Price increases for IBM’s S/390 software applications are a market reality. But at what point does a price hike become price gouging?

For sometime, S/390 administrators have cried foul play when trying to negotiate software prices for their systems. Many claim the price increases have nothing to do with the market reality of supply and demand. Rather users say vendors are putting a stranglehold on companies because of poorly negotiated contracts, vendor consolidation and user ignorance.

Search390.com assistant news editor, Edward Hurley, spoke with Jim Sieger, vice president of Macro 4 of Parsippany, N.J., a software applications vendor for mainframes. Macro 4 sells mainframe system management tools for a range of platforms, including the S/390. Sieger says that not all S/390 software vendors engage in software gouging practices and claims to be one that does not. As a result, Sieger says he has experienced first hand, the wrath of customers who claim to have been the victim of price gouging by other software vendors. He says customers gripe about companies jacking up prices on software, leaving no room for negotiation. Prior to joining Macro 4, Sieger held a variety of sales and marketing positions at major corporations, including Data General Corp. and IBM.

Search390.com: It's no secret that vendors and users within the S/390 community are up in arms over "price gouging." Has price gouging been going on for a while?

Sieger: I think it has been prevalent for 10 years or more. My experience has shown it pops up in different areas every few years, particularly when a specific tool or application becomes available from only one vendor.

Search390.com: What is the difference between gouging and taking advantage of market conditions?

Sieger: Gouging is all about attitude. Some software vendors think that their customers are locked into using their products, so they abruptly increase costs much more than market conditions can justify. Gouging is not taking advantage of market conditions, it is taking advantage of the customer.

The motivation for gouging can be that software companies make revenue growth commitments to their shareholders. In many ways, the mainframe software market is a mature one, and the only source of revenue growth is from an installed customer base. If a vendor needs to show a 25% annual revenue increase, that increase has to come from its existing customers if it doesn't have new solutions to offer. So the vendor imposes cost increases on its customers in the form of upgrade license charges and increased maintenance fees.

Generally when there is no room for negotiating or vendors say they are going to negotiate and don't, then it could be price gouging. It has a lot to do with attitude, how the message is delivered. They basically say "Take it or leave it" to customers for software contracts.

Search390.com: In what ways does price gouging affect software buyers besides hitting them in the wallet?

Sieger: Customers are looking for two things in their software plans with vendors. First, what is the absolute dollars they will have to spend so they can budget. Second and perhaps more important, they are looking to avoid unknowns two, three or five years down the road. With the Internet, a lot of companies don't know what their hardware needs will be in three or five years.

In some cases, it costs them more for updating their software than it does for the new hardware. Even if no more users are going to use it.

Search390.com: Price gouging can be tempting, then, for software vendors. How can the industry regulate itself? Can price gouging be eliminated or avoided?

Sieger: More competition is the way around it. Companies also need to stop relying on a single product that services a non-growing customer base. One company has addressed this by expanding into different offerings so it is not totally reliant on 390 software. When a company is making money from other areas, then it is a lot less likely to inflate the prices and gouge in a specific area.

Search390.com: Have you seen any difference in IBM's pricing since Hitachi announced it was no longer going to support the platform?

Sieger: We have not seen any difference, but any change would likely occur on the hardware side where Hitachi competed. We do not expect any affect on software prices.

Search390.com: Can you offer some tips for users to avoid a price-gouging trap?

Sieger: The best strategy is to explore the alternative solutions that are out there. There are excellent products that have come into the market which are just as good, and in many cases better, than those from the big vendors. They are also available under more customer-friendly terms and conditions. At Macro 4, we have hundreds of customers who have switched to our Dump Analysis and File Management tools and saved millions of dollars along the way.

Search390.com: Are there ways to structure contracts to insulate oneself from price gouging? Should such factors come into play when selecting applications or even hardware?

Sieger: Absolutely. Contracts can be structured to limit or even eliminate upgrade charges and maintenance fees. When a hardware upgrade is required due to additional applications or increased system use, the cost of the resulting software upgrades becomes a significant component of the total upgrade cost. In some cases, the magnitude of software upgrade charges has delayed and even prevented hardware upgrades. IBM, who is always interested in selling hardware upgrades, has recommended to customers that they look at alternatives, including Macro 4, to make these upgrades more affordable for their customers.

Search390.com: Specifically how has your company avoided price gouging? What has been the customers' response?

Sieger: Macro 4 offers flexible licensing, contract, and payment options that allow our customers to lock in their costs over a three to five year period. Many customers have taken advantage of our site licenses, which do not subject them to additional software license charges if they upgrade to more powerful CPU's. The increasing rate-of- change of business conditions make it difficult for customers to accurately project the growth of their MIPS requirements over a multi-year period. We offer contracts which allow customers to accurately budget and plan for their software costs even if they are uncertain of their CPU hardware growth.