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 108 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 108 of 140)
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term lease plans under which it offers most of its EDP equipment. Again, there
seems little question but that in a different context, or directed to general
competition, the leasing plans adopted by IB:m might be unexceptional or
entirely justified. The question remains, however, whether in the setting of IBM's
dominant position in the plug compatible submarkets and in view of the evidence
as to its specifically directed intent and concern with reference to the plug
compatible competition in those markets, the two leasing plans above-mentioned
can be sustained as against Telex's attack.

F80. IBM's 2319B announcement failed to retain IBM's high share of the
plug compatible disk market and failed to contain the growth of IBM's plug
c(mipatible competition during the first quarter of 1971. The latter continued to
make strong advances with its installations in the 2314 disk area. By February 12
IBM's plug compatible competitors had installed 3.006 2314 equivalent spindles :
by March l."j, 3,491; and by April 9, 4,614. IBM's plug to plug peripheral com-
petition commenced to proliferate from tapes and disks to printers in the last
quarter of 1970. By September, 1970, IBM anticipated that Telex would have a
plug to plug compatible printer, and revised its printer forecast. Telex was
regarded by IBM as the leading competitor in the plug compatible peripheral
marketing area because of its broader product lines, having tapes, disks and
printer, and IBM suspected that Telex would soon offer a memory device.

FDO. Mr. Whiteomb prepared an overview study of IBM's plug compatiltle
competition late in the first (piarter of 1971. This overview study was presented
to the President of IBM, IBM's Data Processing Division, and" IBM's Manage-
ment Review Committee. It concluded (a) the plug compatible phenomenon!
was accelerating in volume and scope: (b) the plug compatilile competition
l)resented a serious threat to IBM's potential growth since the exposed periph-
erals represented 03% of IBM's installed lease base; (c) defending against
plug compatible competition was difl^cult because of their pricing and per-
formance advantages; M) IBM should try to combat i>eripheral competition by
frequent advances in technology utilizing ''mid-life kickers'' and pjicing whicii
would take advantage of IBM's short-lived product lead in the peripheral area
including the consideration of long term uses; 13% of IBM's systems were
'"contaminated" with jilng compatible tape or disk equipment and I'CSl penetra-
tion woidd increase with package selling. Specifically, the Whitcomb study found
tliat IBM would lose 19% of the plug compatible tape market by 1976 and IBM's
planned tape program was inadequate and IBM would lose 28.7% of the plug
compatible disk market by 1976 and IBM's planned disk program was inadequate.

The Whitcomb study also found that IBM should l>e concerned about the
memory and printer areas. AVhile it is clear that IB:M expected plug compatil)le
competition to increase in volume and scope by the end of the first quarter 1971.
it is also clear that IB;M, even by its worst case forecast only anticipated loss in
the neighborhood of 20 to 25% of tape and disk markets to all of its compatible
competition by 1976.

F91. Even after the 2319 price cuts. IB:\[ on in-depth study considered Telex
a '"viable" competitor that could "manage impressive earnings. . . ." In April,
1971, IBM's ^lanagement Review Committee concluded that its control of plug
compatible disk and tape drives was being eroded and the printers and memories
would be next. IBM determined to deal more effectively with its plug compatilde
conu)etition. At a :\ranagement Review Committee meeling on April 23. 1971,
IBM's chief executive officer. :\rr. T. .1. Watson. .Jr.. formulated IBM's l)asic
policy approacli. Mr. Watson informed the Data Processing Croup that he wanted
'"a clear understanding that the comiiany swallow whatever financial iiills
required now and get ready for the future . . . irrespective of financial con-
siderations of one of two years — must return this l)usiness to a growth posture
and operate accordingly." Mr. Watson stressed the need for IBM "to make the
hard decisions today so that the same proldems don't have to be faced again and
again down tlie road." IP>?iI's Management Review Committee appointed a task
force to develop a new peripheral strategy and specific action programs to deal
with plug compatible competition. The task force, although not specifically



5732

given that name, was sometimes known witliin IBM's organization as tlie "Blue
Ribbon Task Force".

