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 109 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 109 of 140)
Font size
QR-code for this ebook


stand-alone equivalent constituted a discriminatory pliysic-al and economic tie
of the ISC to the 370/145, 158 and 168 central processing units.

These integrated controllers consist of control electronics contained within
the same boxes or frames as the CPU's or other EDP equipment and using a
part of the CPU resources to perform their functions. IBM offered customers the
option of ac(iuiring integrated controllers at prices lower than stand alone
controllers and there is no question that prices were substantially lower for
the integration.

Unlike the situation which existed in respect to the Merlin, the fixed plan
leases and IBM's actions directed to memories hereinafter considered, tlie
integrations mentioned are not sliown to have been dictated by specific preda-
tory objectives on the part of IBM. While some question is raised in the evidence
as to rhe economic justification for the extent of tlie price reductions, and some
justifiable suspicion may exist as to predatory intent, a finding that such
intent was a significant motivation for the integration is not deemed warranted
by the evidence in view of the preponderant showing that these integrations
represented a legitimate technological and performance advance consistent
with trends in the industry and at significant decreased cost

F107. While cost and performance justifications may have existed to an
extent, it is found that IBM lowered the price of its FET monolithic memory
products and raised prices on its CPU with the primary purpose of creating
barriers to entry for potential plug compatible memory competitors. The 370/155
and 165 were introduced in June, 1970, with magnetic core memories which were
contained in boxes external to the CPU, but which were cable-connected to the
CPU.

The main memory for the 155 and 165 consisted of the 3360 processor storage
together with a Jiigh speed monolithic (bipolar technology) butt'er storage w'hich
made up a two level "hierarchical" type memory. IBM was greatly concerned
with the high market penetration which independent manufacturers of plug
compatible memories for System 370 threatened, it being estimated by it that
such penetration might amount by 1976 to as much as 23%.

Pending the availability of improved technology, IBM's Management Review
Conmiiftee explored and adopted a memory strategy which repriced memory by
reducing prices and by at least partly offsetting this reduction by an increase in
CI*U prices. Its studies indicated that plug compatible memory companies could
become viable competitors in supplying memory for IBM CPU's by oft'ering their
products at $6,000 per megabyte if that price was under IBM's prices ; that is,
viability and entry would depend upon the slope or pricing level of IBM's FET
monolithic memories.

F108. IBM formed another task force in March, 1971, which was charged with
the mission of developing a "memory strategy'' which would optimize profit and
revenue for IBM and also control the market penetration that was forecasted
for plug compatible memory products. The work of this memory task force
included an attempt to fix a price for IBM's monolithic FET memories that would
infiurnce potential plug compatible competitors to stay out of the market.

The IBM Management Review Committee set the monthly rental price for
IBM's FET monolithic memory at $5,200 per month per megabyte, which was less
than the amount rei)orting experts had indicated a potential competitor would
be required to charge in order to enter the market and be profitable and viable.
The monthly rental price for the 158 CPU was raised from the $20,600 charged
for a 155 CPU to $30,700 for the 158 CPU to offset the decrease in price for tlie
FET memory, the percentage increase in price being higher than the percentage
improvement in performance.



5737

The monthly rental price for the 16S CPU was raised from tlie $30,400 cliarsecl
for a 165 CPU to $48,600 charged for a 168 CPU to offset the decrease in price
for tlie FET memory, the percentage increase of tlie 168 CPU when compared
to the 165 being higher than the percentage improvement in performance. Neither
tlie design of the 370/158 and 370/168 nor the price of .$5,200 per megabyte per
month prevented Telex from planning competing memory ])rodncts and in March,
1073, it announced that it would market memory components for 158 and 168
systems. Control Data, Itel, Ampex and Intel have announced memories for
IBM's 370/158 and 370/168 systems at prices substantially below IBM's price.

