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The Industrial reorganization act. Hearings, Ninety-third Congress, first session [-Ninety-fourth Congress, first session], on S. 1167 (Volume pt. 7) online

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THE INDUSTRIAL REORGANIZATION ACT



HEARINGS

BEFORE THE

SUBCOMMITTEE ON
ANTITEUST AND MONOPOLY

OF THE

COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE

NINETY-THIRD CONGRESS

SECOND SESSION
ON

S. 1167



PART 7

The Computer Industry



JULY 23-26, 1974



Printed for the use of the Committee on the Judiciary
(Pursuant to S. Res. 255. Sec. 4)




FRANKLIN PIERCE LAW CENTER

Concojcd, New Hampshire 033Q1

- • -' - 1Q7S

ON DEPOSIT



Boston Public Libiary
Boston, MA 02116



THE INDUSTRIAL REORGANIZATION ACT



HEARINGS

BEFORE THE

SUBCOMMITTEE ON
ANTITRUST AND MONOPOLY

OF THE

COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE

NINETY-THIKD CONGRESS

SECOND SESSION
ON

S. 1167



PART 7

The Computer Industry



JULY 23-26, 1974



Printed for the use of the Committee on the Judiciary
(Pursuant to S. Res. 255, Sec. 4)




U.S. GOVERNMENT PRINTING OFFICE
40-927 WASHINGTON : 1974



For sale by the Superintendent of Documents, U.S. Government Printing Offlca
Wasliington, D.C. 20402 - Price $9.55



COMMITTEE ON THE JUDICIARY

JAMES O. EASTLAND, Mississippi, Chairman

JOHN L. McCLELLAN, Arkansas ROMAN L. HRUSKA, Nebraska

SAM J. ERVIN, Jr., North Carolina HIRAM L. FONG, Hawaii

PHILIP A. HART, Michigan HUGH SCOTT, Pennsylvania

EDWARD M. KENNEDY, Massachusetts STROM THURMOND, South Carolina

BIRCH BAYH, Indiana MARLOW W. COOK, Kentucky

QUENTIN N. BURDICK, North Dakota CHARLES McC. MATHIAS, Jr., Maryland

ROBERT C. BYRD, West Virginia EDWARD J. GURNEY, Florida
JOHN TUNNEY, California

Subcommittee on Antitrust and Monopoly

PHILIP A. HART, Michigan. Chairman

JOHN L. McCLELLAN. Arkansas ROMAN L. HRUSKA, Nebraska

SAM J. ERVIN. JR., North Carolina HIRAM L. FONG. Hawaii

EDWARD M. KENNEDY, Massachusetts STROM THURMOND, South Carolina

JOHN TUNNEY, California EDWARD J. GURNEY, Florida

Howard E. O'Learv, Staff Director and Chief Counsel
(II)



CONTENTS



Dates Hkaring Held

Page

July 23, 1974 4833

Jul V 24, 1974 5065

Julv 25, 1974 5357

July 26, 1974 547I

Oral Statements

Biddle, A. G. W., executive director, Computer Industry Association,

Encino, Calif 5065

Breyer, John P., executive vice president, International Data Corp.,
Newtonville, Mass.; accompanied by James Peacock, editor, EDP
Industry Report; and J. Thomas Franklin, counsel 4933

Bz'ock, Gerald, a.ssistant professor of economics, University of Ai-izona_ _ 5637

Collins, Eugene K., director of research, Evans & Co., New York, N.Y_. 5357

Donaghue, Hugh P., assistant to the chairman of the board, Control Data

Corp., Washington, D.C 5471

Hart, Hon. Philip A., a U.S. Senator from the State of Michigan, and

chairman of the subcommittee, opening statement 4833

Katzenbach, Nicholas deB., vice president, general counsel, IBM Corp.,

Armonk, N.Y.; accompanied by Thomas 13. Barr, counsel 4834

Layton, Christopher, director responsible for data processing, Commission

of European Communities 5317

McGurk, Dan, L., president. Computer Indu.stry Association, Encino, Calif- 5448

Miller, Ralph E., economist, Washington, D.C 5594

Nicolaidis, Alain, scientific attache, computers, Embas.sy of France,
Washington, D.C, on behalf of Maurice AUegre, Delegue a I'lnforma-
tique, French Government 5349

