United States. Congress. Senate. Committee on the.

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

. (page 102 of 140)
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 102 of 140)
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5698

tonipanies would also reduee barriers to entry in the other markets because
it would provide alternate sources of CPU's if CPU Company did not provide
the needed products or charged a price far above the competitive level.

Some reduction in barriers to entry in CPU production could be gained by
prohibiting Cl'U Company from renting. However, that restriction would in-
crease the power of the Marketing Company by restricting customers who
wanted to rent from dealing directly with the CPU Company. On balance, it
appears that no net gain in economic perfornuince would result from such a
restriction.

The above proposal should restore competition to the industry wdth very little
user disruption or loss in eflBciency. and with little need for continuing restric-
tions. However, continuing court supervision would be needed to interpret and
enfoi-ce the ban tm restrictive agreements among the new companies. For exam-
ple, the CPU Company might announce that it was selling the system control
programs for a flat fee which then entitled the l)uyer to reproduce or remarket
them for u.se on any number of CPU's. If the flat fee were set very high, only
Marketing Company would find it economical to pay the fee because of its
large base of customers to whom the control program could be resold. In this
case, a tie would be created between CPU Company and Marketing Company
because neither individual customers or other marketing companies could buy
rights to the control programs directly from CPU Company. Although a restric-
tion on this itarticular pricing behavior could be written into a dissolution
agreement, it is unlikely that all pctssible such arrangements could be perceived
at the time of dissolution. Conseciuently, it would be better to put in a general
lian on restrictive agreements or pricing i)olicies and allow the court to inter-
pret it in speciflc situations as they arose.

There is still a possibility of non-competitive conduct in the C(miputer industry
even with the dissolution agreement in effect. The above plan was chosen as the
best compromise between free competition and avoiding disruption to the indus-
try. It is possible that fiirther study of IBM's operations (including studies by
persons with technical skills not possessed by the author) would indicate that
the proposed four comi)anies could be fuither sulidivided in such a way as to
improve performance over the four company plan presented here.

No change would be made to companies other than IBM. The non-IBM c<mi-
panies control too small a share of the market to block competiticm through
integration. With the increase in standardization that could be expected to result
from the reorganizaticm of IBM. customers would gain a wider choice of equip-
ment both from the former IBM companies and new entralits to the industry, and
from the existing integrated competitors to IBM. because the various pieces of
equipment would be more easily interchangeable. Customers could make more
precise choices than at present because they could evaluate each piece of equip-
ment individually rather than the entire system at once. Customer choice should
l)e increased, prices should be rediiced because of freer entry, and the rate of
technological progress should be increased because of the increased ability of a
new company to market an innovation. A clear gain in economic performance can
be expected from the proposed reorganization of IBM.



APPENDIX

United States District Court for the Southern District of New York

(Civil Action Xo. 60-Civ 200 Filed: January 12. li)69)

United States of America,
plaintiff,



International Business Machines Corporation,
defendant.

complaint

The I'nited States of America, by its attorneys, acting under the direction of
tlie Attorney (ieneral of the United States, brings this action against tlie defend-
ant named herein and complains and alleges as follows :

JURISDICTION AND VENUE

1. This complaint is filed and this action is instituted against the defendant
under Section 4 of the Act of Congress of July 2. 18(iH», as amended ( lo U.S.C.
S4) commonly known as the Sherman Act. in order to prevent and restrain the
continuing violation by the defendant, as hereinafter alleged, of Section 2 of the
Sherman Act ( L") T'.S.C. §2).

2. Defendant International Business Macliines Corporation has offices, trans-
acts business and is found within the Southern District of New York.

DEFENDANT

3. International Business Machines Corporation, hereinafter referred to as
"IBM,"" is made a defendant herein. IBM was organized under the laws of the
State of New York in 1911 and asusmed its present name in 11124.

4. IBM is the largest niamifacturer of information handling systems in the
world. It develops, manufactures and markets electronic and punclied card data
l)rocessing machines and systems, as well as electric typewriters, dictation
equipment, and related supply items. In 1067 IBM had total revenues of .$5,345,-
201.000 with total assets of !i;5,50,S.670.000 and net income of $651,500,000.