F109. The same task force studied a projiosal that "concurrent with the intro-
duction of FET memories, the minimum entry sizes of the 145, 155, 165 and 195
be raised." A chart considered by it showed that a "minimum" memory of one-
fourth megabyte on tlie 145 would "protect" 71% of the 145 memory from expo-
sure to competition, a "minimum" memory of one-half megabyte on the 155
would "protect" 42% of the 155 memory; and, a "minimum" memory of one
megabyte on the 165 would "protect" 37% of the 165 memory from comperition.
Plug compatible memory vendors were forecast to receive a $35 million sliare
of the market for memories on ^^ystem 360, $623 million share for memories on
System 370 if IBM did not take preventive action.

One of the financial analysts, Hochfeld, in March, 1971. raised the question
with his superiors of the legality of increasing memory minimums and tlie
danger of a civil damage suit. He testified at the trial that based upon the
studies and analysis that he had done it was his opinion that when IBM dropped
its price of FET monolithic memories for the 158 and 168 to $5,200 per mega-
byte it made it impossible for anybody to enter the field and be viable competing
with IBM on the 158 and 168 memories.

P'llO. Beyond the matter of pricing, plaintiffs contend that IBM ". . . unlaw-
fully bundled" a minimum FET monolithic memory "under the covers" with its
370 CPU's so as to protect a substantial portion of the memory from exposure to
plug compatible competition. There is furtiier indication of an anticomi>etitive
design in the investigation of proposals for minimum mejuories in IBM CPU's,
but, again, it appears that there are so many practical ;ind technical justitica'
tion.s for the integration of mem(U-y as to raise substantial (luestion coiicei-ning
the validity of plaintiffs' contention on this point.

Memory is an essential component of the central processing unit since all
processing units must have storage to operate. The integration of memory gen-
erally tends to reduce cost and improve performance. If memory is packaged
sep.irately in a separate box it does require additional frames and covers ; it
recpiires its own separate cooling system, power supply, acoustic battles and
electrostatic shielding. It also requires extra cables.

The speeds and circuits used in CPU's have increased dramatically in recent
years ; to best take advantage of this faster technology it seems desirable, all
other things being equal, that memory be integrated into the CPU's so that the
wire lengths between logic and memory elements be reduced as much as feasible.
As a result of cost and performance advantages integration is accepted as ak
industry standard and an objective of good engineering design.

Historically most CPU's designed by IBM and various other EDP suppliers
have included a minimum main memory integrated within the CPU. Historically
aloo, whenever a main memory has been integrated within a product it has been
included in the price of that product and not separately iiriced. Reduction in
the size of memory components has made it practical to integrate more memor.-r
with the logic elements of the CPU.

111. The preponderance of the evidence establishes in the case of IB^I's
370/158 and 370/168 CPU's that IBM's integration plan was adapted primarily
to achieve the cost and perfm-mance improvements made pos.«>ible li.v reductior
in size of the memory component. Other companies are still able to attach their
memories to IBM 370/168 and 370/158 Systems and Telex has recently an-
nounced its intention to do so.

The IBM 370/155 and 370/165 primarily use magnetic cores for memory, and
because of its size such magnetic core memory is sold in a separate box. At the
time the 370/155 and 370/165 were announced, advances in semiconductor tech-
nology were raiiidly obsoleting core memory technolngv. The main memories of
the IB?,I 370/1,58 and 370/168 CPU's announced by IBM on August 2. 1972, are
made up of FET semi-conductor circuitry. The trend toward miniaturization of
conqjuter circuitry no doubt will continue in the future to permit further
integration.



5738

Telex itself anticipates that memory cliips contiainins 8,000 circuits will l)e
■commercially available by the time it delivers its replacement memories for
•370/158 and 370/168 Systems. Using an 8,000 circuit chip, 4 megabytes of stor-
age can be housed in a space approximately 21 inches by 15 inches by 6 inches.
I'hips containing 61,000 circuits are presently under development at a number
of laboi-atories.

IBM anticipates chips containing 256,000 bits by the lOSO's. In the court':^ view
it would not be a proper application of the antitrust laws under the circum-
.stances shown by the record to preclude or discourage the utilization of advanc-
ing technology by this type of integration.

The testimony, and particularly Hochfeld's, affords .'^•.ome indication that one
of tlie motivations for the "bundling" of the minimum memory l)y IBM was
to reduce exposure to plug compatible competition. Yet, dominant justifications
on other grounds lead the court to believe that this was not unlawful in and
of itself, however significant some of the related tes-timony may be in indication
of a predatory intent primarily directed in actuality to other areas as herein
found.