Parkin, Thomas R., vice president, software, Control Data Corp., Minnea-
polis, Minn.; accompanied by Earle L. Lerette, special assistant to chief
executive officer 4867

Sanders, Royden C, Jr., president, Sanders Associates, Inc., Nashua.

N.H .' : 5436

Wallace, Robert E., vice president, Commercial/Industrial Division,

Auerbach Associates, Philadelphia, Pa 5024

Walter-Carlson, Marilyn, vice president and associate director. Research

Shareholders Management Co., Los Angeles, Calif 5393

Material Received for the Record

AUegre, Maurice, Delegue a I'lnformatique, French Government, prepared

statement presented l)j' Alain Nicolaidis 5349

Biddle, A. G. W., executive director. Computer Industry Association,
Encino, Calif.; material relating to the testimony of:

Exhibit 1. — Prepared statement 5087

Exhibit 2. — Report on market appraisal. Computer Division, Bendix

Corp 5130

Exhibit 3. — ^^illiam Rodgers article re "IBM on Trial" 5290

Exhibit 4. — Propo.sed Final Judgment: "U.S. versus IBM" 5298

Brej-er, John P., executive vice president. International Data Cor])., New-
tonville, Mass., accompanied by James Peacock, editor, p]DP Industry
Report, and J. Thomas Franklin, counsel; material relating to the
testimonj' of:

Exhibit 1. — Background material submitted bv International Data

Corp ■_ 4947

Brock, Gerald, assistant professor of economics. University of Arizona ;
material relating to the testimonjr of :

Exhibit 1 . — Prepared statement 5657

Exhibit 2. — Excerpt, chapter 8 of "Competition Among Peripherals

Suppliers" 5664

Exhibit 3. — Paper by Mr. Brock, re structural reorganization uf

computer industry 5681

(III)



IV

Collins, Eugene K., director of research, Evans & Co., New York, N.Y.,

material relating to the testimonj^ of: ^*^®

Exhibit 1 . — Prepared statement 5380

Control Data Corp. joint position statement re Urnted Slates v. IBM 5540

Donaghue, Hugh P., assistant to the chairman of the board, Control Data
Corp., Washington, D.C.: material relating to the testimony of:

Exhibit 1 . — Prepared statement 5483

Exhibit 2.— Copy of complaint. Control Data Corp. v. IBM 5488

Exhibit 3. — Control Data divestiture plan 5499

Exhibit 4. — Memorandum re restoring competition to the industry. _ 5525
Exhibit 5. — Joint position statement of Control Data Corp., Honey-
well, National Cash Register, Sperry Rand re United States v. IBM. 5540
Exhibit 6 — CDC memorandum report to Justice Department re IBM

attempt to monopohze ADP industry 5545

Honeywell, Joint position statement re United States v. IBM 5540

Katzenbach, Nicholas deB., vice president, general counsel, IBM Corp.,
Armonk, N.Y.; accompanied by Thomas D. Barr, counsel; material
relating to the testimony of :

Exhibit 1. — Correspondence between Senator Hart and Mr. Katzen-
bach re delaying of hearing due to pending litigation 4854

Exhibit 2. — Letter from Association of Data Processing Service Or-
ganizations, Inc., transmitting position paper re IBM monopoUza-

tion of software and services industry 4858

Exhibit 3. — Letter from American SatelUte Corp. re anti-competitive

effects of proposed IB M-Comsat Joint venture 4864

Layton, Christopher, director for data processing. Commission of European
Communities; material relating to the testimony of:

