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 105 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 105 of 140)
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circuity, store data by converting electrical signals into a magnetized recording
that can be reconverted into electronic signals. A magnetic recording is perma-
nent in that it remains when electric power is "off", but the semiconductor cix'cuit
loses its stored data when the electric power is "off".

F32. The CPU is generally where most of the logical functions or calculations
are performed. Controllers, channels, peripheral processors and multiplexors are
smaller processors designed for a particular use. and when used permit a more
efficient use to be made of the central processor l>y speeding up interchanges of
data and making preliminary or intermediate computations for relay to the
CPU.

F33. EDP products are built from electronic and electrochemical components.
The components include electronic circuits, devices for converting electrical
impulses to magnetic, devices for converting magnetic impulses to electrical,
devices for converting electrical current to mechanical movement, as well as
cables, connectors, metal frames and various power and cooling elements. The
most numerous physical parts of an EDP system are the electronic circuits.
Electricity, as used in a computer, essentially has only two states or condi-
tions — it is either "on" or "off" as is the case of an electric light. By combining
electronic switches which are on or off, computing can be done if "on" equals 1
and "off" equals 0. Different combinations and .sequences of I's and O's then
can be used to represent all numbers and all letters. When electronic data proc-
essing began, each electronic circuit was made up of a vacuum tube, such as is
used in radio or television, plus wires and resistors. The development of tran-
sistors in the 1950's allowed the vacuum tubes to he replaced by transistors.

F34. IBM was an early user of the transistor in its EDP systems. IBM built its
own factories to make transistors. The use of tranisistors made pos.<il)le the re-
duction of size, cost and power requirements of an EDP system and increased
reliability and speed. This allowed the construction of EDP systems of greater
capacity and operational speed and expanded the number and t.vpes of applica-
tions for which such equipment could be used. As work continued on the refine-
ment of the transistor at places like Bell Laboratories, Texas Instruments, Motor-
ola. Fairchild, and IBM. ways were foimd to combine the various components
making up an electronic circuit into a single chip. M'iiich is now about Vs inch
square. This chip is called an "integrated circuit". In the 1960's, IBM as well as
others began to build EDP systems using integrated circuits. This allowed a fur-
ther reduction in size, a further increase in reliabiltiy, a further increase in
speed and a further reduction in cost. Work at IBM and other places has led
to the continual miniaturization of the circuits. It became possible to produce
multiple circuits on a chip. This was referred to first as "medium-scale integra-
tion" and later, as the number of circuits increased, "large-scale integration".
In the latest EDP equipment, components are in use which have more than two



5717

thousand circuits on a single silicon chip % inch square. Under development in
IBM and other laboratories are chips containing IG.OOO circuits. Moreover, there
are under development processes which, it is believed, will produce chips with
64,000 circuits or more.

IV. RELEVANT MARKET

F35. In determining whether there is monopoly power to control prices or ex-
clude competitors In any part or line of commerce, the court is required to con-
sider a relevant market or markets mthin which such determination can l)e
made. Manifestly, the electronic data processing market in general is one rele-
vant to such an inquiry. But the fact that monopoly power may not exist on the
part of any company within that general market as a whole does not end but
only begins the inquiry in this case. It should also be noted that we are not pri-
marily concerned with prior or subsequent years, but that in view of the issues
of this case a determination must be made as to the relevant mai'ket or markets in
the period 1969-1972, timing also being an important element here because of
the youth and dynamics of the market and its various developmental stages over
the "years. It is recognized that a purely tran.sitory condition could be so brief
or insubstantial as to be de minimis or immaterial in appraising market power ;
but it must also be recognized that in a real sense every market condition may
be temporary in the perspective of historical development, and yet the policy
of the antitrust laws does not permit the unlawful applicariou of monojioly
power against competition to its damage over a substantial period even though, if
competifors could hang on for a time, technological or other developments might
change the competitive situation for the better.

