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 107 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 107 of 140)
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in the number of companies engaging therein accordingly cannot be considered
as necessarily negating the monopoly power or predatory intent of IBM, since
as far as the evidence discloses IBM did not really begin the exercise of what-
ever market power it had as against plug compatible equipment manufacturers
until the period 1969-1970. It also is relevant to note that any increase in com-
petitive entries into the market in 1972 and 1973 could well have been affected
by the institution of the present litigation in early 1972, and, for prospective en-
trants, at least some possibility which pending litigation to obain remedial action
may have held out.

F66. The testimony of Bonham and the Bonham charts indicate in accordance
with the census that in 1970 IB:M received revenues of $1,137,819,000, from its
plug compatible pheripheral products, and all other manufacturers of IBM plug
compatible products together received slightly in excess of $100 million in reve-
nues ; that in 1970 IBM had 90% of the revenues from tapes attached to IBM
CPU's and PClM's had 10% of the revenues ; that in 1970 IB:M had 68% of reve-
nues received from disk drives attached to IBM CPU's and PCM's had 32% ;
that in 1970 IBM received 99.6% of all revenues for memory products attached to
IBM CPU's and that PCM's had the remaining .4% of memory revenues ; that in
1970 IBM received 92.3% of revenues from communication controllers attached
to IBM CPU's and that the PCM's had 7.7% of such revenues.

F67. IBM's internal documents indicated that in 1970 IBM had 80% of tapes
(units) attached to IBM CPU's, and that PCM's had 13%; that in 1970 IB:M
had 91% of disk drives (units) attached to IBM CPU's, and that PCM's had
6% ; that in 1970-71 IBM had 99% of the market for impact printers attached
to IBM CPU's; that Telex was an entrant in the high speed impact plug com-
patible printer market with a potential market share of 8.5% for PCM's. and
91.5% for IBM by 1978 ; that Telex and a number of other companies were poten-
tial entrants into the plug compatible memory market, and that the total num-
ber of units of magnetic tape devices ( 240X-2420-3420 tyi)e) and disk drive prod-
ucts ( 2.311-2314/2319' s-3330 type) attached to IBM central processing units as
of December, 1970. June, 1971. and December. 1971. June, 1972, and December,
1972 (both the PCM's and IBM's share including all devices marketed by them
whether leased or sold) were as follows :

TAPE DRIVES-204 2420-3420 TYPE, TOTALS INSTALLED ON IBM CPU'S

12/70 6/71 12'71 6//2 12/72

units Percent units Percent units Percent units Percent units Percent

IBM 36,726 89.8 35,742 86.3 36,403 86.0 37,944 86.1 39.670 85.1

PC?//.-""^"!-" - - -" - - - 4,169 10.2 5,668 13.7 5,931 14.0 6,116 13.9 6,952 14.9

Total 40,895 41,410 42,334 44,060 46,622



DISK DRIVES— 2311-2314/2319-3330 TYPE, TOTALS INSTALLED ON IBM CPU'S

12/70 6/71 12/71 6/72 12/72

units Percent units Percent units Percent units Percent units Percent

IBM 65,686 93.2 63,574 85.5 65,941 84.2 66,622 82.7 68,002 82.5

PCMV."."-"!"^"-]" - -. - 4,833 6.8 10,748 14.5 12,402 15.8 13,967 17.3 14,445 17.5

Total.... 70,519 74,322 78,343 80,589 82,447



F68. The Bonham charts on which some of plaintiffs' contentions with refer-
ence to market share are based cannot be taken at face value and must be
evaluated with reference to related circumstances as shown by the evidence.
For example, only revenues from the principal or dominant PCM's in the
market are included in some of the charts ; revenues from leasing companies
which acquired IBM plug compatible memory devices and disk devices from IBM
and marketed them in competition with IB:M were excluded and the figures
were not updated to indicate a probable continuing decline of certain IBM
market shares during the period 1971-72. Weighing these and other factors, and
particularly testing the charts as against the internal documents of IB:M v.nth
reference to its shares of the relevant submarkets, it is fair to say that they



5727

swpport a iiudiftg that IB:M"s share of the relevant submarkets or the combined'
subiuarkety t'oniprehended in the general market classitication "peripheral
equipment plug compatible to IBM", is .such as to permit an inference of
monopoly power on the part of IBM, and the court so finds.

