IBM Needs a Good Lawyer

Is bigger better? Sometimes, it just makes you a fatter target.

Recent months have seen the Obama administration target defense industry programs, investigate telecom business practices, and paint a bullseye on insurance companies' profit margins. This week, IBM (NYSE:IBM) landed in its gunsights, as the Justice Department began investigating possible abuse of IBM's monopoly position in the market for mainframe computers.

The Justice Department subpoenaed information from the Computer & Communications Industry Association (a broad organization supporting open competition that includes such disparate companies as AMD (NYSE:AMD) in semiconductors to Oracle (NASDAQ:ORCL) in databases to Google (NASDAQ:GOOG) in Internet search), seeking information on potential abuses by IBM.

Lawsuits filed by IBM rival Platform Solutions (since acquired by IBM) and T3 Technologies, which is partly owned by Microsoft (NASDAQ:MSFT) and produces mainframe products, sparked the inquiry. The plaintiffs accused IBM of "tying" its software and mainframe computer sales together, refusing to license the former, and in effect requiring purchasers of IBM hardware to buy IBM software to run on it.

IBM denies any wrongdoing, and they might even have a good defense. But that's not the point. It doesn't matter whether IBM must accede to its rivals' wishes. It matters that Big Blue should.

Altruism? Pshaw!
Listen, Fools. I'm not arguing that IBM should license its software to the enemy because it's the nice thing to do, but because it's the better way to make profits. (It'll also avoid a Justice Department headache that will only waste time and money.)

I'm old enough to remember when there were just three kinds of personal computers on the market -- Apples, "IBMs," and "IBM clones." (Ask Hewlett-Packard how it felt about that moniker.) Apple built the better mousetrap, but then it got greedy. Refusing to permit other companies to build "clones" that could run Apple software, it committed corporate near-suicide when Microsoft and IBM teamed up to build an army of clones, coring Apple's market share.

IBM should remember that lesson. And it should recall why it later exited the low-margin PC market in order to make more money elsewhere. IBM's Systems and Technology division, where its mainframe and server products are located, posted a mere 8% operating margin last year -- the only division to fall short of double-digits. In contrast, IBM's Software business booked over a 28% operating margin.

Foolish takeaway
Simply put, software is a better business than hardware. If IBM is smart, it will figure that out quick, settle the Justice lawsuit quicker, and turn its attention to making some serious money -- in software and services.