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

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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 18 of 140)
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]Mr. Wallace. Back to your earliest observation, I did describe two
barriers; and you added something to one: a caveat that said, "due
to the leasing nature of the business." That is only part of it.

The caj^ital barrier comes in many other forms — research and de-
velopment, marketing, geographic distribution of both the technical
support services and the maintenance services.

To go to your question, I think your question is, is it feasible to
separate purely equipment maintenance activity ? I think the answer
to that has to be : Of course, because it is already in existence, and
it is being done today.

It is feasible. I don't know that it would be particularly rewarding.
I think that IDC pointed out that something like 8 percent of the
computer expenditures are for maintenance activities.

It is not maintenance that is the strickiest part, of the total service
concept. That is one piece of it, but all of the things that have to do
with software maintenance — which is a very different thing than
equipment maintenance — and technical support are probably a more
siirnificant factor to the user than just having someone come and re-
place a faulty board, for example.

Mr. ISTash. I recognize that you are talking about an 8 percent ele-
ment, but to the extent it is that after-sale contact which contributes
to the user sticking to a particular company, would it not have more
of an impact than you suggest ?

INIr. Wallace. It would have some impact, but the people whose con-
tinuing contact, I think, means as much as people who don't really
fix the equipment, but are people who are the carriers of technical
support and the sales representatives who keep reminding people
about product improvements, changes, and things of that sort.

The maintenance people are there, and they fix the equipment. They
deal with the people in the machine room, but they don't get as much
of the management's attention as do these other people who are a
part, of the total service concept package.

Mr. Nash. I can think of one approach to lessen the capital barrier ;
namely, to bar manufacturing companies from leasing and require a



5036

GMAC-type entity to lease all computer equipment, or just let in-
dependent leasing companies spring up. You indicated leasing is not
the sole cause of the capital barrier.

Can you contribute any other ideas for thinking about what poli-
cies might be mvoked to lessen the capital barrier?

Mr. Wallace. Leasing costs are certainly not trivial. I didn't mean
to toss them off as being trivial. They are simply not all of it.

The critical question in leasing is, Who takes the risk? A^Hiile IDC
pointed out that a number of people made out very well in the leas-
ing business, it is also true that there are an awful lot of them who
didn't make out well at all.

The manufacturer, prior to or in the absence of a third-party leas-
ing organization, is the one who carries that risk. Laying it off is not
a simple financial matter.

There is a risk involved, and someone has to pay — the manufacturer,
specifically, who is laying off that risk — a premium for it. You describe
a GMAC-type of realtionship. That GMAC relationship, or whatever
equivalent you get, must be structured in such a way that it can
handle the risk, otherwise, it is not performing the same function
that the manufacturer performs. It is performing purely a channel ing-
of- funds kind of function, and there are plenty of those around today.

You certainly can find people who will arrange full pay-out leases
based on the customers prime credit, if all you are trying to do is to
shove the risk on the customer without his laying out capital.

It is the risk-beai-ing function that the manufacturer now holds
that is the thing that has to be assumed by somebody. That is the
thing that the manufacturer's money is up for.

To answer the rest of your quesiton. I can think of a way in which
the industry might be more completely separated, but I don't expect
to live to see it ; that is, by having some of the entities who create soft-
ware be the entities who create the systems software tliat is now the
province of the manufacturer.

I have been involved in investigations where people have seriously
considered doing just that, and I am sure that somebody is sitting
around seriously considering how to do it somewhere today.

It has a lot of difficulties ; quite a few. When one designs a computer
today, one generally starts with a description of the software and
proceeds to design the computer from that point. So it is very inti-
mately tied up with the conceptual process of a new product, and that
is the thing that I think stands in the way of it.

But I want to convey as strongly as I can the impression that soft-
ware is the toughest lock today, in my opinion, and I think that is
echoed by several of our other speakers here today, in one form or
another.