Vii'X IBM's internal documents generated in connection with comiietitive
studies looking toward management decisions to meet the competition of plug-
compatible manufacturers have been deprecatingly referred to in argument by'
the defendant as being the products of non-management employees, or as grossly'
underestimating competition. It seems appropriate to note here, however, anrf
for later reference in connection with the predatory conduct of IBM, that most
of tlie studies were made by highly trained and (lualitied IBM personnel acting
within an organization justly noted for its perception and respcnisiveness to
market conditions, and with technological standards and aids likely superior
to most great companies of the United States. There were some inicertainties
in file precise sources of some data coming to the attention of management, and
some combinations of documents in the evidence did not represent the precise
form in which they were submitted to management. Yet the inputs into manage-
ment with reference to competitive and market situatii>ns. the testing and
processing by management of these inputs and its rather consistent acceptance
of their bases in any management outputs, indicate to me. by and large, in view
of all the circmnstantial evidence in the case that IBM's internal documents
represent significant evidence not only as to market shares but as to the intent
and puriJOse of tlie defendant. They were prepared for subnussion to management
in the course of the business of a highly competent and effective organizatiou
at a time when we can assume that their litiguous signiticance was not dis-
torting. They were represented by forecasts, chart presentations, tables, and
similar documents and were generated with specific reference to the competitive
situation involving the plug compatible market at the time, and thejr relation-
ship to top management decision under all the circumstances may be i-eadily
perceived in most critical instances.

F70. On the basis of all of this testimony with reference to market shares,
inferences that may be reasonably drawable therefrom, direct testimony as to
IBM's domination of the relevant markets and submarkets. and the effect upon
competitors in this market and submarkets of its predatory comi>etitive prac-
tices, during the i>eriod 1969 to 1972, inclusive, I find IBM ix)ssessed monopoly
market power in the relevant market of peripheral equipment plug compatible to
IBM CPU's and in the relevant submarkets for nuignetic tape products, direct
access storage products, memory products, impact printer products and com-
munication controllers plug compatible with IBM central processing units. The
court further finds in this connection that this general market and the sub-
markers specified above comport to the competitive realities of the period; that
by reason of the peculiar development of the P]DP industry with the historical
domination of IBM in the general systems market, with the market of plug-
compatible jteripherals growing up, in historical and developmental fact, as a
sejiarate competitive entity along with its submarkets, the separate reality
of this market along with its submarkets cannot be dismissed or ignored as a
mere example of a manufacturer necessarily having a monopoly of its own
product. The court further finds that whether the submarkets hereinabove de-
fined I'C considered separately and severally or whether they be combined into
the market for periplieral I^IDP equipment plug compatible with IBM CPU's,
monoiKily power during all periods material herein was possessed and exercised
by the defendant IBM.

VI. IBM's PRACTICES AND INTEXT

F71. IBM's top managemnet became concerned in the summer of 1969 that
IB:M forecasts with regard to plug compatible competition were understated.
This concern was intensified in Januaiy of 1970 when IBM learned that the
Bureau of the Budget intended to encourage federal agencies to use equivalent
lower cost plug compatible products with IBM central processing units instead
of IBM peripheral equipment and standard interfaces had been .suggested.

F72. By 1970, some plug compatible devices offered in the tape and disk areas
by PC:M"s were, in fact, functionally superior to, and were regarded by IBM a."?
superior to, their corresponding IB:M products. The Telex 4700, 4S00 and ."420
model raije drives were, in fact, superior and were regarded by IBM as superior
products to tlie IBM equivalent tape drives Models 729, 2401 and 2420. Telex's
5311 and 5ol4 disk drives were in fact superior, and were regarded by IBM as
superior to IBM's equivalent 2311 and 2314 disk drives.



5728

F73. In response to the increasing competition IBM was receiving from plug
compatible nianufacturers marketing some functionally superior periplieral
slevices in the tape and disk areas, IBM's Management Committee, in February
•of 1970, designated peripherals as a '"Key Corporate Strategic Issue" (KCSI).
To be so designated was a management device to deal with an issue that had
broad implications and required the attention of its top corporate management.