F112. IBM's growth and success in the industry have l)een due in sultstantial
measure to its S'ldll, Industry and foresight. It has tended to set the standard
for quality in the EDI' industry for products and services. It has met notably
favorable response in the market, and has been deeply involved in the plienomenal
.growth of the industry since almost its beginning. Each succeeding generation
"of IBM products has represented some technological improvement over the
preceding generation and has involved development of new processes, storage
devices, input/output devices, and software.

In the approximately twenty years that the EDP industry has been in exist-
ence IBM has introduced more than 600 products. Some of these products
include major technological innovations. By virtue of its own research and
development, IBM has obtained more than 10,000 patents which are freely
licenS'8d.

I therefore cannot fully agree with Telex's contention that "IB:\I did not
•gain, nor has it maintained its position in the industry through skill, industry
and foresight". No doubt it gained a dominant position in the industry through
a praiseworthy degree of these qualities. Whether there was anticomi>etitive
conduct that went along with them in recent years prior to 1969, the record
does not disclose.

The real problem here is notwithstanding Ihis, whether IBM has maintained
its monopoly position, or attempted to do so, by unlawful conduct since 1969. la
the respects determined herein in the critical period at least it must be recognized
that its diligence and foresight have included the competitive studies and the
anti-competitive objectives and intent heretofore found, and that particularly
as applied to this case have included an attempt to substantially constrain or
destroy its plug compatible peripheral competition by predatory pricing actions
and by market strategy bearing no relationship to technological skill, industry,
appropriate foresight or customer benefit.

With such intent and objectives manifest with respect to its plug compati!>le
competition, it is understandable that the defendant should be particularly op-
posed to the recognition, as essentially separate entities or markets, of what was
initially a part and parcel of its own internal business over which it exercised
legitimately a 100% control — the peripherals attached to its own developing
system.

But we find unconvincing the idea that separate markets or submarkets
actually recognized by IBM itself in this dynamic and amazing industry could
not have been developed eventually from IBM's prior lawful domination of it;
or that the objectives and planning of such a i»resently dominating force against
the competition of the peripherals could somehow be deemed dissipated among
lower echelons of this great organization and not considered to l>e reflected in
the competitive actions of top management, or that, if reflected, should be
held innocuous or futile, or at all events lawful, as competitive weapons.

VII. IMl'ACT AXD DAMAGES FOR AXTITITRUST VI0LATI0^■S

F113. Telex now claims that its damages resulting from unlawful predatory
acts of IBM total $361.3 million, and that these damages are comprised of $257.7
million in deprivation of market share, $02.3 million for lost rental profits and
$11.3 million for lost sales profits.



5739

F114. The record leaves little room to question that the acts, conduct and
intent on the part of the defendant found herein to have been in violation of
Section 2 of the Sherman Act proximately caused substantial impact and damage
to the business of the plaintiffs, and the court so finds.

Aside from its quantification beyond substantiality, such impact is to be found
in the circumstantial evidence as a whole, the direct evidence by way of opinion
iuul judgment of Telex officers and witnesses, .some evidence elicited by the
cross-examination of tlie defendant's witnesses, the admitted fact that such acts
were competitive responses on the part of IBM to the inroads the plug com-
liatible competition was threatening and mailing against its market position,
by reasonable inference in view of IBM's marlvet domination and organizational
effectiveness that these responses must have advanced their purposes to some
appreciable degree, and from a number of statistical indications to l)e referred
to in some detail in connection with a determination of the amount of damages
to which plaintiffs are entitled.

Fllo. As to any specific amounts of damages awardable in this given case
the evidence is less clear, and as justification for the sums asked for quite
unsatisfactory and insufficient. There is evidence tending to show that Telex
liad a taxal)le income of $12,462.0(10 for fiscal year 1971 ; for fiscal year 1972, after
the effects of the 2319 announcement were expectable. Telex's loss was ($913,000) ,
and for fiscal 1973, after 2319 and the FTP influence, its pre-tax loss was esti-
mated to be approximately ($7 million). Its gross receipts of $77,843,000 in
fiscal vear 1971 declined to $56,076,00<) in fiscal 1972.