A user client of ours the other day said to me, "You can feel yourself
being drawn in closer and closer, each time you adopt a new chunk
of major software." You just feel it. There is absolutely nothing
you can do about it. You don't necessarily deplore it. ])ut you cer-
tainly can feel it, because of the investment that the user makes in
training, data conversion, program conversion, and just general over-
all ache of getting onto some new piece of vendor-supplied software.
It makes it almost unthinkable at major installations to change sys-
tem suppliers just because of the trouble you would go through with
the software.



5037

Mr. Xasii. Thank you very much.

Senator Hart. Mr. Chumbris ?

Mr. Chumbris. Thank you very much, Mr. Chairman. I have no
questions of the witness. He ]j resented a document here. He has handled
his questions well with Mr. Nash. I think it will be good for the
record, for those who wish to examine closely not only your testimony,
but the testimony of previous witnesses.

I am sure during the course of these hearings we will get reaction
to all the testimony today.

Senator Hart. L too/think that the background you have given us
will be helpful. It has been a strong background. Again, I thank you
and apologize for holding you so long.

Mr. Wallace. Quite all right.

Senator Hart. We will adjourn to resume tomorrow morning at
10 in this room.

[Whereupon, at 6 p.m., the hearings were adjourned, to reconvene
at 10 a.m., Wednesday, July 24, 1974, in room 2228, Dirksen Senate
Office Building.]

[The following was received for the record :]

MATERIAL RELATING TO THE TESTIMONY OF ROBERT E. WALLACE

Exhibit 1. — Prepared Statement of Mr. Wallace

Prepared Statement of Robert E. Wallace, Division Vice President, Com-
mercial/Industrial Division, Auerbach Associates, Inc., Philadelpia, Pa.

The Structure of the Computer Systems Industry

auerbach corporation

Auerbach Corporation was foimded in 1957 by Isaac L. Auerbach, President,
and a few associates. In 1957, these men were already veterans of the computer
business; most of them are still employed l)y the Firm. Since its inception.
Auerbach has been deeply involved in providing consulting counsel to both the
manufacturers and the users of computers. Thus, the Firm has had excellent
opportunities to view the industry both from the supplier and user points of view.

Auerbach now supports the computer business as a publisher of technical
reference services and as a consulting firm. Both activities keep the Firm in
constant toucli with the products, policies, and practices of the principal suppliers
and many of the users of computer equipment, on a day-to-day basis. The material
you will hear today is drawn from our experience in these relationships.

IMPACT OF THE COMPUTER

Less than twenty-five years ago, the Electronic Digital Computer was a
laboratory curiosity. Today it plays a part in the life of nearly every United
States citizen. There are now more than 200.000 computers at work in the
United States performing jobs as complex as guiding space vehicles ; as basic
as computing sui^ermarket bills. This year more than $25 billion will be spent
on their acquisition and use.

Computer activities in the United States employ about 1.5 million people;
but there is scarcely a life which is not affected in some way as computers:

Process bank transactions.

Handle insurance premiums and claims.

Keep track of tax payments,

Control welfare and social .security benefits,

Record .stock and bond sales.

Make reservations for transportation and lodging, and

Administer credit files,

to name only a few of the uses of these new tools in everyday life.



40-927 O - pt. 7



5038

In industry and commerce, computers have become a near-necessity as they
have established a level of control over business inventories, costs, and analysis
of sales that has greatly raised the level of sophistication required of business-
men to compete in virtually every market for capital and consumer goods.

The impact of the computer on society and on our way of life has so far been
less evident than that on the economy but it has begun to make its mark :

There are far less routine clerical jobs in the economy than there would have
been without the computer. For example, just prior to wide-spread adoption of
the computer in insurance companies, the largest companies were developing
attractive, low-cost apartment building "cities" in which young ladies could live
in order to staff their steadily growing clei-ical operations. Today, a great deal
of this work has been taken over by computers. There would not be enough women
in the country to handle the present burden of their tasks in any other way.