F74. After the designation of peripherals as KCSI, a task force was formed in
IMarch of 19'70 to be headed by H. E. Cooley, Vice President of the Systems
Development Division. The Peripheral Task Force or Cooley Task Force, as it
became known, met regularly both in formal and informal meetings from the
middle of March of 1U70 until its report to the Management Committee of IBM
on .July 31, 1970. The objective of this task force was to examine the competitive
threat to IBM of plug compatible suppliers. A Telex trial witness, Richard Whit-
eonib. wlio was IBM's manager of I/O Systems Marketing from the fall of 1968
to the summer of 1971, participated in the work of the Peripheral or Cooley Task
Force on behalf of the Data Processing Division. A purpose of the Peripheral
Task Force was to study and recommend plans and product strategies to impede
the growth of IBM's plug compatible competition. The Peripheral Task Force
made in-depth analyses of various plans and strategies each having as a signifi-
cant puiiwse the containment and retardation of tlie growth of IBM plug com-
patible competitors. The task force made in-depth assessments of the status of
plug compatible competition and analyzed the viability of particular plug com-
patible ctmipetitors, including Telex.

F75. In the summer of 1970, IBM's top management believed that plug com-
patible competition was one of IBM's major business problems. And the "Mal-
lard" project was the tirst concrete response to this problem. The Mallard disk
tile was announced by IBM as the 2319A disk storage facility for the Model 145
System 370 on September 23, 1970. The 2319A was a reworked 2313 disk drive
with one of the spindles removed. IBM removed one of the four disk drives from
the 2313 box (IBM's four spindle 2314 type disk drive box) and put in some of
the control function electronics from the 2314 controller. The control function on
the 2319A for the 14.j was handled by integrated file adapter (IFA) that was
placed underneath the covers of IBM's System 370/145, together with the por-
tion moved into the disk tile cabinet. The user had the option of using the 2314
subsystem attached directly to the channel instead of the internal IFA. The soft-
ware programming support for the operating system was identical in each
configuration.

F76. The 145 end-user who elected to use a 2314 controller, a 2312 and a 2318 for
a three spindle configuration, instead of the IFA and 2319A, was chargeil the
higher 2314 prices for the same identical function. In short, if the user did not
choose the IFA and 2319 he received no price reduction for the disk drives
utilized on the 145. The end-user who selected the IFA/2319 disk drive subsys-*
tern for the 145 saved $1,325 per month on a three spindle configuration. The
$333 per spindle price represented a '$103 i>er mouth reduction per spindle below
IBM's price per spindle for its 2313 four drive configuration. IBM's monthly
rental per spindle for the 2319 A was $100 per month lower than Telex's then
current price per spindle for Telex's equivalent drive ; and, was less than the
price then being offered by IBM's plug compatible competitors. The monthly
rental adopted by IBM for the 2319A was the lowest rental profile consideretl by
its management prior to the announcement. The price level announced was fore-
cast by IBM to have maximum impact on IBM's plug compatible comi>etitors.
Prior to the 145 announcement, IBM considered raising the rental price of the
145 CPU to offset the revenue reduction that would result from the reduction
associated with the IFA/2319 when compared to the 2314 control unit with the
2312/2318 attached.

F77. The 2319A disk subsystem did not substantially increase the perform-
ance of the 2314 subsystem. The end-user customer received similar functional
performance by utilizing a three spindle 2319 box with the IFA as he did by
utilizing a 2314 subsystem. The data rate, the access rate, and the data capacity
per spindle were the same. IBM's price cuts for the 2319A and IFA were not
justified upon the basis of reduced manufacturing costs.

F78. IBM may have reduced its cost somewhat through reuse of 2314's wliich
were being returned to IBM because of plug compatible competition, Init it is
clear from the evidence that any decreased cost was of minor importance or influ-
ente in the Mallard plan and that price reduction independent of cost on limited
products in competition with plug compatible suppliers was the primary pui-jjose
of the response. IBM camouflaged the 2319A price cut as a "new" product for the



5729

pui-pose of avoiding a general price reduction to all its installed 2814 subsystems
whicli would have reduced IBM's revenue stream of $.j14 milliun a j ear on its
installed disk base by approximately $120 million per year.

F79. The 2310A price cut was designed by IBM specifically to contain plug
compatible competition. It originated in the Cooley or Peripheral Task Force
and was approved by top management. Its primary puq^ose was to maintain
control of the plug compatible disk market for liiM. It was introduced by IBM
with the specific purpose and intent of suppressing plug compatible disk com-
petition. IBM admits, indeed argues, that its action was a competitive response
necessitated b ythe inroads of plug compatible competition and that it in fact
did not succeed in maintaining IBM's market share. But IBM already possessed a
dominant market share, and continues to do so. Notwithstanding lawful acipiisi-
tiou tlieretofore, its intent to maintain its monopoly by unlawful predatory con-
duct cannot be equated reasonably with an ordinary competitive response.