Exhibit L — Council of Ministers of European Communities resolu-
tion re common industrial policy 5333

Exhibit 2. — Council of Ministers of European Communities docu-
ment re background information pertaining to above resolution.. 5334
Exhibit 3. — Turnover of main European computer companies in

millions of dollars 5348

McGurk, Dan L., president. Computer Industry Association, Encino,
Calif.; material relating to the testimony of:

Exhibit 1. — Prepared statement 5464

Miller, Ralph ,E., economist, Washington, D.C.; material relating to the

testimony of: e^nn

Exhibit 1. — Prepared statement 5620

National Cash Register Co., joint position statement re Ujiited States v.

IBM 5540

Nicolaidis, Alain, scientific attache, computers. Embassy of France,
Washington, D.C., on behalf of Maurice Allegre, Delegue a I'lnforma-
tique, French Government; material relating to the testimony of:
ExhilMt 1. — Letter from Mr. Nicholaidis re French Government

subsidies to the computer industry 5355

Parkin, Thomas R., vice president, Software, Control Data Corp., Minnea-
polis, Minn., accompanied by Earle L. Lerette, special assistant to chief
executive officer; material relating to the testimony of:

Exhibit 1. — Figures and charts mentioned throughout testimony 4883

Sanders, Royden C, Jr., president, Sanders Associates, Inc., Nashua,
N.H.; material relating to the testimony of:

Exhibit 1 . — Prej^ared statement 5442

Sperrv Rand Corp., joint position statement re United States v. IBM 5540

Wallace, Robert E'., vice president, Commercial/Industrial Division,
Auerbach Associates, Philadelphia, Pa.; material relating to the testi-
mony of : ^

Exhibit 1. — Prepared statement '^OiY

Exhibit 2. — Speech of I. L. Auerbach before the Sixth Australian

Computer Society Conference (May 1974) 5043

Walter-Carlson, Marilyn, vice president and associate director. Research
Shareholders Management Co., Los Angeles, Calif.; material relating
to the testimony of:

Exhibit 1.— Prepared statement 5412

Appendix

Proposed final judgment, United States v. IBM 5699



THE INDUSTRIAL REORGANIZATION ACT (S. 1167)
(The Computer Industry)



TUESDAY, JULY 23, 1974

U.S. Senate,
Subcommittee on Antitrust and Monopoly

OF the Committee on the Judiciary,

Washington^ D.C.
The subcommittee met at 10 a.m. in room 2228, Dirksen Senate Office
Building, the Hon. Philip A. Hart (Chairman of the subcommittee)
presiding.

Present : Senators Hart and Hruska.

Staff present : Howard E. O'Leary, Jr., chief counsel ; Bernard Nash,
assistant counsel; Janice Williams, chief clerk; Peter N. Chumbris,
minority chief counsel; Charles E. Kern, II, minority counsel; and
Michael Granfield, minority economist.

Senator Hart. The subcommittee will be in order.
Permit me, first, a brief opening statement.

OPENINa STATEMENT BY SENATOR HART

This is the beginning of an examination of the third of seven in-
dustrial sectors included in the Industiial Reorganization xict.

While there are many who follow the hearings, each change of in-
dustry brings us an audience of a somewhat different composition.

I think it would be best to order a copy of the bill. The bill, basically,
will do two things ; outlaw monopoly power with a few limited excep-
tions and establish special permission to intercede, either in Congress
or a special district of restructuring a major industrial sector.

"Wliile each of the industries are similar in many regards, it's the
differences more than their similarities, which seem strildng.

In a sense, the computer industry may be the most interesting. First,
it's a new industry, only 20 or 30 years old.

Although dominated by one company, whose sales figures some say
spell monopolist, the computer industry is one of the most dynamic
and exciting industries around.

Its capabilities seem to be antiquated as soon as they are voiced. One
estimate that I'm sure will not be out of date quite so fast in our life-
time, is that this industry will be number one in sales.