5. IBM conducts its worldwide business through 11 divisions and three sub-
sidiaries. The Service Bureau Corporation, a wholly-owned, but independentl.v
operated sul)S!diary, furnishes data processing services on a fee or contract
basis to its customers in the United States. Science Research Ass(»ciates. Inc..
acquired l»y IBM in 1964 and now operated as a wholly -owned sulisidiary. de-
V(^lops and markets instriictional and guichmce materials and a wide variet.v
of intelligence, aptitude and achievement tests. IBM World Trade Corporation,
another wholly-owned sulisidiary. conducts all of IBM's business, excejjt that of
Science Researi-h Associates, Inc., in over 100 countries out.side the United States.

TRADE AND COitMERCE

6. As used herein, a computer is an electronic device which processes informa-
tion as desired by activating electronic impulses in pre-defined sequences.
Digital computers, which represent over 95% of all computer sales and leases,
are machines which process information which is symbolized by numerals and
processed in tliat form.

7. A computer system, sometimes referred to as an electronif data professing
system, consists of a machine or a group of automatically intercomnuniicating
machine uiuts capable of entering, receiving, storing, classifying, computing
and/or recording data, which system includes at least one central processing

( 5699 )



5700

unit and one or more storage facilities, together witli various input and output
equipment.

8. Computer hardware includes all the physical components used in a com-
puter system. Computer software includes the programming know-how and
materials necessary to make the computer hardware operative. Computer
support includes all manpower and other assistance necessary to make and
keep the computer hardware and software operative.

9. The general purpose digital computer is one which has general commercial
application and is offered for sale or lease in standard model configurations.
Special purpose digital computers are designed for particularized needs or pur-
poses and are produced for use by a limited number of customers but not made
generally available to all customers.

10. The computer industry is an extension or outgrowth of the electrical
tabulating industry. Electrical tabulating machines are devices for recording on
a unit basis, and automatically classifying, computing and printing alphabetic
and numeric accounting and statistical information by controlled electrical
means. IBM was originally organized as the Computer-Tabulating-Recording Co.
and from 1911 to 1933 it owned a majority of the capital stock of. and con-
trolled, The Tabulating Machine Company, a corporation organized in 1905
under the laws of the State of New Jersey. During this period IBM operated in
the tabulating field through The Tabulating Machine Company, which was
merged with IBM in 1933. The tabulating business continued to represent the
major product line of IBM until the advent of the electronic computer in the
1950's.

11. In 1932 the United States filed a civil antitrust suit against IBM and
Remington Rand, Inc. charging that they had unreasonably restrained and
monopolized interstate trade and commerce in tabulating machines and tabulat-
ing cards by entering into agreements in which they agreed :

(a) to lease only and not sell tabxilating machines ;

(b) to adhere to minimum prices for the rental of tabulating machines
at fixed by IBM, and

(c) to require customers to purchase their card requirements from the
lessor or pay a higher price for the rental of machines.

The agreements between IBM and Remington Rand, Inc. were cancelled in 1934
prior to the trial of that suit, and the issues presented by the agreements were
withdrawn from the case. The lease provision requiring the lessees to purchase
cards from the lessor was adjudged to be illegal by this Court. (13 F. Supp. 11,
afiirmed298 U.S. 131).

12. On January 21, 1952 the United States filed another civil antitrust suit
against IBM charging that it had violated Sections 1 and 2 of the Sherman Act
by attempting to monopolize and monopolizing interstate trade and commerce
in the tabulating industry. The complaint alleged that IBM owned more than
90% of all the tabulating machines in the United States and manufactured and
sold about 90% of all tabulating cards sold in the United States. This suit was
terminated by the entry of a consent judgment by this Court on January 25,
1956 (Civil Action 72-344).

13. Although a few experimental computers were assembled during the late
1940's, the general purpose digital computer did not have its beginning until the
early 1950's. The first installations of general purpose digital computers were
made by Remington Rand, Inc. beginning in 1951. IBM followed with its first
general purpose digital computer being produced and delivered near the end
of 1952.

