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Neon sues IBM over 'anticompetitive' mainframe tactics

zPrime finally feeds some lawyers

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This summer, when Neon Enterprise Software launched its zPrime software for moving legacy workloads on IBM's mainframe engines to lower-cost specialty engines, it was only a matter of time before the lawsuits began.

As it turns out, Neon, which is seeing its zPrime business thwarted by what it claims are unfair business practices and anticompetitive behavior on the part of Big Blue, sicced the lawyers on IBM first.

Neon filed its lawsuit filed yesterday in the U.S. District Court for the Western District of Texas, which is located in Austin. IBM has about 6,000 employees in its Austin facility and Neon is located nearby in Travis. In the suit, Neon basically says that IBM left the mainframe barn door open and has been trying to close it after the specialty engine horses have bolted.

There are three specialty engines, and two of them are exploited by the zPrime product and are at the heart of the Neon suit. The first is the Integrated Facility for Linux (IFL). This is IBMese for a standard mainframe engine that is only explicitly sold to support Linux and its applications.

These IFLs, which debuted in 2000, cost considerably less to buy than a regular mainframe engine (called a central processor, or CP for short). How much less costly is hard to say since IBM does not provide pricing for mainframe hardware except in the rare occasions when it feels like it. More importantly, IFLs do not invoke monthly software licensing fees for IBM's z/OS operating system and related systems software. (A year ago, IBM authorized the IFLs to support the "Sirius" variant of Solaris Unix, but nothing much become of this.)

The next specialty engine, which came out in 2004, is the System z Application Assist Processor (zAAP) for offloading Java and XML workloads from the central processors (CPs) running z/OS and IBM's WebSphere middleware. The third, which came out in 2006, is the System z Integrated Information Processor (zIIP), which accelerates DB2 databases by offloading certain functions from the CPs running z/OS and DB2 to these zAAPs.

Neon's legal argument, which you can read in the suit here, boils down to this: IBM said it would not charge software license fees for zIIP and zAAP specialty engines and did not put any restrictions in their use in mainframe contracts to restrict the workloads running on them, as it did with the IFL. (Which explicitly is only allowed to run Linux or Solaris.) And now, Neon alleges, Big Blue is trying to retroactively impose restrictions. And for good reason. There are billions of dollars at stake.

"Faced with the threat now posed by Neon, IBM has used a variety of unlawful means, including misrepresentation, disparagement, threats of retaliation, baseless litigation, and other types of unfair and unlawful competition, in an attempt to crush Neon and thereby protect the revenue generated from IBM's monopoly in the processing of legacy workloads," Neon's lawyers, Reynolds, Frizzell, Black, Doyle, Allen and Oldham, say in the suit. "In sum and substance, having sold products to its customers without limitations on their use, IBM is attempting unlawfully and retroactively to impose such restrictions, all to the billion-dollar-plus detriment of consumers throughout the United States and the world at large."

The suit filed by Neon alleges that IBM's practices in trying to scare its mainframe customers off from using the zPrime tool violate the Lanham Act and also unfair competition laws in California, where both companies do business. The suit also names some names, saying that financial services giant Wells Fargo and healthcare provider Highmark, were two prospective customers who "tested and loved zPrime".

It then suggests they were dissuaded from buying the product when "IBM elected to interfere through the use of specific and unlawful disparagement of zPrime and threats of retaliation and baseless litigation." Neon's lawyers allege that IBM's actions also violate the Texas Deceptive Trade Practices Act and provisions of the act that created the Federal Trade Commission.

Because Neon has estimated that there were hundreds of millions of dollars in mainframe hardware and software fees at stake among its prospective zPrime customers, it is alleging tens of millions of dollars in damages through lost sales.

In November, when Neon put out the zPrime 1.2 release and was bragging that zPrime was beginning to get traction among the IBM mainframe base. Lacy Edwards, chief executive officer at Neon, said that it had been contacted by some 1,500 mainframe shops, and estimated that there were probably only somewhere between 6,000 and 7,000 unique mainframe customers in the entire world. That is a phenomenal amount of interest for a product that hasn't even been in the field for six months.

When zPrime 1.2 was released in November, Neon had 14 customers using zPrime in production, 50 had tested it, and another 200 were lining up to do evaluations. Pricing for zPrime is kind of slippery, but generally, the company takes a mainframe shop, figures out what workloads can move over to zIIPs and zAAPs, and does a two-year calculation on the amount of money customers can save in hardware, software, and maintenance fees to IBM. It then charges somewhere between 10 and 20 per cent of that fee per year for a license to use zPrime. If several hundred of the largest mainframe shops in the world started deploying zPrime, IBM's Systems and Technology Group and Software Group would feel the hit immediately.

The amazing thing is that IBM has not come up with a reason to sue Neon itself, as it has eventually done with any competitive threat to its proprietary mainframe or midrange system hegemony. It could be that zPrime does not violate any of IBM's contracts and software licenses for zIIPs and zAAPs, as Neon has said all along, even as IBM has hinted to customers that it might in its letters to and conversations with mainframe customers.

But then again, IBM's public relations machine and its lawyers appear to be taking a much harder line than they have to date with regard to zPrime

"Neon's claims have no merit, and its product offers no innovation," an IBM spokeperson said in a statement. "Neon's software deliberately subverts the way IBM mainframe computers process data. This is akin to a homeowner tampering with his electrical meter to save money. IBM has invested billions of dollars in the mainframe this decade, and we will vigorously protect our investment."

In its suit, Neon is asking the U.S. District Court in Austin to provide a declaratory judgment that none of IBM's contracts or software licenses that related to the use of specialty processors by customers impose any limitations with regard to workloads. It further asks the court to confirm that zPrime will not cause mainframe shops to breach or otherwise violate their agreements with Big Blue. Neon is also seeking punitive damages and wants a trial by jury. ®

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