There have been claims that as rapidly as this industry is growing
that it is not allovvcd to mature in a fully competitive atmosphere.

Large companies have entered this indnstry and have dropped out
because they found it, for one reason or another, not desirable to
remain in.

(4833)



4834

We will hear about tlie competitive structure and practices today
and the 3 days f ollowin.g.

Another significant aspect of this industry is its international
application, both as it afl'ccts payments balances and national policy
for the country.

There will be industries from overseas who will discuss these aspects.
Let me spend 1 minute on a similai'ity of this industiy- to so many
others we will examine.

Because of a pending lawsuit, and the action of the congressional
committee in light of that pending lawsuit, as Mr. Nicholas Katzen-
bach. the vice president and general counsel for IBM, will explain in
a moment the company did request that these hearings not be held
at this time.

The argument was that the (xovernment case against the company
is ))ending and trial is expected in New York in October.

I considered the request — so did the other members of the subcom-
mittee — and concluded that we should go ahead. As I see it, almost
anytime we take up an industry for examination there is a case, or
several, pending against the members of that industi-y.

My uneasiness is whether we should defer until litigation is con-
cluded. Congress may not be able to meet its responsibility in review-
ing the extent for which the antitrust is containing competition is the
policy by which this committee is run.

I have at no time entertained any doubt about the sincerity and
conviction of IBM and Mr. Katzenbach in urging delay.

On a personal basis it would be much easier to agree than to dis-
agi-ee, but I have concluded that we should go forward. Our first
witness then will be an old and respected friend. Mr. Nicholas Katzen-
bach, vice president and general counsel of IBM.

TESTIMONY OF NICHOLAS deB. KATZENBACH, VICE PRESIDENT
AND GENERAL COUNSEL, IBM CORP., ARMONK, N.Y.; ACCOM-
PANIED BY THOMAS D. BARR, COUNSEL

Mr. Katzenbach. Thank you, Mr. Chairman. I do have a prepared
statement. "With the committee's permission, I would like to read it,
and I would like to introduce, although I think he needs no introduc-
tion to you, Thomas D. Barr, a member of the New York bar and
known to you as counsel to the Violence Commission, Avho is accom-
panying me to be sure I don't say anything

Senator Hart. And also Senator Hruska served on the Violence
Commission.

INIr. Katzenbach. Yes, I appreciate tliis opportunity to appear be-
fore the subcommittee at the outset of the hearings on the electronic
data processing industry.

As you know, I think it is unfortunate, somewhat unfair, and
clearly unnecessary, for the committee to hold these hearings at this
time and under tliese circumstances. TTnfortunate because the commit-
tee depriA'cs itself of expert testimony which would otherwise be
available; unfair because whatever the committee's intentions there.
mav be misinformation al)out, criticism of, and attacks upon IBINI
which it cannot rebut in present circumstances and whicli make this
record u-oless as a basis for legislation; unnecessary because all rel-



4835

evant information about the industry will be available to the commit-
tee soon in a far more comprehensive, objective, and useful form.

These conclusions stem from the fact that the trial of the case of
United States v. IBM is scheduled to commence before Chief
Judge David Edelstein of the Southern District of New York on
October 7. The issues in that case, i)robably the most important and
certainly tiie most complex in the history of the Sherman Act, are
broad aiid will, necessarily, involve extensive testimony on the history
of the industry, its competitive structure, the practices of IBJNI and
others, over a period of years, both here and abroad. The facts rel-
evant to the decision of the case — and to the work of the committee —
will be brought forth, as they should be, in an objective forum ; tested
for accuracy by the examination and cross-examination of witnesses
under oath by counsel who are not only expert in the law but who
have spent literally years in preparation of the case.

This case has been pending for over 5 years. Hundreds of thousands
of hours have been spent on both sides in its preparation; millions of
documents containing statistics, plans, analyses of decisions, and so
forth, have been studied; and many hundreds of other companies
with relevant information or expertise have been formally deposed.