r36. Telex asserts that in the period mentioned IBM possessed mouoply mar-
ket power in the general systems (CPU) "relevant market", in the market for
peripheral devices plug compatible with IBM CPU's, and in the "relevant sub-
markets" for magnetic tape products, direct access storage products, memory
products, impact printer products, and communication controllers that were plug
compatible with an IBM CPU. IBM claims that it had no monopoly power in
any such general markets and that submarkets did not exist because competition
in the EDP industry was primarily on a systems basis, and that the relevant mar-
ket consisted of EDP systems and the products which make up such systems and
the companies which provide alternatives to such systems. IBM further claims
that even if one were to limit the focus to particular parts of a system, such as
peripherals, the relevant market must include all peripheral products, not just
those currently attached to IBM systems. It is further contended by IBM that
once the decision is reached that the relevant market should include peripherals
attached to competitive systems, as well as those attached to IBM systems, it
does not make any difference with i-espect to IBM's share whether the market is
limited to such peripherals or is broadened to include all products which make
up .systems. IBM further claims that even if "'plug compatible" tapes, disks, prin-
ters, communications controllers, and memoi'ies did constitute separate sultniar-
kets, if the decision were made to include disks or any of the other products at-
tached to known IGM systems, as well as those attached to other than IBM
systems, IBM's share of each of these submarkets would be well below the level
that would support any inference of market power.

F37. The potential general market toward which the elforts of both companies
seem directed, with the progressive broadening of Telex's base and the techno-
logical and industrial developments in prospect, appears substantially the same,
and the real issue is whether that market may be realistically subdivided in the
time frame 1969-1972 to focus on and encompass only those parts of current
product lines which are respectively attached to IBM systems, rather than all
those products which actually have similar uses in connection with other sys-
tems ; although, with respect to the claimed attempt to monopolize, these dis-
tinctions may not be critical. By definition every manufacturer has 100% of its
own product. Thus, where a hopeful competitor first offers a product as a substi-
tute for the original, the originator typically will continue to have a large share
share of that product. So, likewise, in the EDP industry each manufacturer of
systems normally has a large percentage of the peripheral equipment which is
part of its system. By this token a .systems manufacturer has 100% of the periph-
eral attached to its new system until someone begins to copy some or all of these
peripherals or designs others to take their place on a plug compatible basis.
It is an over-simplification to say, however, that under Telex's market definition
theory, as soon as someone begins (or perhaps even plans or thinks about) copy-



5718

ing a part of a new system, as IBM argues, the manufacturer of that system
becomes monopolist and has an obligation not to cut prices or do anything else
that might reduce the profitability of the copier.

The record in this case shows that peripheral devices attached to IBM equip-
ment but manufactured or supplied by others during the relevant period have
grown into, and have been recognized as, a significant, distinct and important
part of the EDI' industry. Again, for the particular period mentioned, we are
not dealing with mere theory but with a historic, economic fact, transitory or
otherwise. The (piestion persists, however, whether such suggested subdivisions
of the industry can proiierly be regarded as relevant markets or submarkets
within which economic power can be separately appraised. A related dilemma
must be avoided by at once precluding the unreasonable fragmentations of
markets " and preventing the monopolization of separately competitive compo-
nents while a whole industry is thus subverted part by part.