F92. On May 6. 1971, this task force made a report to IBM's ^Management
Review Committee (MRC). It recommended drastic tape and dislc price cuts
to contain IBM's plug compatible competition. Specifically, the task force recom-
mended that IBM reduce its price by 50% on 2314 and 2420 disk and tape drives,
by 20% on 3330 disk drives and by 15% on 3420 tape drives. Tlie MRC rejected
these recommendations and directed the task force to develop a strategy for
memories and printers and to rework "'the possibility of a long-term leasing ap-
proach as suggested by FTC (Frank T. Cary)." In the ensuing three weeks this
task force made a number of reports to IBM's Management Review Committee
on long-term leasing of specific peripheral products. The MRC gave final approval
to IBM's Term Plan (FTP) on May 25, 1971.

F93. The task force's presentations and recommendations to IBM's MRC
during May of 1971, indicated that some disks, tape and printers were going to
be included and some omitted from FTP, and tliat there would be an omission of
card I/O devices and system 3 products. IMost of its iterative forecasts were in
terms of the impact that IBM action would have on IBM's plug compatible
competition. The inclusion of the 1403 XI and 3411 printers was recommended
because of plug compatible competition expected from Telex. The task force
determined that the Fixed Term Plan leasing would cost IBM millions of dollars
in revenues and profits during the first two years, and projecting that on disk
drives IBM would lose .«13.200.000 in 1971, and $20,300,000 in 1972: on tape
drives $6,500,000 in 1971 and $5,300,000 in 1972 ; on printers $11,800,000 in 1971,
and $18,500,000 in 1972. In short, the task force determined that IBM would
sustain revenues reduction of more than $75 million in 1971 and 1972 by putting
tape disks and printers under FTP leases. Notwithstanding these projected loses,
it v.as thought that FTP would be very profitable to IBM in the long run because
losses from plug compatible competition would I)e decreased and it would have
more units out in the field for longer periods of time.

F94. On May 27. 1971, IBM announced FTP. One and two year leases on IBM
disk, tape and printer peripheral products (except those excluded) were pro-
vided for, with an 8% monthly rental discount for one-year leases and a 16%
monthly rental discount for two-year leases. IBM also eliminated its extra use
chargs on products leased imder such leases. Punitive penalties for cancellation
of a lease by a customer were included. The penalty for a two year lease ter-
minated during the first twelve months was five times the monthly rental
charge. The penalty for a one year lease cancellation, or a cancellation of a
two year lease during the second year, was two and one-half times the monthly
rental charges on disk products covered by the two year Plan by 31%, and its
covered.

F95. IBM's price cuts under the Fixed Term Plan were even greater than the
apparent 8% to 16%. The elimination of IBM's extra use reduced IBM's monthly
rental charges on disk products covered by the two year Plan by 31%, and its
tape products by 20%. On printers the reduction was about 30-35%. The price
cuts in many instances put IBM prices below those of its plug compatible com-
petitors.

F96. The benefiits anticipated by IBM in connection with the adoption of
FTP revolved around the suppression of IBM's plug compatible competition.
Indeed, the very creation of the task force was occasioned by plug compatible
competition. Pricing presentations of the task force to the Management Review
Committee were importantly concerned with comparisons of plug compatible
prices and projections.

Defendant's officers at the trial expressed the view that FTP was simply to
render the company "more competitive" and to obtain more business by meet-
ing the competitive efforts on a basis similar to that of plug compatible sup-
pliers. It is the court's view that such justification, which could be convincing
under different circumstances, is overpowered by IBM's monopoly position in
the particular markets involved and the rather clear indication that its action
was directed not at competition in an appropriate competitive sense but at
competitors and their viability as such.

The products specified by FTP were those peripheral products on which IBM
was receiving, or on which it anticipated that it would receive, substantial
plug compatible competition. The statement at the trial by Mr. Carey, Chairman
of the Board. President and Chief Executive Officer of IBM. that tapes and
disks were covered because "we, obviously, had to reduce our prices on them
or go out of business and so they were very logical candidates for the Fixed



5733

Term Lease Plan", aside from its cliaracter of confession and only attempted
avoidance, was overstated factually.

IBM's plug compatible competition in the disk tape area did not threaten to
drive IBM out of the business in those markets. In June of 1971, IBM's plug
compatible competitors had only 14.5% of the plug compatible disk market and
13.7% of the plug compatible tape market, and IBM's worst case forecast, that
is. "if IBM did nothing'", predicted that IBM's plug compatible disk market
and 19% of the plug compatible tape market by 1976.