The computer has standardized and made less personal many of the customer-
supplier and citizen-government relationships which previously existed. Twenty
years ago if vou found a mistake in your bank statement, you could talk directly
to the bookkeeping clerk about it. Today, there is no bookkeeping clerk and other,
less personal means are utilized to investigate such matters.

Today, so much information about the daily lives of citizens is recorded in
computer systems by government, industry, and commerce, that serious issues
have been raised about the "right to privacy," or protection from unwarranted
instrusion on the personal affairs of citizens.

These are only a few of the ways in which our econoihy and our society have
so far been affected by computers. Until recently, the involvement of ordinary
citizens with the computer has usually been only second-hand. But the arrival
of hand-held calculators for as little as .$29.00 indicates the impact on everyday
life to be expected in the future from the very inexpensive computers now becom-
ing available. Simple computers are already at work in our automobiles and it
will be only a short time until they are in use in our homes. The potential uses
of these devices in the home, in education, personal transportation, health care,
and product distribution are discussed in the attached paper "The Information
Revolution— Will It Improve The Quality Of Life" presented by Isaac L. Auer-
bach, President of AUERBACH Corporations, to the 6th Australian Computer
Society Conference in Sydney, Australia this past May. In this paper, Mr. Auer-
baoh compares the development of low-cost computers to that of the low-cost
fractional horse-power motor and predicts that the computer will have as pro-
found an effect on our society as the ubiquitous fractional horse-power motor has
had.

Computers are already an important factor in our economy. But it is estimated
that only about one percent of the business establishments in the United States
currently use computer services, many of them only in simple ways, and com-
puters liave not yet begun to be used in the home. The final impact of the com-
puter on society is still before us and many predict that the computer industry
will eventually be the largest industry in the world.

A BRIEF HISTORY OF COMPUTERS

Scientists and engineers have long known how to build machines to perform
mathematical operations and many have been built in the form of adding ma-
chines, bookkeeping machines, and sijecialized calculators. During World War II,
means were conceived to build calculating devices many times faster than those
in existence by using vacuum tubes to perform the calculations. While many oth-
ers worked in the field, the first real digital computer is usually credited to
J. Presper Eckert and John Mauchly, who built a computer called ENIAC at the
Moore School of Electrical Engineering at the University of Pennsylvania. Eckert
and Mauchly formed Eckert-Mauchly Computer Coriwration, and in 1951, de-
livered the first commercial computer, the UXIVAC I.

It is interesting to note that at about this time, less than 2") years ago, serious
evaluators predicted that perhaps as many as fifty computers, certainly no more,
could conceivably be utilized in the U.S. economy.

Suddenly it was recognized that the electronic digital computer was the
logical extension of the punched-card machines long marketed by IBM. Rem-
ington Rand, and others. It i>osses.sed the capability to replace the battalions of
clerical workers then being organized to cope with the post-war expan.sion
of clerical-intensive industries such as insurance and banking.

Thus, the computer l>ecame a necessary successor product to IBM and Rem-
ington Rand but it was, after all, electronic, and virtually every sizable elec-
tronic firm in the country plunged into the business.



5039

IBM entered the business by building 'ts own organization. In a series of
acquisitions, including that of Eekert-IMa^.jhly, Remington Rand built its initial
capability, subsequently merging with Sperry Gyroscope to form Sperry-Rand,
the present parent of the UNI VAC computer division.