F3<S. Peripheral products constitute an important part of a data processing
system, accounting for 50-75% of the price of the system. Such products are
critical to the performance of the system as a whole. It cannot be gain.-<aid that
indirectly at least and to some degree the peripheral products attached to non-
IBM systems necessarily compete with and constrain IBM's power with respect
to peripherals attached to IBM systems. The quality and price/iJerformance of
the peripherals attached to a .system are a substantial factor in a cu.stomer's
choice between competing systems, and if for example IBM failed to improve the
price/performance of its peripherals, customers might choose systems (including
peripherals) of other systems manufacturers. Peripheral pricing and product
announcements of one systems supplier influence subsequent peripheral iiricing
and product anmmncements of other systems suppliers, although it may be
difficult to identify any given comi>etitive price cut or product improvement as
a reaction to a single competitive act. Many companies, including Telex, which
manufacture or market peripheral equipment for attachment to IBM CPU's also
manufacture or market equipment for attachment to non-IBM CPU's, but to a
substantially lesser extent. Moreover, suppliers of peripherals plug compatible
with non-IBM systems could in various instances shift to the production of
IBM plug compatible i>eripherals, and vice versa, should the economic rewards
in the realities of the market become sufficiently attractive and if predatory
practices of others did not dissuade them. In the absence of defensive tactics on
the part of manufacturers of CPU's, the cost of developing an interface for a
pheripheral device would generally be about the same regardless of the system
to which it would be attached, and such cost has not constituted a substantial
portifin of the development cost of the ix'ripheral device.

F81>. In this extraordinary industry dominated as it has been by IBMs influence
neither theoretical relationships nor technological similarities supply the full
answer to the relevant market problem. In the realities of the marketplace, as
recognized and acted upon by IBM as well as by the plaintiffs and their customers,
it must be determined (a) whether plaintiffs' conce])t of relevant markets keyed
peculiarly to devicps plug compatible with IB:M CPU's is sound, and (b) whether
there is sufficient demand or sui>ply interchangeability. substitutnbility or flexi-
bility as to render indistinct or ineffectual the lines dividing the submarkets
reMed upon by plaintiffs as among themselves or as between them and general
EDP systems." A differentiation between the IBM plug compatible peripheral mar-
ket in general and submarkets iTivolving particular types of such peripherals
seems not so critical, .since it appears likely that IB:M's market power would not
significantly vary as between them.

F40. IBM and other systems niainifacturevs design, develop, manufacture and
market system solutions to data iirocessing problems on a systems liasis primarily,
although with respect to particular applications the suitability of particular
peripheral equijiment may be emphasized. In designing a system. IB:M and other
svstems manufacturers must design the boxes comprising the system, the con-
figuration of lioxes in the system to provide the best solution to a partici^lar
set of requirements, the system software essential or helpful for the operation
of the hardware generally, and the particular applications software to perform
the customer's sjiecial applicati(ms. The relial)ility and predictability of the
system involve the hardware, software and the personnel maintaining and



3 IP.:M st:itPs : "Obrionslv a finflinjr that the relevant market conld be as narrow as
susgested bv plaintiffs would have broad implications for IBM. for the EDP industry
jrf'nerally and perliai)s for many other Inisinesses as well. Indeed, if Telex has a jrooil
elalm atrainst IP.^f it should have an even better claim against I'nivac w>^o's acquired
RC.\ CPU's. Telex's tape drives attached through Formation controllers. Such a broad and
novel impact susfjests that the reasoninjr that leads to such a result may lie faulty ;
Indicating that the appropriate market must be broader than plaintiffs contend."



5719

operating the system. There are significant exi>enses involved in designing
systems so that the various boxes can be integrated into different configurations
and combinations. Tliere are a number of otlier systems development costs not
easily identifiable because of ditticulty in segregating an engineer's time between
developing a particular unit aud working on its integration into a system.
.Similarly, systems marketing costs are hard to define because of the difficulty of
separating the time a salesman spends configuring a system from his other
activities. Particularly with respect to new customers, systems manufacturers
offer a substantial amount of EDP education, which is essential in order to
market systems. Systems development and marketing costs are allocated across
all of IBM's products and are included in the pricing of those products. Some
custcmiers can perform completely their own systems integrati(m work in view
of the level of sophistication among them, but others rely upon IK^I or other sys-
tems suppliers to do this work and to provide systems control programs. Telex and
other peripheral manufacturers do not incur substantial systems development
and systems marketing costs in connection, with their plug compatible business,
nor could they market their products for attachment to IBM systems withcmt
IBM system software to which is devoted about 30% of IBM's annual develoi>
nient cost. Thus there are practical and logical difficulties in severing the
peripheral market from the systems market.