F80. IBM, in October, 1970, organized a second peripheral task force to
analyze plug compatible competitors in the disk dri\e area. The scope of the task
force study included analyzing of the marketing, management, maintenance,
production and engineering capability of IBM's plug compatible competitors.
The group was directed to study and estimate tlie announcement and first cus-
tomer shipmeni dates on PCM's 3330 equivalents and make a cash flow analysis,
including financing arrangements, of PCM's, to make an estimate of the PCM's
2314 manufacturing cost and to determine "how long can OEM PC suppliers go
on 2314 prices'' This group's report concerning Telex concluded that Telex was
viable, that its management was competent and aggressive and that it had a
strategy of marketing a full line of high volume IBM plug compatible periph-
erals, that its in-house engineering capability was good, but that its manufactur-
ing costs were 10% to 15% above IBM's. The Telex analysis concluded that
Telex's cash flow was inadequate to permit Telex to finance its own lease base
and that Telex's key exposure was "impact by IBI\I — shortens product life."

FBI. Prior to a further announcement involving the 2319 IBM had concluded
that Memorex and Telex were the two most significant plug compatible com-
petitors for 2314 type disk drives. Telex witness Whitcomb in his role as IBM"s
I/O Marketing Manager attended a presentation by Telex's deposition witness,
Fassig, on Memorex and Telex in the fall of 1970. Fassig's pre.sentation was
an analysis of the impact on Memorex and Telex of various price cuts by IBM
on 2314 drives, the corresponding price reactions that Memorex and Telex
would be forced to make, and the effect upon their vial)ility. Fassig's analysis
demonstrated that as IBM would ciit the price in the 2314 area, and Memorex
and Telex would respond, there woiild be a very serious impact on the profits
and revenues of both Memorex and Telex. By October 20, 1970, IBM's Manage-
ment Review Committee was considering extending the 2319 program to the
System 360 and the elimination of IBM's extra use charge on disk drives. On
December 10, 1970, the Management Review Committee approved the '•2419B''
announcement.

F82. IBM announced the 2319B on December 14, 1970. The 2319B was a single
box containing three 2314 disk drives. The 2319 did not attach to an IFA but
attached to IBM's 2314 control unit. In conjunction with the 2314 control unit
the 2319 could be utilized on all IBM Systems 300 and 370 computers to form
a disk subsystem of three, six or nine 2314 drives (8 drives plus a spare). The
2319A announcement only permitted the use of one 2319A box with the IFA. The
2319B announcement permitted the use of an additional 2319B box with the
2319A box and the IFA, thus giving the 145 IFA user the option of using the
IFA and two 2319 boxes with an additional 2314 box to make up eight drives,
or using the 2314/2319B nine drive subsystem.

F83. IBM's rental price on the 2314 control unit utilized with the 2319B
remained at $1,480 per month. IBM's rental price on the 2319B was set as $1,000
per month, or $333 per 2314 drive — the same price that had been set by IBM
on the 2319A announcement. Tlie monthly rental price on the 2319B represented
a substantial price cut for 2314 drives. In a 2319 subsystem consisting of three
disk storage units, the 2319 monthly rental price represented a price cut of
over $1,000 per month for a 2314 subsystem. In addition, the 231 9B announce-
ment eliminated IBM's extra use charge on 2319A. 2319B and 3330 disk drives.
The elimination of the extra u.se charge represented an additional and sub-
stantial price reduction. The 2319B announcement was purely a price cut. The
2319 did not even purport to represent any increase in performance in a 2314
subsystem. This price cut was to a point below the prices IBM's plug compatible
competitors were charging for their plug compatible equivalent 2314 drives.



5730

IBM's price cut on the 2319B announcement cut the price of the nine 2314
drives used in a 2314/2319 subsystem approximately $700 below the average
price of IBM's plug compatible competition and $800 lielow Telex's price.

