A two-man team of arbitrators last week declared a truce in the international mainframe computer software wars, where American and Japanese companies have long traded charges of monopolizing markets, counterfeiting and corporate spying.
Addressing longstanding claims by International Business Machines Corp. that Japanese computer giant Fujitsu Ltd. has violated IBM mainframe software copyrights, the arbitrators decided that Fujitsu has the right to sell close imitations of key IBM mainframe software products.
Though Fujitsu could end up paying IBM hundreds of millions of dollars for the privilege, the decision is seen as a defeat for IBM, which has long used its control over mainframe software to hold back competition in the $17 billion worldwide mainframe market.
The arbitration order doesn't guarantee Fujitsu success in this turbulent market, but it does end speculation that IBM will be able to slam the door shut on the largest of its Japanese rivals -- the competition IBM admits it fears most.
IBM has traditionally been at its most competitive in the mainframe market. Mainframes -- the massive, multimillion-dollar computing engines that large corporations employ for accounting and information functions -- represent the lion's share of IBM's earnings. The company currently holds an estimated 60 percent share of the worldwide mainframe market, and 70 percent of the U.S. market.
But perhaps more importantly, IBM has taken over other key segments of the computer industry, such as desk-top computers and disk storage devices, by building on its mainframe dominance. Thus, IBM has geared up to repel a challenge from Digital Equipment Corp. for the exploding minicomputer market by bringing out a minicomputer that runs the same software as its mainframes.
One of IBM's primary strategies for holding on to the mainframe market has been to keep away from its competitors the inner workings of its operating systems -- the highly complex software programs that drive the computer's basic functions. Without access to this software, competitors face a tough choice. They can develop and sell their own, completely different operating system. But that's a rocky strategy because the IBM operating system has become a de facto standard around the world. The computer industry is littered with the corpses of companies that have gone this route -- RCA, General Electric and Honeywell, to name a few that have tried and failed to challenge IBM's system.
The alternative is to build computers that run IBM's mainframe operating systems, or facsimiles. In personal computers, this strategy has created armies of IBM clones, compatible with IBM hardware and software.
Although this path, too, has seen many failures, two companies have fared well in the mainframe business: Fujitsu and Hitachi. The two together have an estimated 15 to 20 percent share of the worldwide market for mainframes. Fujitsu is the larger of the two. In the U.S., Hitachi mainframes are marketed by National Advanced Systems in Mountain View, Calif. Mainframes based on Fujitsu components are sold here by Sunnyvale, Calif.-based Amdahl, of which Fujitsu owns 46 percent.
One reason the Japanese giants haven't done better is that many potential customers, though tempted by the superior technology and price/performance that characterize many of the Japanese computers, are concerned that IBM might make changes in its operating system that would render the competitive machines at least temporarily incompatible with the latest IBM software.
Thus the Japanese manufacturers need to get their hands on new versions of IBM operating systems components: If they know what changes IBM is making in the software, they can quickly modify their machines to keep up.
The need for such information led Hitachi into a scheme to steal IBM documents in 1983. Hitachi pleaded guilty to criminal charges and settled a resulting IBM suit for a reported $300 million.
Fujitsu has additional motivation for wanting a close look at IBM software. Rather than requiring its mainframe customers to buy IBM operating systems, Fujitsu offers its own operating system that is nearly identical to IBM's (though Amdahl's U.S. customers typically run IBM software). By selling its own operating system, Fujitsu stands to reap considerable profits that would otherwise go to IBM: A single mainframe can require operating system software costing as much as $1.5 million. Also, Fujitsu has been able to adapt its version of the operating system to run computers far more powerful than IBM's biggest machines. Though the market for these computers has so far been limited to Japan, Fujitsu could one day sell them in the United States and Europe
IBM has done everything in its power to stop Fujitsu from cloning IBM's operating systems, a complex feat Fujitsu accomplishes by studying the functions of IBM's software and then writing software that performs similar functions. Since 1982 IBM has repeatedly accused Fujitsu of violating software copyrights, a murky and rapidly changing field of law. Fujitsu insisted that, because it was using publicly available data and because IBM's operating systems had become international standards, the company was acting legally. The charges, however, hurt Fujitsu's business by raising concerns that IBM might eventually prevail and force a recall of Fujitsu software.
In 1983, hoping to avoid a protracted legal battle, the two companies signed an agreement governing access to each other's operating system software. The inadequacies of the agreement -- such as its failure to take into account differences in Japanese and U.S. laws -- caused the truce to quickly deteriorate. In 1985 IBM placed the case before the American Arbitration Association, which the agreement specified would settle disputes.
Presumably, IBM expected the arbitrators to forge an order that more or less followed the basic shape of the 1983 agreement, which granted Fujitsu rather limited access to IBM operating system products. The order handed down last Tuesday goes a great deal further.
It gives Fujitsu the right to examine in unprecedented detail the intimate workings of nearly 800 key operating system products, as well as the right to develop and sell its own versions of these products. A complete assessment of the order's ramifications will have to await the arbitrators' determination of the sum Fujitsu must pay IBM for the right to access and clone IBM's software. That figure will be set by the arbitrators in about a year; analysts estimate it will be somewhere between $500 million and $750 million.
But many observers aren't waiting to label the arbitration order a blow to IBM. Among the potentially damaging implications: IBM customers can, at least for the five- to 10-year term for which the order will be in effect, turn to Fujitsu hardware and software with complete assurance that the products will remain fully compatible with IBM; Fujitsu will be immune from all present and future software copyright lawsuits for the term of the order; and IBM will almost certainly be forced to hold down the price of its operating systems to avoid being undercut by Fujitsu's version.
"The arbitrators have clearly stated that Fujitsu has a right to be in this business," says PaineWebber analyst Stephen K. Smith. "The long-term results will be negative for IBM."
If the order seems skewed in Fujitsu's favor to some, it may be because the arbitrators took a broader view of the issues than might have been expected. Arbitrator Robert H. Mnookin, a Stanford law professor, emphasized in a phone interview that the order "promotes competition" in the mainframe industry and "benefits customers." Mnookin and fellow arbitrator John L. Jones, a retired Norfolk Southern Corp. executive, must have been aware that "promoting competition" in the computer industry is virtually synonymous with weakening IBM's dominance.
Mnookin wouldn't acknowledge that view, but he defended the fairness of the order to IBM. Calling it a "win-win" decision, he pointed to the "full and adequate compensation" IBM will receive from Fujitsu, as well as the safeguards established for sharing information. "IBM will now be able to rest confident that Fujitsu's use of IBM's programming material will be limited by the instructions that we're going to issue," he explained.
Some analysts question whether any amount of information sharing can help Fujitsu wrest a significant share of the $5 billion market for operating systems software away from IBM, which owns 70 percent of that market.
"Even if Fujitsu's software is functionally equivalent and they discount it 20 percent, IBM will still be able to differentiate itself by its image and maintain pricing power," insists analyst Peter Burris at International Data Corp. in Framingham, Mass. Burris also contends that customers will remain concerned about Fujitsu's position after the order expires, which will be in 10 years at the latest.
Ultimately, information systems managers at large corporations will determine the effects of the arbitration order. These executives make the mainframe hardware and software purchasing decisions.
For now, most don't think the order will put much of a dent in IBM's business. One major edge IBM retains is its massive service and support network, a crucial consideration to information system managers.
Some computer managers, however, suggest that the arbitration order could help Fujitsu become a viable alternative at more companies. "If we can be sure that their hardware and software is 100 percent compatible, we'd have to give it serious consideration," says Gary Biddle, information services vice president for New York-based multinational American Standard Corp.