Nor is Mr. Careys' explanation that FTP was merely an experiment borne
out fully by the record ; it was directed specifically at markets in which plug
compatible competition was of special concern to IBM and the selection of these
areas was not on the basis of a random experiment to ascertain the effect of
the plan, but to accomplish results with respect to these markets forecast in
advance by its experts. The plan was extended beyond disks and tapes to print-
ers from an apparent desire to lock up that market before Telex could start
deliveries. On May 6, 1971, the Management Re\iew Committee directed the task
force to prepare a long term lease approach for disks and tapes "plus a strategy
for memories and printers". Telex was known also to be interested in memories.

F97. IBM did not place its CPU's under the Fixed Term Plan. In fact, IBM
raised its prices on its CPU's and 350 memories to offset its peripheral price
cut within two months after reducing its prices on its disk, tape and printer
products under the FTP. Long term leasing represented a substantial change
iu IBM policy not only in the swing from short or open-ended leases, but in
previously contemplated general pricing policy. Mr. Emery, a member of the
task force wrote : "It was pointed out in most instances that any policy change
which we now advocate for peripherals would have to be applicable to proc-
essors as there is no justification for different treatment." One of the studies
had concluded that long term lease plans "must apply across the board — pe-
ripherals not different". IBM's Management Review Committee at one point in-
structed the Cooley Task Force not to consider long term lease plans "since
there does not appear to be a way of limiting such a plan specifically to the
lieripheral marketplace".

F9S. By January, 1971, IBM had determined that it needed a price increase
on products not covered by FTP. The Management Review Committee was
actively considering raising IBM's prices in March, and on March 30, 1971,
the Data Processing Group made a recommendation to IBM's Management
Review Committee for a price increase on CPU's. On April 7, 1971, Mr. Learson
wrote Mr. Bietzel stating : "We believe at the moment that w^e should postpone
any pricing action for another mouth . . ." In late June, IBM rejected the idea
of placing CPU's and memories under a Fixed Term Plan on the ground "this
would prematurely erode the FTP concept to the entire product line, and, in
addition, would be ineffective unless accompanied by some degree of pricing
action." IBM not only increased its prices on CPU's and memories in July,
1971, but it was IBM's estimate that those price increases would offset IBM's
price decreases on disk, tape and printer products placed under the Fixed Term
Plan. On August 5, 1971, Mr. Powell of IBM wrote : "I can support the position
that the net effects of the FTP and price change will probably be a wash insofar
as business volumes are concerned . . . The net effect of the FTP and price
changes will not significantly increase [the customers'] total cost and no
svstem decreases were forecast."

F99. In March 1972. IBM announced its "Extended Term Plan" (ETP), a
variation of the Fixed Term Plan having no substantially separate or dift'erent
economic impact of consequence in this case. ETP also was optional, IBM custom-
ers having the opportunity to rent IBM equipment under the 30 day lease con-
tract formerly utilized by IBM if they were willing to forego the price reduc-
tions provided in FTP. The defendant has now three long term lease plans pur-
suant to which it leases central processing units, tape drives and tape drive
controllers, disk drives and disk drive controllers, printers, communications con-
trollers, consoles, channels, and other products. In March of 1973. IBM an-
nounced a term lease plan which offers a four year lease on System 370 ^■irtual
storage processors.

FIOO. Surface ju-stification for IBM's turning to fixed term plans does not
insulate its conduct in monopoly context from serious question. Since the mid-
19.50's IBM and others have offered their customers the opportunity either to
purcliase computers or to lease them on short term leases basically cancelable
on 30 days' notice. Until the early 1960's many customers wore hesistant about
making commitments longer than for a month or so at a time because of the



5734

difficulty of evaluating the rapid changes in EDP technology, which situation
changed with increasing sophistication of customers and more general acquaint-
anceship with industrial developments and prospects. For a number of years
prior to IBM's announcement of the Fixed Term Plan in 1971, many of its com-
petitors had offered lower prices on long term leases.