FS4. Just after IBM made its 2319B announcement IBM had an installed
liase of 47.051 lease and purchase 2314 spindles, as compared to an installed base
of 2.639 2314 equivalent type spindles for all of its plug compatible competition
together, and further, IBM had over 94% of all disk drives installed with IBM
CPU's. IBM foreca.sts and analyses with respect to the adoption of the 2S19B
program considered IB:\I's comiietition with plug compati!)le manufacturers.
None of the IB^^I forecasts and analyses with regard to the adoption of the
2319B program was expressed or geared in any way toward competition between
IBM and systems manufacturers, leasing companies, software and consulting
organizations or service organizations. The 2319B was designed by IBM as a
predatory action contrived to maintain its 94% control of the plug compatible
disk market.

Fs.~>. IBM's 2319B price cut sul)stantially impacted its plug compatil^le com-
perirnrs' revenues and profits by reason of responsive price reductions which
IB:\I had anticipated would have to result, but it did not succeed in fully pro-
tecting IB:\rs installed base. As Mr. Evans, then President of IBM's Systems
Development Division, testified : "For a month or two after the 2319 was an-
nounced, tlie plug compatible sales leveled off: but then, as I recall, there were
l)ricing actions by the competition, and that curve turned right back upward."
Nor only did IBM plug compatible competitors lower their prices but The plug
compatible competitors had complete modularity (1 drive per box) on their
2314 equivalent drives and by reducing their price per drive they were able to
sell between the configurations of IBM's three, six and nine 2319 drive sub-
system configuration. (1. 2. 4. r>. 7 and S drive configurations.) Mr. Finuell
reported to the Management Review Committee in January, 1971, with regard
to IBM's 2319B and 3420 pricing actions: "OEM reaction to our recent tape and
disk pricing action . . . were as expected or lower. We are continuing to up-
date our 1971 forecasts — raises the question of are you really ahead or are
you l)ack to where you started before you adjusted your own prices."

F86. In Decemlier. 1970. IB:M announced a price reduction for all its disk
devices, including the 2314. 2319 and 3330. by eliminating all additional use
charges. Immediately after IB:M's announcement of the 2319B. Telex negotiated
the 28% price reduction from its supplier ISS for the 2314-type devices it was
buying! Telex, other peripheral equipment manufacturers, and some leasing
com.panies dropped their prices for the 2314-type devices to levels substantially
under those of IBM. After the decrease in Telex disk device prices the order
rate of Telex disk devices again increased significantly. In the period from
November. 1970, to December 31, 1972. Telex shipped 1074 more 2314-type
disk drives and 191 more 2314-type disk controllers than it had forecasted in
Novm'oer 1970, that it Vv'ould ship.

F87. Telex claims that as a follow-up predatory action IBM announced its
3420 or "Aspen'' tape device: that Aspen was not planned by IBM until after
PCM's started gaining substantial shares of the installed base from ma,gnetic
tape products, and that Aspen was a price manipulation which was conceived to
reduce the number of drives marketed by plug compatible manufacturers with-
out reducing IB:M's revenues from its installed 2420 tape drives. While there is
some evidence to support such a theory, the court considers it less than pre-
ponderant and finds that the announcement and marketing of Aspen was not
predatory and did not represent in and of itself an unlawful attempt to monop-
olize. The Aspen devlopment began in approximately 1966. and finally incorpo-
rated significant technological innovations not found in prior tape devices. The
price of the IBM Aspen was based on lower cost when compared to the 2420 and
included reasonable profit. Telex announced its. equivalent 2120 products almost
two years after the announcement of the 2420 :Model 5 and has offered insufficient
proof as to how in any event it was damaged by the 2420 INLodel 5. There was no
Aspen issue included in the final pre-trial order, but tlie court has made the
foregoing findings against the possibility that it may be contended that such
ait issue with the acquiescence of the parties was actually tried and considered
during the trial.

F88. Telex contends that IB:\rs announcement of its Fixed Term (lea.«ing)
Plan (FTP) in IVIany of 1971 was a predatory act and that similarly IBM's
annotmcement of its Extended Term Plan (ETP) in ]\Tarch of 1972 was a pred-
atory act. Telex also claims tliat FTP and ETP constituted illegal restraints of
trade because they locked out competitors ; and a further contention is made that



-



5731

IBM's announcement of a CPU price increase of July 28, 1971, was undertaken
^specifically for the purpose of recouping the losses occasioned by the introduction
of FTP. IBM denies these contentions and alleges that it announced its leasing
lilans in response to similar plans offered by virtually all IBM's competitors,
recognizing that without some form of long term lease it would suffer serious and
continuing loss of business to systems manufacturers, leasing companies and
peripheral equipment manufacturers, pointing out that it now has three long



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 107 of 140)