14. Remington Rand, Inc., which was later merged with Sperry Corporation
to form Sperry Rand Corporation, took the early lead in the development and
sale of general purpose digital computers. However, IBM surpassed that com-
pany in the sales of such computers by the late 1950"s. Both companies' early
activities in the general purpose digital computer marketplace were regarded
primarily as extensions of their earlier activities in the tabulating industry.
The prior customers for the tabulating machinery presented an inherent source
of potential users of general purpose digital computers.

15. The computer industry has been one of tremendous growth. By 1955 some
400 computers had been installed in the United States. By 1960 the number of
installations approximated 6,000 and by the end of 1967 the number of computer
installations exceeded 43,000. In terms of total revenues from the sale of general
purpose digital computers, the industry has seen an increase from approximately
$600,000,000 in 1961 to in excess of .$3,000,000,000 in 1967.



5701

16 IBM's total revenues from the sale or lease of general purpose digital com-
puters in the United States increased from $506,668,000 in 1961 to .$2,311,353,000
in 1967. During this period of time IBM's share of total industry revenues of
these products varied from approximately 69% to approximately 80%. In 1967
IBM's share of such revenues was approximately 74%. Its nearest competitor
in 1!>67 had revenues of approximately $156,000,000 or 5% of the total.

17. Approximately 76% of the value of all general purpose digital computers
shipped in the Ignited States in 1967 were shipped by IBM while its two nearest
competitors together accounted for about 8% of such shipments. At the end of
the same year, approximately 67% of the value of all installed general purpose
digital computers in the United States was represented by machines that had
been manufactured by IBM.

18. IBM manufactures general purpose digital computers at its plants located
in Poughkeepsie and Endicott. New York, and manufactures parts, components
and subassemblies at numerous other plants in the United States. Such com-
puters and related products are shipped to customers located throughout the
United States.

OFFENSES

19. Beginning in or about 1961 and continuing up to and including the date
of the tiling of this complaint, the defendant has attempted to monopolize and
has monopolized the aforesaid interstate trade and commerce in general purpose
digital computers in violation of Section 2 of the Sherman Act (15 U.S.C. §2).
Said offenses are continuing and will continue unless the relief hereinafter prayed
for is granted.

20. Pursuant to and in furtherance of the aforesaid attempt to monopolize and
the monopolization, the defendant has pursued a manufacturing and marketing
policy that has prevented competing manufacturers of general purpose digital
computers from having an adequate opportunity effectively to compete for busi-
ness in the general purpose digital computer market, and has done, among other
acts, the following :

(a) Maintained a pricing policy whereby it quotes a single price for hard-
ware, software and related support and, thereunder, (i) discriminated among
customers by providing certain customers with extensive software and re-
lated support in a manner that unreasonalily inhibited the entry or growth
of competitors: and (ii) limited the development and scope of activities
of an independent software and computer support industry as a result of
which the ability of its competitors to compete effectively was unreasonably
impaired ;

(b) Used its accumulated software and related support to preclude its
competitors from effectively competing for various customer accounts;

(c) Restrained and attempted to restrain competitors from entering or
remaining in the general puriiose digital computer market by introducing
selected computers, with unusually low profit expectations, in those segments
of the market where competitors had or appeared likely to have unusual
competitive success, and by announcing future production of new models
for such markets when it knew that it was unlikely to be able to complete
production within the announced time ; and

(d) Dominated the educational market for general purpose digital com-
puters, which was of unusual importance to the growth of competitors both
by reason of this market's substantiality and by reason of its ultimate im-
pact on the purchasing decisions in the commerical market, by granting ex-
ceptional discriminatory allowances in favor of universities and other edu-
cational institutions.

EFFECTS

21. The aforesaid offenses have had, among other things, the following effects :

(a) The defendant has monopolized and continues to monopolize the
general purpose digital computer market in the United States ;

(b) Actual and potential competition in the manufacture and marketing
of general pui-pose digital computers in the United States has been re-
strained ; and

(c) Competitors of IBM have been improperly deprived of the oppor-
tunity to earn competitive profits on their general purpose digital computers
and actual and potential competitors have been discouraged from entering
or continuing in the business of manufacturing and marketing general pur-
pose digital computers.



