IBM Needs a Good Lawyer

Pity IBM (NYSE: IBM  ) . They get no respect -- not at home, and not abroad, either.

Nearly one year ago, we regaled you with the tale of how IBM's friends in the tech industry ("friends" of the "who needs enemies" variety) were trying to lay the tech titan low. Instigating a Justice Department investigation into alleged "tying" of mainframe computer hardware to mainframe software, the Computer & Communications Industry Association (a broad organization supporting open competition that includes such disparate companies as Advanced Micro Devices (NYSE: AMD  ) in semiconductors, Oracle (Nasdaq: ORCL  ) in databases, and Google (Nasdaq: GOOG  ) in Internet search) aimed to force IBM to license use of its software by competitors who hawked competing, presumably cheaper, hardware.

Now the European Union -- which never met a monopoly complaint against a U.S. company that it didn't like -- is getting in on the fun. Earlier this week, we learned that the EU Competition Commission, lately the domain of the dread knight Neelie Kroes, is now leveling its lance at IBM, and sounding the charge.

Do-da-da-dupe-da-doo!
Already juggling legal brouhahas with Intel (Nasdaq: INTC  ) and SAP (NYSE: SAP  ) , new Competition Commissioner Joaquin Almunia has begun investigating whether IBM is trying to lock rivals TurboHercules and t3 Technologies out of the mainframe market. (Almunia leveled a second, related claim that IBM may be withholding shipments of spare parts for its mainframes to third parties interested in doing maintenance on the comps.)

IBM calls both charges without merit, argues this is all Microsoft's (Nasdaq: MSFT  ) fault, and labels TH and t3 Mr. Softie's "satellite proxies." But IBM's objections are beside the point.

Point, counterpoint
The point is not whether IBM is dominating the market for mainframes. (With a 73% share of this $4.5 billion global market, it almost certainly is, legally or otherwise.) The point is that this isn't a fight worth winning.

Last year, I argued IBM should accede to its rivals' wishes without a fight. I pointed out that IBM's systems and technology division, where its mainframe and server products are located, earns only 8% operating margins on its products and is the only IBM division that fails to earn double-digit margins on its products. IBM's tech services segment is nearly twice as profitable at 14%, while its software biz boasts 34% operating margins. From where I sit, it looks like rather than defending its right to tie software to hardware, IBM should "pull a Lenovo," toss hardware on the scrap heap, and focus on what it is best at.

"Tying" hardware to software isn't the path to profits for IBM. Hardware is what's tying IBM down.

Intel and Microsoft are Motley Fool Inside Value recommendations. Google is a Motley Fool Rule Breakers selection. Motley Fool Optionshas recommended buying calls on Intel. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Google, Intel, and Oracle.

Of all the companies named above, though, Fool contributor Rich Smith owns only Google. Check out his latest stock recommendations on Motley Fool CAPS. The Motley Fool has a disclosure policy.


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