At the end of fiscal year 1971 (after 2319 but before FTP) the market value
of Telex's stock was $i9 a share or $197,999,000 for all shares ; two years later,
after FTP, it was $4.60 per share or $48,143,500 for all shares, a loss in value
of $149,85.5,500. According to Telex's November, 1970, forecast and product plan,
a profit of $33,837,000 would have been produced in fiscal years 1972 and 1973.
Telex's initial November. 1970, forecast sliowed a projection of 8,910 units, and
Telex actually shipped 4,517 units through March 31, 1973.

Following the 2319A and B announcements and FTP, Telex had been able
to make third party sales of $30 million from January 1, 1971, to March, 1973,
while in 1969 and 1970 almost $120 million in Telex tapes and disks were sold
to third parties. Prices at which equipment could be sold has eroded some 35%
as compared to the 1969 and 1970 prices. Marketing expenses increased. Backlog
and order rates were reduced. Recruitment of adequate personnel became more
difficult as uncertainty as to Telex's future viability increased. "Front end"
expense has been increased by inadequate concentration of products and services.

Competition among Telex and other plug compatible manufacturers for re-
maining business has intensified. Telex's ability to secure financing has been
impaired, and Telex has had to pay more for financing. There is some evi-
dence that Telex's problems are not unique in the plug compatible market ; that
some companies following 2319 and FTP failed in or abandoned their plug
compatible business.

There was a "plateau" that existed in Telex's installations growth from about
November, 1971, to about July, 1972. From September, 1969, to November 1971,
Telex's domestic installation or "population" of peripheral devices increased
from 1,000 units to 8,000 units. From about November, 1971, to about July, 1972,
the last month included in the Telex chart reflecting such plateau. Telex's
installations neither substantially increased nor decreased.

F116. There was evidence developed ))y IBM at the trial that Telex's fore-
casts were untried and unrealible upon which to base damage and impact claims
and that in any event, the recorded business experiences of Telex were explain-
able by various factors and influences unconnected with IBM's business prac-
tices, it dismisses Telex's income tax returns as unreliable for the purpose of
indicating damages, pointing out that in 1972 Telex changed for tax purposes
from the accrual method of accounting for certain revenues to the installment
metho<l ; thereby slowing down the tax reporting of revenues on certain leasing
company transactions. The tax return handling of depreciation of Telex's
retained equipment and interest expense is also attacked.

The necessity of a detailed and complex analysis including a reclassification
of all items of expense and revenues is emphasized by IBM and in the absence of
such a study and restatement it is asserted that the income tax returns have
little or no value for comparative purposes or even as statements of_ actual
income. The significance of stock price changes is also dismissed by IBM, it being
claimed that there is no evidence relating the fluctuations or declines in the
market prices for Telex stock to any or all of the IBM actions of which Telex



5740

makes complaint, and that such stock fluctuations are assignable in whole or in
part to adverse publicity over IBM's accounting methods and other circumstances
over which IBM had no control.

Finally, IBM demonstrated with some persuasion that Telex's difficulties
at least in part stemmed from its own problems of management, testing, service,
organization and personnel. Defendant's charts 143, 144 and 145 indicate that
while Telex disk drive spindles and tape drives installed on CPU's manufactured
by IBM leveled off markedly in number for the period 11*71-1972, as Telex
showed, similar non-Telex installations continued to appreciably advance.

In the latter connection it is notable, however, that about the time the acts
complained of by Telex were becoming effective to the extent they did, there was
a discernible diminution in the rate of increase of even these non-Telex instal-
lations. Telex's response to the claimed adverse effect of its management and
other internal problems is that they are more or less normal to the industry and
that most of them have been intensified to critical stages because of IBM's
predatory actions.