F41. It is true also as a generalization that to a substantial degree each of the
different functions of a system can be and is performed by a variety <jf devices
and that users not infrequentl.v can choose among different devices which make
up an EDP system on the basis of price/performance and the particular appli-
cations desired. This interchangeability, however, is between particular periph-
eral devices for particular applications, and in and of it.self does not render
particular devices a necessary part of a systems market. Rather, it raises the
question whether all or a portion of the peripheral devices are a part of the
market for peripheral devices. Merely because there are alternate ways of
storing data in an EDP system, each of which comi>etes to a degree with others
in various applications, does not mean that it is appropriate to consider storage
products such as tai)es, disks and memories and their substitutes as a part of
the systems market rather than part of a peripheral device market.

Y42. Devices whicli perform a storage or memoi-y function include core arrays,
semiconductor circuitry, magnetic tape drives, magnetic strip files, magnetic
drums, and magnetic disk drives. Each of these devices has a different opera-
tional speed and a dift'ereiit cost and. depending upon the ni^eds and l)udget of
the user, each can be used in structuring the computer in different ways to a
limited extent. Constrained by particular ap])lications, needs and ol).iectives,
the.se devices compete with one another in a limited sense and in some appli-
cations users can employ dift'erent devices interchangeal)l.v. An EDP user miglit
"trade off", for example, tlie higher performance of memory for the lower price of
disks in certain applications, whereas for other applications disks and tapes
cnuld perform similar functions and be used interchangealily. A user might trade
off" the higher performance of magnetic disks or drums for the lower price of
magnetic tapes on some applications, and in general, but still in a limited sense,
users may have price/performance alternatives or trade-off's among disk drives,
memory, tape drives, the tape library, the vault, the disk pack, etc. in configur-
ing any total EDP systein. In a limited sen.se. too, certain storage devices such
as memory are interchangeable with the CPI" it.self, u.sers choosing between
larger or faster CPU's with relatively small amounts of memory and smaller
or slower CPT^'s with relatively large amounts of memory: and in certain
instances CPT^'s function as i)eripheral devices, and peripheral devices or parts
of perijilieral devices have similarity to CPI"s. Terminals which perform input
aiid output functions also have processing functions, storage functions and con-
trol functions. Intelligent terminals perform processing functions otherwise per-
foi-nied by communications c(mtrollers or central processing units. ;Most mag-
netic core storage, magnetic tape drives, maenetic disk drives and magnetic
drums contain some processing control functions. Printers, like Telex's r>f>4H. can
also jierform processing storage functions with a controller and magnetic tape
drives.

F^3. The users also choose between terminals, printers and computer output
microfilm devices as various means of accomplishing an output function de-
pending upon the various needs and applications involved. Special kinds of
printers, called plotters, can l>e used to produce graphs, charts or drawings, and
even maps. Otlier tyjies of printers called computer output microfilm (COM) de-
vices produce microfilm. A teletype is one kind of slow speed printer. Other kinds



5720

of printers inchitle drum printers, whicli can be slow or high speed (from 300-
to over 1000 lines per minute), chain printers and train printers. Less expensive
slow speed printers are alternatives to more exi>ensive higher .speed printers.
Terminals are also used to perform output functions. Electrical signals are con-
verted into words and numbers on a displa.v screen or typed on a roll of paper.
Many terminals also have processing functions, storage functions and control
functions. Comi)uter output microfilm may he a direct competitor to printers
because of relative hardware costs as well as cost of paper versus cost of micro-
film, and some customers have replaced or are replacing printers with COM
equipment on a price/performance basis.

