Allen-Myland, a company that refurbishes and upgrades IBM mainframes, has taken IBM to court, charging several violations of antitrust law (CI Nos 725, 727, 729). The refurb house, known as AMI in the trade, alleged that IBM had imposed a charge called the IWSC that killed some of its 3033 mainframe upgrade business. AMI also said that IBM blocked its access to certain independently-made parts. But the most important part of AMI’s case may be its accusation that IBM unfairly prices the parts used to upgrade 308X mainframes.
All Cadillacs
In a January 16 courtroom argument that preceded the actual trial, Evan Chesler explained this to Judge Clarence Newcomer (who turned the case over to Judge Thomas O’Neill before the trial started. Judge Newcomer’s curiosity was piqued.You haven’t run into the General Motors problem? the Court asked. [The one] they ran into using Chevrolet engines in Cadillacs? No, your Honour, Chesler replied, because these are all Cadillacs. Whether they are Chevys or Cadillacs, or Edsels for that matter, IBM keeps careful control over the parts in its engines. In the case of an E-to-B upgrade, for example, IBM replaces two TCMs and keeps the pair that has been removed. In July 1985, the upgrade of a 3083-E, which runs at roughly 4 MIPS to a 3083-B, which runs at roughly 6 MIPS, was net priced at $420,000, of which $2,400 was IBM’s labour charge. This means IBM was paid more than $200,000 for each TCM that was swapped. This was pretty profitable for IBM. Even if the returned parts were no good, the average direct cost of making a new TCM was only $12,000. This pricing strategy was continued as IBM announced mid-life kickers, the 308XX models, and again with the 3090s, IBM’s current series of mainframes. Most upgrades that boosted MIPS are net priced. Net pricing means that, aside from labour, the price of an upgrade is the cost of new parts less the value of old parts that IBM will take out and keep. The returned TCMs are recycled through IBM’s manufacturing operation at a tiny cost – about $4,000 apiece. IBM says recycled TCMs are equivalent to new ones. When IBM mainframe users want a model-to-model upgrade, they almost always call in IBM. But independent leasing companies are different. They don’t always go to IBM for the labour, and occasionally they even cannibalise old mainframes for the parts. The lessors instead hire independent companies, called refurb houses, to perform the upgrade. Allen-Myland Inc, of Broomall, Pennsylvania, is one such company. AMI get the jobs not because it is cheaper than IBM, but because it can get the work done a lot faster. IBM may take months to schedule and complete an upgrade; AMI can get the job done in days.
Getting no rent
Leasing companies can’t afford to wait for IBM. It’s very expensive for lessors to sit on a large mainframe, getting no rent, until IBM gets around to souping up the CPU so that it can be installed at a new location. When AMI gets an order for an upgrade, it can order the parts and documentation from IBM. But IBM does not let AMI simply order such parts and keep them in stock. IBM’s policy is to demand the serial number of the machine that is to be upgraded. It will issue the upgrade for use only on the designated processor. AMI contends that IBM’s policy is burdensome, and that it interferes with AMI’s business, which is based on quick response. AMI has tried to show that its technicians can complete upgrades using parts kept on hand, and that the computers will pass all IBM’s tests when AMI is done with its work.The rationale behind IBM’s insistence that it needs the serial number of a machine before it can issue an upgrade is this: IBM says its big computers – even ones with the same model number and features – aren’t all alike. Large mainframes are subject to engineering changes from time to time. IBM wants machines to have all the appropriate engineering changes installed before it permits an upgrade to be completed. But some of the testimony in the case shows that IBM may not be as meticulous about engineering changes as i
t would like the outside world to think. Despite IBM’s substantial charges for maintenance – more than $130,000 a year for a large 3084, more than $50,000 a year for a typical 3081 – IBM does not routinely install every engineering change for its customers as fast as the change is developed. Instead, IBM may wait until a user has a problem or gets an upgrade. As long as an installed machine seems to be working, it’s usually left alone.IBM’s track record in this matter was relatively easy for AMI’s lawyers to bring before the court. IBM keeps files on every one of its mainframes at its plant in Poughkeepsie, New York. These records are supposed to show the level of the machines, meaning the recency of any engineering changes that have been installed. When a technician orders an upgrade – whether the technician is with IBM or not – IBM provides instructions so that the equipment can be conformed to current standards before its TCMs are changed. Even then, differences between IBM’s functionally identical mainframes may require that a special version of the system’s microcode be loaded into memory. Whoever performs the upgrade must install the correct microcode, too. As complicated as this might seem, AMI goes more red tape than an IBM technician does when it performs an upgrade. This is necessary to ensure that IBM will maintain the machine once it’s been modified. Basically, AMI runs a full set of diagnostics before touching the computer. If the processor fails any test, AMI refuses to work on it. The owner has to call IBM service technicians to fix it. Once the system passes all the diagnostic tests, the upgrade is installed. Finally, another full set of diagnostics is run to prove that the upgrade is one hundred percent functional. AMI insists that IBM personnel participate in this last checkout to make sure there’s no backbiting if the mainframe crashes the next day.
A whopping bill
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Once the machine is checked out by IBM, its maintenance contract can be resumed as if no other company had it hands on the circuitry. Third parties like AMI can go to IBM for the parts to perform the upgrades. They can also get documentation to enable their technicians to do the work. The way IBM charges for its upgrades is generally net pricing. The manufacturer wants to get back any parts removed from the lower-powered models when more powerful circuits are installed. This practice gives IBM components to recycle into production. It also keeps the parts out of the market, where they might be used by independents to perform other upgrades. For instance, the parts removed from a 3083-B when it is upgraded to a 3083-J can be used to boost a 3083-E to a 3083-B. IBM’s parts are priced cheaper when they are grouped as kits. The over-the-counter prices on individual TCMs are substantially higher than combined prices in an MES. For example, according to the sworn statement of one IBM executive, the September 1985 net price IBM asked for upgrading a 3083-B to a 3083-J, including labour, was $365,000; the five TCMs, if purchased individually, listed for $805,000. These are the TCMs that cost IBM an average of $12,000 each to manufacture. If a third party orders a net priced MES, and then doesn’t return the parts it’s supposed to when the job is done, IBM will send it a whopping bill. That’s just what happened to a large leasing company when it used AMI on an upgrade. (To be concluded). Copyright (C) 1987 Hesh Wiener