5702



Wherefore, the plaintiff prays :

1. That the Court adjudge and decree that the defendant has attempted to,
and did monopolize interstate trade and ecmimerce in the general purpose digital
conii)uter industry in violation of .Section 2 of the Sherman Act.

2. That the defendant and all persons, firms, and corporations acting in its
behalf or under its direction or control be permanently enjoined from engaging
in. c-arrying out, or renewing any contracts, agreements, practices, or uderstand-
ings, or claiming any rights thereunder, having the puropse or effect of con-
tinuing, reviving, or renewing the aforesaid violation of the Sherman Act. or any
contract, agreement, combination or conspiracy having like or similar purpose or
effect.

3. That the defendant hereafter be required to price .separately and to offer to
sell or lea.se separately, and to sell or lease .separately to any applicant upon
such terms and conditions as the Court may direct (a) general purpose digital
computers; (b) peripheral equii)ment ; (c) computer software; and (d) other
customer support which it manufacturers or offers to its customers.

4. That the defendant hereinafter be required to refrain fr(»m the use of spe-
cial allowances, buy-backs of computer time, or research grants, in the sale or
lease of any and all general purpo.se digital computers, peripheral equipment,
computer software and other customer support equipment or services which it
manufacturers or offers to any of its customers, where the effect of such practices
may be unreasonably to inhilnt the entry or growth of competitors.

5. That the defendant hereinafter be required to refrain from entering into
the production of computer hardware which is not likely to result in returns
reasonably related to returns fi-om other computer hardware products sold or
leased, or which could be sold or leased, by the defendant.

6. That the defendant hereinafter be required to refrain from the announce-
ment of the development or production of any planned computer hardware or
software until such product has been subjected to normal testing.

7. That the plaintiff have such relief by way of divorcement, divestiture and
reorganization with respect to the business and properties of the defendant
as the Court may consider neces.sary or appropriate to dissipate the effects of
the defendant's unlawful activities as hereinbefore alleged in this complaint,
and to restore competitive conditions to the general purpose digital computer
industry.

8. That the plaintiff have such other and further relief as the nature of the
case may require and the Court may deem proper in the premises.

9. That the plaintiff" recover the costs of this suit.

Ramsey Clark.

Attorney General.
Edwin M. Zimmerman,
Assistant Attorney General.
Baddia J. Rashid,
Lewis Bernstein,
Burton R. Thorman,
Joseph H. Widmar.
William B. Slowey.
Harold J. Bressler,
Attorneys, Department of Justice,



o7G3

T'.MTEi) States District Court
Sol tiii:k.\ District of New York

(Civil Action 69 Civ. 'JOO. i

UxiTED States of Amekic a. plaintiff,

i-crsus

International Business Machines Corporations, defendant.

plaintiff's PRELIillNARY STATEMENT OF TENTATIVE TRIABLE ISSUES*
MARKET MEASUREMENT

1. Wlietlier in nny relevant market or markets herein defendant's pre-Com-
lilaint" records of market measurement provide an appropriate measurement
of the universe or denominator of such market or markets and defendant's
share therein, in determining" whether defendant has (a) attempted to mono-
polize or (I) ) monopolized such market or markets.

2. Whether in an.v relevant market or mai-kets herein defendant's post-Com-
plaint records of market measurement provide an appropriate measurement of
the universe or denominator of such market or markets and defendant's share
therein, in determining whether defendant has (a) attempted to monopolize
or (1)| monopolized such market or markets.

3. Whether IBM effected changes in its market measurement policies and
practices on or about the time of the tiling of the Complaint and if so whether
such changes show or tend to show IBM's knowledge that its prior market meas-
urement policies and practices revealed that it possessed a monopol.v share in
an.v relevant markets or suhmarkets.

4. Whether plaintiff's evidence of intent to monopolize establishes or tends
to establisli the market universe and/or defendant's share in an.v relevant
market or markets.