F44. An essential element of any electronic data processing system is the con-
trol function. In large portion the control function is performed by software
or programming. The cost of developing operating system software is sulistautial
and competition in the supply of better operating systems necessarily affects the
price a manufacturer can charge for its EDP systems. But it is true only in
the superficial sense that software can be used as a direct suljstitute for hard-
ware, although cost of certain hardware or the extent of its necessity may be
affected by the software.

F45. Some suppliers of peripheral devices can and do become suppliers of sys-
tems and the suppliers of full systems can and do supply peripheral devices
plug compatible to the CPU"s of other manufacturers in some instances. Sup-
pliers of peripheral devices, including Telex, either have planned or are con-
sidering movement to full systems. Texas Instruments, which began as a sup-
plier of components for EDP and other electronic purposes, now markets the
world's fastest CPU, and Memorex, which began as a supplier of peripheral de-
vices, announced two full EDP systems in 1972. Suppliers of full systems, in-
cluding IBM, can and in some instances do provide peripheral devices for use
with the systems of other manufacturers either directly to end-users or to other
system manufacturers. Manufacturers of CPU's and peripherals use to a sub-
stantial degree the same technology, making it technologically practical given
time, funds and personnel, to switch from one to the other. In the long range
this potential "supply substitutability" has had and will have substantial
effect upon the development of the market and upon trends of competition, but
during the period with which we are concerned supply substitutability was a
minimal factor in the marketplace as a constraint upon pricing. It was a fact
of economic life in the industry that new technological developments and new
entries into the market were continuing, but the primary factor which governed
the pricing of peripherals for entrance into the peripheral market was the de-
mand elasticity or the substitutability of immediately available products in con-
nection with the needs and applications of users.

F46. Computer equipment is different than used automobiles because when
properly maintained such equipment generally performs as well today as it did
when new, subject to repair and subject to ol)solescence through technological
advances. Various end-users view leasing companies as a competitive alterna-
tive and in many instances may substitute leasing company equipment for in-
stalled IBM equipment. Telex itself leases full systems to users, including IBM
CPU's, and purchases certain peripheral equipment from other manufacturers
and remarkets it to end-usei's. Service bureaus, time-sharing companies and data
centers are also used by customers to a degree as alternatives to acquiring new
or additional EDP systems. An EDP user may obtain his own equipment, may
have his data processing done by establishments such as service bureaus, data
centers and time sharing companies, or he may purchase time from another user.
Some EDP end-users consider service bureaus, data centers and time purchased
from other users as practical alternatives to acquiring new equipment. But with
respect to peripheral equipment to be added to or integrated with IBM CPU
systems, these alternatives have not provided substantial constraints on IBM's
product and pricing decisions.

F47. Systems manufacturers "offer central processing units and peripheral
products ' which are electronically compatible to each other. The peripheral
products designed to be compatible with one manufacturer's central processing
unit are not interchangealile or attachable to the central processing units of
another manufacturer without modification of their interfaces. As a practical
matter, there is no direct or box for box competition between IBM's peripherals
and the peripherals of other systems manufacturers, and in order to replace
IBM peripherals witli the peripherals of another system manufacturer, the
user must first replace his IBM central processing unit. The only box for
box peripheral comi)etition of any substantiality has been and is between IBM



5721

and the ping compatible manufacturers (PCM's). IBM's Systems competitors
were not directly affected by IBM's pricing and product actions for peripherals
and made no competitive price responses to IBM's 2139A and B and Fixed
Term Plan (FTP) price reductions for its peripheral products. After FTP,
IBM's Systems competitors were not mentioned in any of IBM's FTP tracking
documents as having cut or reduced their price for any of their products.
Time sharing companies, service bureaus, and data centers, were not directly
affected by IBM's price and product actions for peripherals, and after 2319A
and B and FTP made little if any competitive pricing responses to IBM's
peripheral price reductions.

F48. IBM market.s its product by both lease and sale. All sales to end-users
or leasing companies are at IBM's full retail price. IBM determines its retail



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 105 of 140)