By 1971, most of IBM's competitors, including systems and peripheral com-
petitors and leasing companies, were offering users long term lease options.
IBM's studies indicated that a long term lease plan on peryipheral products,
among other things, would reduce IBM's costs through decrease in "churning"
of IBM's leased equipment at the same time and for similar reasons that its com-
petitive position in relation to PCM's would be enhanced. But preponderant
evidence demonstrates that IBM's fixed term plan was generated and imple-
mented at the time it was with the primary intent and purpose of suppressing
plug compatible competition and to maintain its monopoly power in the plug coui-
patible disk, tape and printer markets and the general plug compatible market for
peripheral devices.

FlOl. With reference to the FTP, as in the instance of the 2319 and memories,
the intent and purpose of IBM in taking competitive action or reaction becomes
important in view of its dominant position in the markets. Some of the evidence
is equivocal. One of the difficulties lies in the inadequacy of the minutes of The
Management Review Committee to clearly indicate the reasons for approving the
actions complained of here. There was an abundance, or perhaps IBM would
now think an overabundance, of documentation in lower echelon views, studies,
computations, projections, forecasts and recommendations leading up to the ac-
tion of the Management Review Committee, the top executive authority in IBM.

In retrospect, and in view of the absence of full documentation at the top. in-
ferences are arguable and have l)een argued to the effect that the predatory in-
tent clearly indicated by task force or other processors of problems, and their
related data, were disregarded or re.iected by top management. But I have felt
constrained to reject this bland construction by consideration of the record
as a whole, and by the very organizational framework within which the record
demonstrates such decisions and intents were initiated, formulated and pursued.
In the first place I am doubtful that the intent of subordinate agents must be
entirely disregarded in determining intent of a corporation represented, as
all corporations are. by top management.

Especially is this so in the case of IBM. which the evidence makes clear was
finely tuned, organized and managed to reflect to top management the composite
of a sophisticated, widespread ad coordinated employee organization for the pur-
pose of management decisions. In the absence of some clear record or indication
to the contrary, it reasonably may be inferred that top management in adopting
recommended actions or modifications not inconsistent with the data and recom-
mendations submitted did not entirely reject their rationale and reasoning.
Moreover, there is considerable direct evidence on vital points to indicate that
top management itself did in fact subscribe to the anticompetitive views and
objectives of lower echelons, the numerosity and pervasive nature of which pre-
clude their disregard.

F102. One of many examples of the relationship of corporate investigation and
processing to corporate decision, the comprehensive and systematic studies con-
stituting input into top management, and the likely dependability of those studies,
is furnished by plaintiffs' Exhibit 107R. somewhat randomly selected.

This exhibit is headed "Key Corporate Strategic Issue . . . Peripherals". The
objectives were listed as "A. To assess all pertinent factors affecting current and
future impact of competitive compatible products on IBM's worldwide business.
B. To review current IBM strategies, policies and practices and to identify and
prioritize exposure areas in relation to A above. C. To recommend actions re-
quired to produce an optimum IB:m strategy for peripheral products." After
listing "External Factors" such as itemized "Federal Government Environment
and Influence". "Marketing Environment", "Maintenance Environment", "Manu-
facturing Environment", "Pricing Evironment". "Engineering Environment", and
"Market Potential and Trends", and after listing "Internal Factors" including
"Ease of Competitive Interface" and "Legal Considerations", the "Scope of Issue"
is defined.

"The scope of this issue", says the memorandum, "shall be selected competitive
compatible products which replace IBM products in an IBINI computer system."
To obviate any uncertainty, "Competitive compatible products" are further de-
fined as "system attached input/output and memory products." In further refine-
ment it is stated that "Input/output products shall include . . . magnetic tape



5735

drives and control units, direct access storage products and control units, im-
Iiact printers and control units, card readers, card punches, reader/punches and
control units." ••Memory products shall include main (buss connected) and
large capacity storage (plug connected)". "Excluded products'' were •'Central
Processing Units (CPU) -consoles-paper tape products-communication products
and control units-R.P.Q.'s and non-standard products-non system attached
products




with an indication that additional line organization was ••to be designated by
DP Group and V/TC." Each assessment was to include, iutcr alio, "IBM Strategy/
I'olicies/i'ractices Relating to this Eactor", "Identification and Priority of Ma-
jor lOxposure Areas" and "Recommendations for IBM Actions."