The Department of Justice has stated to the court its intention to
use some 160 persons as witnesses at trial, and IBM has similarly listed
some 400 persons.

These persons include experts of all types : economists, accountants,
investment analysts, scientists, and engineei'S. They also include many
competitors, customers, and more than 100 representatives of Fed-
eial departments and agencies whose testimony by deposition will be
offered by IBM. It has involved and wall involve immense cost and
effort to the Government and to IBM ; but it does and will provide all
the factual information necessary for the work of this committee. This
committee may question whether or not this long and expensive proc-
ess is the best, speediest, and cheapest way to develop such informa-
tion. But there can be no serious question that this process will pro-
vide incomparably more accurate, less biased, more comprehensive,
and better informed facts than this hearing.

Now, if nothing more were involved I would, therefore, wonder
why — with all this information about the industry soon to be avail-
able — this committee is holding these hearings. It cannot be to develop
relevant information.

Only the committee can answer that question. But lest anyone draw
mistaken inferences from it, let me make it unequivocally clear that I
intend no implication of an improi^er motive on the part of the com-
mittee, any desire to be unfair, any intention to attempt to influence the
result of an important antitrust case on the eve of trial.

I know the members of this committee too well to imply any such
motive, and there is no Member of the U.S. Senate whom I regard
as more fair, more ethical, more scrupulous in his conduct, than the
chairman of this subcommittee, and none for whom I have higher
personal or ])rofessional regard. Nor do I believe for one moment that
Chief Judge Edelstein, or any respected member of the Federal judi-
ciary, could be so influenced.

I can't speak with tlie same conviction about some of the witnesses
the committee has seen fit to invite, though again I do not impugn



4836

the motives of the committee. And whatever is said in these hearings
I have no doubt that IBM will get a fair trial in court.

But to sav that is not to say that these hearings will not prejudice
and damage IBM in other ways. In all honesty I believe they will.
For they are almost certain to generate testimony and opinion adverse
to IBlNi in circumstances in which IBM cannot properly respond,
offer contradictory testimony, or otherwise defend itself.

And while none of this will affect the judicial process, and hope-
fully not the testimony of witnesses, it may suggest to the general
public, to unsophisticated investors, and even to some of our own
employees, that IBM is guilty of something improper.

They will wonder why these hearings are held, why such distin-
guishexl Senators do not take exception to at least some of the testi-
mony you will hear, and why — most of all why — IBM does not set
the record straight.

The members of this committee, all distinguished lawyers, under-
stand why it would be improper for me. as counsel, to testify pub-
licly about any of the issues in the pending cases. Members of this
committee will understand why I would not want— putting ethics
aside— to attempt to try IBM's case in tliis forum. And those who
are close to the litigation will know that IBM and the Government
are bound by court order to limit scrupulously their comments to the
press about matters involved in the antitrust litigation.

I suggest, Mr. Chairman, that much of the information dcA'eloped
at these hearings will l)e adverse to IB^I: that IBM cannot defend
itself at this time in this arena; and that to permit sucli attack — in-
deed, to provide a public forum for it on the eve of a trial important
to this country and important, ceifainly. to IB]M and its stockholders —
is inherently unfair.

Not, to repeat, because it will influence tlie i-esults of the trial, but
simply because the trial in and of itself highlights interest in these
hearings.

There are many — investors, employees, customers, competitors —
who want to guess the results of this litigation simply because they
fear it will affect them. And there will be those who do seek to in-
fluence public opinion in ways adverse to IBM and who will promote
views prejudicial to IBM in every way they can.

As the committee knows, Messrs. McGurk and Biddle of the so-
called Computer Industry xVssociation — CIA — have as the principal
objective of their employment to make public attacks u.pon IB^I in tlie
interest of their members, a number of whom are suing IBM in the
courts. The CIA is not representative of the computer industry. There
are such organizations, with significant membership, but representa-
tiA'es of those organizations do not appear on the committee's witness
list.

