factual connection between the two events: the zEnterprise is an overtly aggressive move by IBM to leverage, expand and extend its mainframe monopoly with a view to enterprise cloud computing. It is high time for intervention to avert abuse that would otherwise cause irreversible damage to the emerging cloud computing market.

In its report on the zEnterprise launch, V3.co.uk picked just the right headline:

"IBM zEnterprise mainframe
assimilates Unix and Linux servers
Brings Power 7 and [x86] servers under its control"

The word "assimilates" alludes to Star Trek, but it is appropriate. IBM calls the zEnterprise a "system of systems" and a "datacenter in a box". Indeed, the objective is to absorb x86 (Intel and compatible) servers. "One box to rule them all", one might say.

If this only meant more competition on the x86 side and if customers really had alternative options, I would welcome it. However, the way IBM leverages its mainframe monopoly is abusive and anticompetitive. Let me explain.

Enterprise cloud computing: clarifying the term

Wikipedia defines cloud computing as "Internet-based computing, whereby shared resources, software, and information are provided to computers and other devices on demand".

There are different ways in which enterprises can operate cloud-based services. They may operate their own cloud (meaning they have the infrastructure in house) or use services provided by third parties. In many cases they'll do a combination of both.

Another distinction is that those cloud-based services may be available only to a company's employees (private cloud, like an "Intranet"), to select business partners (public cloud, like an "Extranet"), to the general public, or a combination (public-private cloud).

Mainframe-managed data: the lifeblood of large enterprise clouds

In every one of those setups, the mainframe legacy comes into play. In most cases -- especially in the most important cases -- new enterprise cloud services are not stand-alone creations totally detached from other business operations.

Other business data (and the applications managing them) are the lifeblood of enterprise clouds. For an example, whatever an airline might do in cloud computing, it will usually have to be connected to the reservation system and/or operations management system. Whatever a bank does in the cloud, it will usually need access to account management and the related transaction processing. Whatever an insurance company does in cloud terms, it will usually need access to all of the essential records.

Where do those essential data (and the applications managing them) reside? In most cases, on mainframes. In this recent blog posting I already mentioned that 80% of the world's business data reside on mainframes. That's the percentage across all industries. In the ones I particularly mentioned -- banks, insurance companies, travel reservations -- the number is even closer to 100%.

So to make an enterprise cloud fly, it still has to be tethered to a mainframe in many cases. That metaphor may sound paradoxical. It's just the sad reality of a lock-in of enormous proportions.

A senior IBM executive noted that IT projects don't start on a "green field" these days:

"We ought to look at these things the way we look at a city -- a city is a living, breathing thing, and you don't literally rebuild New York every year: you add to it. And more often than not, you're renovating what's already there -- you're improving what already exists, you're not replacing what exists."

IBM's all-absorbing zEnterprise cloud machine

The zEnterprise (latest mainframe generation) was designed from the ground up to connect mainframe legacy workloads with new cloud computing technologies.

It doesn't really add much new on the original mainframe (System z) side. CPU clock speed went up only from slightly below to slightly above 5 GHz, and the number of processors from 64 to 80 (in each case, 16 are reserved for internal purposes). But the key new element is that the zEnterprise is a "system of systems", integrating x86 (meaning Intel or Intel-compatible) blades to a greater extent.

I've seen and used the integration of different computer architectures in the same system a long time ago. The Commodore 128 had a CP/M component with a separate CPU, and my first PC was a plug-in card for the Amiga. That was fascinating, but those devices were toys.

What IBM now wants to achieve with the zEnterprise is that companies consolidate their entire data centers on the basis of IBM's technology, putting tons of IBM's x86 components under the control of a mainframe. IBM calls it a "data center in a box". I consider it a very dangerous expansion and extension of the mainframe monopoly. Let me explain what's wrong with this.

The need for integration

There are technical reasons for which it does make sense to run a mainframe legacy application on the same system -- not just in the same network -- as new cloud applications that require access to those data and the applications managing them.

One very important aspect is administration. If you run a large IT operation, you need an efficient way to keep track of all the systems, all the time. IBM's Tivoli systems management software can be used to administrate both System z (mainframe legacy) and x86 resources on a zEnterprise. Tivoli is proprietary software and there's no indication that competing vendors of Intel-based hardware would have access to its interfaces.

The need to integrate mainframe legacy workloads and new enterprise cloud applications distorts competition. For the mainframe, IBM has a monopoly. Consequently, Big Blue also has a monopoly for a "system of systems" including the mainframe. This expands, extends and exacerbates the monopoly. The original monopoly (mainframe) is leveraged to create an even broader cloud-related monopoly. It's like one monopoly "spawning" another.

IBM denies its customers an important choice

Customers should have the choice between two different paths to a "datacenter in a box":

1. the zEnterprise path: bringing x86 hardware under the control of a mainframe

2. the virtualization path: executing mainframe legacy workloads on Intel-based servers

The second choice is the one IBM denies its customers, and it's a very important one. It would allow many customers to make their purchasing decisions based on new cloud computing needs and to achieve similar performance at a potentially much lower cost.

IBM allows customers only to put the old cart (the mainframe legacy) before the new horse (cloud computing). As long as customer don't have an alternative to the zEnterprise approach, they are going to be overcharged and the lock-in that already exists today will only exacerbate in the future, resulting in ever-increasing costs and less innovation.

There are no technical reasons for not offering the second choice. The Hercules open source mainframe emulator is a reliable and innovative solution. It's a mature piece of software whose development started in 1999, and today's Intel-based hardware is powerful enough for many legacy workloads. The only problem is that IBM doesn't allow customers to run the proprietary z/OS operating system (which is key to execute legacy workloads) in emulation. That restriction must come to an end.

Even those who decide otherwise would benefit from the second choice because it would put pressure on IBM and result in more competitive pricing.

Regulatory intervention can open up the market, restore competition and safeguard innovation. In order to do so, it must be timely and decisive. Now is the time.

If you'd like to be updated on patent issues affecting free software and open source (including but not limited to the antitrust investigations against IBM), please subscribe to my RSS feed (in the right-hand column) and/or follow me on Twitter @FOSSpatents.