F108. IBM's Fixed Term Plan etfectively suppressed the growth of plug
coiiiputiljle competition in the plug compatible disk, tape and printer markets
and effectively contained IBM's competition in the plug compatible market for
peripheral devices. IBM's plug compatible competitors' share of the plug com-
patible disk market never exceeded 17.5% after June, 11)71. IBM's plug com-
patible competitors' share of the plug compatible tai^e market never exceeded
157r after .June, 1971. T-r.,r • *•

Immediately upon the announcement of IBM's Fixed Term Plan IBM insti-
tuted an in-depth tracking procedure to determine the effectiveness of IBM's
Fixed Term Plan. On June 18. :Mr. Rodgers reported to Mr. Learson that IBM
had already signed up 16% of its entire installed disk, tape and printer base on
the Fixed Term Plan. On June 24, Mr. Justice rep<u-ted to Mr. Hume that Fixed
Term Plans then covered 19% of IBM's installed base on disks, tapes and printers
and by Julv 22. 1071, 40% of IBM's disk, tape and printer installed base was
covered bv FTI'. yiv. Learson wrote, "They are reporting a 40% coverage on FTP.

Is thishieh or low with reference to what we exi)ect. I consider this very
important.'' And the answer came back. "Our objective was to hit 40% coverage
on files, tapes and printers combined l)y 12/31/71."

1^104. IBM's plug compatible competitors as expected by IBM made com-
petitive price reactions to the Fixed Term Plan. By June 17. Telex became the
fourth plug compatible competitor to announce a price reduction; but even with
such i)rice reductions the plug compatible competitors could not successfully
compete with the Fixed Term Plan.

Mr. Rodiiers estimated that the Fixed Term Plan cut IBM's plug compatible
competitors' order rate by 50%. IBM's tracking sliowed that 90% of its new
disk and tape products, specifically its Merlin and Aspen products, were being
installed under FTP. This tracking was in accordance witli IBM's estimate made
in June. 1971. tliat on the Merlin FTP acceptance would he 9.5% of tlie rental
base and; in fact, IBM's acceptances have been at the 95% level anticipated
by IBM.

IBM in its internal documents described the competitive constraints that it.'*
FTP imposed upon plug compatible competition, particularly plug compatible
con'i)etition for the new 3330 disk and 3420 tape i)r()ducts ; "One competir<u- has
already announccHl a I*C 3330/3S30 and others can be expected to follow soon . . .
The competitor will offer long term leases similar to IBM's with the base rental
initially 10% below ours and declining 5% per year. The competitor will face
a new environment, however, in that the bulk of his early installations will
rei>resent conversions from PC or IBM 2314's rather than plug for plug replace-
ments of installed 3330's.

This will be due to the user's reluctance to break the IBM contract due to
tlie iienalry payment required. As a result, the competitor will face hardei*
selling and harder installation since he has not yet shown the capability to
jtroyide systems, conversion, and application support . . . "While the PC c-oin-
petjtors will make a strong effort, it is assumed that near-term 3330 erosion
will be contained until the FTP contracts approach maturity. By that time.
Winchester, Iceberg, the 3330A/B and the 333M will all be available as customer
options and should hold the market for IBM . . . The 3330/3S30 FTP will receive
wide acceptance in the marketplace. It is estimated that 95% of the rental base
during 1971 and 1972 will be under FTP ... It is further assumed that the
savings engendered bv the FTP will increase the migration rate from the IB:M
and PC 2314-type products into the 3330/3830."



5736

F105. By the end of 1971 the effect of FTP on plug compatible comi>etitors was
nieasured by IBM. DP Commercial analysis reported in December, 1971, "Since
the announcement of FTP, there has been a 62% decrease in PCM tape monthly
sale rate." In disk drives Commercial Analysis reported, "In 4.5 months since
IBM's FTP announcement, the PCM monthly sales rate is down to 475 spindles
per month, oft" 48% compared to 905 per month during the first 5 mouths of
1971.'

F1U6. The plaintiffs claim that the internal Integrated File Adapter for 3330
disk drives used with the 370/135 coupled with a price substantially less than tlie
external 3830 Mod. 2 equivalent, constituted a discriminatory physical and
economic tie between the IFA and the 370/135 central processing unit ; and
that the internal ISC with the rental price substantially less than the external



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 108 of 140)