The committee has also invited two economists to testify. Professor
Brock recently completed, under the tutelage in part of one of the
Government's principal experts, a Ph. D. thesis on the com]5uter in-
dustry, which is an important source of the Government's theory of
the case against IB^M. Similarly, Mr. ]Miller is an economist who has
worked in the Department of justice, and who has been engaged for
some time in assisting in the preparation of the Government's case.

Therefore, if these gentlemen in fact testify, the committee will



4837

be exposed to tlie Department of Justice's view with no opportunity'
for rebuttal by IBM.

I sav if these gentlemen testify, because it seems to me that the
Department may make efforts to persuade them not to because their
testimony is so closely related to the Department's pending case.

Two of the witnesses are employed by Control Data Corp., an im-
portant IBM competitor, which sued IB:M on antitrust grounds in a
case now settled. I do not, of courpe, know the nature of their testimony.

Another heads a company which is also in competition with IBM.
He has been a frequently public critic. The two gentlemen from over-
seas have governmental responsibilities which will inhibit any tes-
timony favorable to IBM.

As members of the committee know, a number of European gov-
ernments, working in cou junction with the European Economic
Community, are subsidizing and otherwise supporting IBM's Euro-
pean competitors.

I assume that there may be other witnesses whose names are m-
cluded on the list in an effort to balance the testimony in some way
or other. I do not Imow this for a fact, since I do not know, of course,
what their testimony will be. And indeed, some of the witnesses are
unknown to me or to my colleagues in IBM, and accordingly I know
neither their qualifications nor their views.

I say all this merely to demonstrate that it would be unlikely that
this committee could get any kind of in-depth knowledge from this
number of witnesses in a few hours of testimony, irrespective of their
objectivity or their expertise. The facts about this young and dynamic
industry are far more complex, as the scope of the Government trial
indicates, than can be comprehended in a few short hours. And to
repeat, if the committee seriously wants to study the industry, it wii1
have the wherewithal to do so "from the record of the Government
case. It cannot hope to achieve that understanding in these hearings.
It can jn-omote misunderstandings prejudicial to IBM.

I accept the fact that there can be and are circumstances where the
fact of ]wnding litigation should not inhibit the need of congressional
committees to seek information relevant to pending legislation. But
these hearmgs do not, Mr. Chairman, fit those circumstances. The
information developed, irrespective of predictable bias, will be woe-
fully inadequate for any responsible judgments.

And accurate and complete information is and will be available
to the committee from other sources.

Mr. Chairman, since I've prepared this statement and submitted
it to the committee one event has occurred to wdiich I wish to call
you I- attention, because it illustrates some of the points that I have
made,

Yesterdav afternoon, the so-called Computer Industrv Association.
Messrs. McGurk and Biddle, who are witnesses before this committee,
being there present, held a press conference about these hearings.

They distributed your openino; statement. T assume that they got it
from the committee. I assume it was publicly available. Thev sum-
marized the testimony of witnesses, and they emrao-od in their cus-
tomary practice of distributing a great deal of misinformation about
IBM.

Now, that is their right. But what distresses me about this, and I
think might distress the committee, is the fact that they did so in an



4838

aura in which this committee and this committee's hearings lent some
prestige to that press conference.

They purported to be doing this in aid of the committee's investiga-
tion of IBM, and even the fact of distributing to the press your state-
ment gave them at least the general aura of being spokesmen for this
committee.

Now, I know and I'm sure anybody familiar with you, Mr. Chair-
man, knows that tliey do not, in fact, play that role.

But it does illustrate the problem that I iiave, and I would predict,



Online LibraryUnited States. Congress. Senate. Committee on theThe Industrial reorganization act. Hearings, Ninety-third Congress, first session [-Ninety-fourth Congress, first session], on S. 1167 (Volume pt. 7) → online text (page 1 of 140)