."). Wliether in an.v relevant market or markets herein, statistics routinel.v
collected and disseminated b.v persons expert in such industry measurement
provide an appropriate measure of the universe or denominator of such market
or markets and defendant's share therein, in determining whether defendant has
(a) atempted to monopolize or (b) monopolized such market or markets.

H. Whether, in determining the market universe and defendant's share there-
of, any one or more of the following is a relevant measure of the markets herein
involved :

( a ) Dollar value of shipments of new systems or products ;
( b ) Unit value of shipments of new systems or products :

(c) Dollar value of the installed inventory of systems or products manu-
factured by each company :

(d) Unit volumes of the installed inventory of .systems or product.s
manufactured by each company :

(e) "Net position" (A term used by IBM to measure i)roducts on order
plus installed products minus products that are going to be removed.) of
products manufactured by each company :

(f ) Revenue obtained from the .sale or lease of systems or products.



^ This filinjr is intfndpd to supersede "Plaintiff's Tentative Statement of Tentative
Trialile Issues" dated October 13, 1972.

-As used lierein. "i)re-Conii)laint" refers to tliat period of time prior to .January 17.
]t)fif»: and "post-Complaint" refers to tbat period of time after January 17. 1!JG!). and
'•icluding tliat date.



5704

7. Whether in the measurement of the relevant market or markets, tlie lease-
price equivalent and/or the purchase-price equivalent are appropriate indices
of value of new systems or products shipped or of the installed inventory of
systems or products manufactured.

MARKET STRUCTOTE AND INDICIA OF MONOPOLY POWER

1. Whether IBM's share of the relevant markets characterizes those markets
as monopolized markets.

2. Whether the sustained high level of profitability by IBM during a period
substantial growth of the relevant markets, accompanied l)y an absence of
significant entry and the exit of two of the leading industrial enterprises in the
United States, GE and RCA, characterizes the relevant markets as monopolized
markets.

3. Whether there exist or have existed substantial barriers to entry Ity new
competitors that contribute or have conti'ibuted to the sustained monopolization
by IBM of the relevant markets.

4. Whether there exist or have existed substantial barriers to expansion by
existing competitors that contribute or have contributed to the sustained monop-
olization by IBM of the relevant markets.

5. Whether the enormous market power of IBM constitutes a barrier in the
sense used in 3 or 4.

6. Whether the monopoly power of IB;m in a given market results in part
from its market power in closely related markets.

7. Whether IBM's ability to price its products substantially higher than the
comparable products of its competitors in the relevant markets shows or tends
to show its control over price, its power to exclude competitors and, thereby, its
monoply povker.

8. Whether IBM has the ability to establish product standards unilaterally, and
if so, whether this ability shows or tends to show that IBM possesses monopoly
power.

9. Whether the size of IBM. both aboslute and relative to its competitors, in
terms of revenues, profits, research and development expenditures, total assets,
accumulated liquid assets, number of employees, etc., serves to maintain its
monopoly position in the relevant markets.

10. Whether potential competition from whatever source constitutes an effec-
tive deterrent to IBM's exercise of its monopoly power in the relevant markets.

INTENT TO MONOPOLIZE

1. Whether IBM intended to monopolize the relevant markets herein.

2. Whether such intent is evidenced in part by IBM's marketing practices
relating to pricing, leasing, product announcements and product developments,
customer or supplier relations and educational allowances.

3. Whether statements by IBM officials and employees, including those dis-
closed in IBM documents, evidence IBM's intent to maintain its monopoly posi-
tion in the relevant markets.

BUNDLING

1. Whether IBM, in furtherance of its attempt to monopolize and the monop-
olization of the relevant markets herein, engaged in "bundling," i.e. marketing
a comlnnation of computer products and services for a single price, for the pur-
pose or with the effect of discouraging or forestalling the growth or entry of
competitors in the relevant markets.

2. Whether IBM believed or had reason to believe that its single or bundled
pricing enabled it to exert greater control over the relevant markets than would
be possible under an unbundled pricing system.

3. Whether IBM's single or bundled pricing enabled it to exert greater control
over the relevant markets than would be possible under an unbundled pricing



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 102 of 140)