Through combinations of acquisition, internal development, and joint ventures,
the founding elements of the other present competitors were formed in the mid-
1950's. In the late 1950's, engineering work had progressed to the point where
transistors were being used to replace vacuum tubes in computers. The im-
proved reliability and lower cost of transistor devices made much more exten-
sive computer systems practical and transistors were universally adopted to build
the "second-generation" of computer systems. At first, transistors simply replaced
vacuum tubes in computers as they did in radios, television sets, and a wide
variety of other electronic equipment. Scientists and engineers quickly devised
many new forms of the transistor, or semiconductor, as it came to be called.
The small size and low power consumption of semiconductors allowed them to
be combined into small packages containing several such devices to ix'rform
a si>ecific function. These devices, called integrated circuits, dramatically reduced
the size, power requirements, and cost of computers, at the same time improv-
ing their speed of operation. The innovations which produced these dramatic
improvements came from a wide variety of organizations both within and out-
side the computer industry, primarily from semiconductor manufacturers, who
progressed from the manufacture of single, discrete transistors the size of a dime
to the point where entire assemblies of semiconductors, for example the active
computing elements of the hand-held calculator, are now deposited in a con-
tinuous process on a ''chip" of about the same size. Improvements in this tech-
nology continue to be made and today techniques of large-scale integration of
semiconductor devices are leading to even smaller, less expensive aggregations
of electronic circuitry which are producing very sophisticated "microcomputers"
which will form tht basis of the wide-spread use of computers referred to earlier.

MARKET SEGMENTATION

The computer market is compri-sed of many segments. Today, one can purchase
or lease all or a part of a computer system from many different sources. In addi-
tion, the services of a computer ma.v be obtained from firms which sii>ecialize in
supplying such service, without the user's acquiring a cfimputer. Computer
programs, the instructions necessary to make use of the computer, may be ob-
tained from independent soui'ces.

In the nmrket segment for computer equipment acquired by the user, a dis-
tinction is frequently drawn between the smaller machines, referred to as mini-
computers, or small business computers, and the larger, more expensive full-
scale general-purpose computers. To date, the largest dollar-volume of activity
has been in the full-scale general-purpose computer, although there are now more
minicomputers in use, their number is growing more rapidly, and they may
eventually rival the larger computers in total dollar impact.

Since the most pertinent monopoly issues have been raised in the full-scale
general-purpose computer sy.^tems market segment, the balance of this testimony
is directed to that segment.

THE SUPPLIER INDUSTRY

In the t'.S. there are six principal manufacturing entities now responsible for
more thaTi S)") i>ercent of the served market for major computer .systems. These
entities share the market roughly as follows :

Percen t
Supplier : market served

IBM (^

Honeywell 9_10

UNIVAC ::_ 9_io

Burroughs 4_5

Control Data (CDC) 4_5

National Cash Register (NCR) 3

Others 5

In 1973. AUERBACH estimates that the financial results of the computer
operations of these entities were :



5040



Computer Computer

revenue profit

Company (bil'ion) (million)



. 7 $1, 200

1.2 93



IBM

Honeywell - - - \i ^i

Unlvac - - - - ^i en

Burroughs _ •" \)



CDCi_
NCR.



.9

.3 <10



1 CDC operates in a wide variety of computer service and peripheral equipment markets. While these are its total revenue
figures, much of its income comes from these sources rather than from large-scale general-purpose systems.

The high degree of leasing employed in the industry makes these figures vari-
able from company-to-company and from year-to-year. In addition, accounting
practices vary with respect to deferred costs. Thus, both revenue and profit data
are simply indicators of the relative impact on the market of each of the com-
panies rather than a precise measure.

While we are dwelling here today on the U.S. computer market, it is important
to note that the revenues and profits of these U.S. companies are derived only
partly from U.S. operations ; much of the income is derived from foreign opera-
tions! IBM, for example, last year obtained more than half its revenue and profits
from overseas operations. In the aggregate, probably a third of the revenues of
the other U.S. manufacturers of computers in this class are received from over-
seas sales and leases.

Furthermore, more than half the computer value, world-wide, is in use in the
U.S., representing a much higher level of market saturation than elsewhere in
the world. Thus, the foreign market for computers, which is dominated by U.S.
suppliers, has been for several years the fastest growing segment and is expected
to remain so far the foreseeable future.

COMPETITION

Clearly, the bulk of the business in this field in the United States is done by
IBM. The same is true in every section of the world where government policy
allows reasonably free competition. How did this come about?