Telex says that the February 7, 1973, product forecast from which IBM con-
cludes that '-Telex has turned the corner" is only a manufacturing capability
forecast in support of which at the time of the trial it was not assured that
adequate financing and third party sales would be available that the order rate
is nowhere near the forecast, that since the first of tlie year there has been a
significant reduction in the level of product shipments and new produetiou units
shipped for this fiscal year are 50% lower than forecast.

F117. My task would be simpler if as to each element of claimed damnge
clear and unhampered causal lines could be discerned, leading to IBM's predatory
acts without passing through or commingling with the literally hundreds of
other circumstances which may have infiuenced the figures. But in cases like
this, if not in every complex case, it is humanly impossible to trace, find, and
specify in detail and quantity in effect the numerous circumstances which
cause or contribute to financial consequences. By such a process the determina-
tion of damages by court or jury could be bogged down in almost any case or
rendered more inaccurate than a considered judgment appraisal of the com-
bined effect of all actionable elements duly considered by an informed fact
finder after elimination of the influence of extraneous causes. The record frag-
menting of judgment might be either a mere exercise in futility or a mechanical
allocation of the result of the aggregate judgment at best.

It is the damage that must be quantified rather than the respective weights
or contributions of tbe unlawful causes so long as each has substantial effect
upon the damages suffered by the injured party so as to constitute their rirox-
imate cause. Notwithstanding the difficulty involved, I have found that there
is reasonable I>asis in the evidence to fairly approximate the damages to which
plaintiffs are entitled as proximately caused by the unlawful acts and conduct
of the defendant.

F118. The largest component of the damages claimed by plaintiffs relates to
the deprivation of market share, based on the difference between Telex's fore-
cast of November. 1970, and Telex's forecast of January 12. 1972. Product rental
prices in effect prior to 2319 were used, product life was based upon IBM
estimates, and Telex's usual product and marketing expenses were used.

Telex's November. 1970. forecast was prepared prior to the predatory actions
of IBM except for the 2319A announcement. The number of units was smaller
than those forecast for Telex by IBM's April 16, 1971, internal forecast, which
took into consideration the impact of IBM's 3420 tape price cut and IBM's
2319 disk drive pricing cut.

Telex's January 12, 1972, forecast reflected anticipated product shipments
greater than Telex's actual business turned out to be over the same period.
The difference between the Telex November, 1970, and January 12. 1972, fore-
casts was less than IBM's internal documents indicated that it expected Telex
to receive prior to IBM's Fixed Term Plan announcement.

IBM's internal documents indicated that IBM calculated its increased profits
that would result from adoption of the Fixed Term Plan leases for tapes, disks
raid printers to be $4(56 million.

Using the latter assumption and considering that in 1970 Telex was installing
approxhnately 53% of the non-IBM plug compatible tape drives, 31% of such
disk drives and 100% of such plug compatible impact printers, a calculated
h)ss of market share from FTP would be ,$218.67 million. In support of its
loss of market claim Telex also cites income tax records and stock prices



5741

as indicated above, but relies primarily upon a comparison of documents de-
scribed as the November, 1970. forecast and a January 12, 1972, forecast.

F119. Tliere are circumstances relating to these forecasts which preclude
their acceptance at face value notwithstanding some supportive evidence of
other types. The handwritten documents assembled as the November, 1970,
forecast were prepared by different people at different times. No part of the
document is actually dated and the text of the initial pages indicates a date
of preparation after Fel)ruary 18, 1971, even though Telex prepared an entirely
new and substantially reduced forecast in February, 1971.

Neither the November, 1970, forecast, nor the January 12, 1972, forecast is
supported by the usual written assumptions which the evidence shows were
utilized in their preparation. Forecast assumptions were "very informal and
very unstructured" in the words of one of plaintiffs' witnesses.

The Telex calculation is based upon the highest forecast it made for selected
products compared with the lowest forecast made for those products and the
forecasts had no substantial histor.v of reliability or accuracy.

Under such circumstances, while these forecasts have been considered to
be good faith evaluations in the course of business operations and for busi-
ness rather than litigation purposes and thus entiled to consideration, calcu-
lations based upon them must be weighed with due regard for their limitations
and other evidence.

Moreover, plaintiffs' calculations have assumed that variation in units fore-



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 109 of 140)