In the pre-computer era, IBM had a strongly-entrenched position in the market
for punched-card business equipment. In fact, before World War II, IBM had
achieved a dominance of that business greater than it now enjoys in computer
systems. That position was establishetl for a long time on a very wide scale and
it was maintained for many years by a combination of factors, including some
found so inappropriate by the U.S. Government that IBM accepted several con-
sent decrees which were designed to remove barriers to effective competition.

A constant ingredient, however, of maintaining that position was the existence
of a very strong marketing establishment, and a policy of supplying an almost
overwhelming amount of maintenance and technical support.

Between 1954 and 1964, IBM built its computer business and obtained a healthy
market share. By 1964, however, competition, particularly from Honeywell,
UNIVAC, and RCA began to siphon off noticeable amounts of its business. In
1964, IBM took the biggest gamble in its history by announcing System 360, a
complete line of computer systems designed to obsolete virtually evei-y computer
in the IBM product line and to compete with practically every competitors com-
puter. A singular feature of System 360 was a high degree of "upward mobility" —
a computer user could obtain a relatively small computer and, as his workload in-
creased, could move to a larger one without the need to redevelop computer
programs, until then a diflScult, costly burden for users who changed computers.

This bold stroke re-established IBM pre-eminence with the bulk of major users
who were long-time punched-card equipment users and IBM's market share
quickly passed 60 percent and has remained above that figure, fluctuating from
time-to-time, ever since.

One of the most difficult and expensive features of System 360 was the provision
of a set of computer programs known as an Operating System, which was de-
signed to control the entire computer resource and all the jobs being done by
the computer.

Operating Systems were not new, but one of the breadth and scope of the one
proposed by IBM had never before been created. As a measure of how difficult a
process the development of this feature was, the proposed single Operating Sys-



5041

tern eventually became five or six different systems and many of the features pro-
posed for the original system are only now coming into existence, ten years later.

The reactions of the principal competitors to tliis move by IBM varied. Bur-
roughs and National Cash Register, who had previously supplied business ma-
chines to the financial and retail industries, carved their market shares largely
in these fields. Honeywell, committed to across-the-board competition with IBM,
released new products and went to work to develop an Operating System for
them. RCA decided to build computers which could use the IBM Operating Sys-
tem and sell them for a lower price. General Electric and Control Data Corpora-
tion generally pursued courses which attempted to avoid head-to-liead competi-
tion with IBM. In the early 1970's, RCA sold its installed base of computers to
UNIVAC and General Electric placed its computer business in a new corpora-
tion, Honeywell Information Systems, majority-owned by Honeywell, and in-
corporating Honeywell's computer business. These moves created the competitive
environment which exists today.

The question then arises "Are the firms now in the market a strong enough
force to operate as effective comi^etition for IBM?"'

At the moment, it would apiiear that they are not very effective. A market
in which the second-place supplier has about 15 percent of the volume of the
largest hardly qualifies even as an oligopoly ; and the two firms who share the
second position were helped to that market share by recent acquisitions of other
firms who were leaving the business.

More effective competition of a different sort has been provided by the plug-
compatible peripheral equipment suppliers.

As computers have developed, increasing amounts of dollar expenditures have
gone into the "peripheral" products-magnetic tape and disc mass memory, printers,
and other equipment designed to store large amounts of information external to
the computer itself and to handle the complex tasks of getting information into
and out of the computer. Some years ago. companies not directly engaged in the
computer system business, but with the capability to make these peripheral
equipment.'-\ began marketing equipment which was directly interchangeable with
IBM products and could replace the IB;M equivalent by simply unplugging the
IBM product and plugging in the competing product. Thus, the name "plug-com-
patible" was born.

Initially, these products were pretty much direct copies of the IBM product
and the appeal to users was simply a lower cost than that from IBM. Eventually,
however, several of these firms understood the technology well enough to intro-
duce products with characteristics superior to those offered by IBM.

While these companies are relatively small by the standards of the principal
computer system competition, they concentrated on the market for only one,
or a few, specific peripheral device products and have been a more effective com-



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 18 of 140)