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 19 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 19 of 140)
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I>etitive force to IBM in these smaller market segments than have any of the
principal computer systems suppliers in the overall systems market.

The efforts of these competitors have resulted in IBM's reducing prices, im-
proving equipment performance for the same price, and developing more advan-
tageous leasing terms for equipment.

Clearly, then, competition when it becomes strong enough influences the
largest supplier to offer more advantageous terms to users.

More effective competition by the competing computer systems suppliers, so that
at least two of them had 20-.30 percent of the market each, would, I believe
result in better value for the user and should be encouraged for the long-term
benefit of the industry.

We are dealing here, however, with a situation in which the largest supplier
holds his market share through the free choice of the computer users, .\rtificial
restraints such as patent monopoly, tie-in sales, and restrictive practices have
been stripped away in this market. The sole remaining restraint appears to be
the cost and ri.sk of obtaining a more significant share. For any of the present
competitors to obtain a more meaninsrful market "^hare will require, at mini-
mum, investment of literally several billions of dollars, much of it at high risk,
and a retiirn to unprofitable oi>eration for several years. In addition, it will
require outstanding equipment and software and the contender must present
credible e^^dence that he is committed to build and maintain that maket share
by matching or exceeding the service and technical support provided by IBM.

While such a feat is not impossilile, at least two of the largest industrial
firms in the country have found it too much to contemplate and anv others who
*ry it must find forebearing investors who are willing to take the long view.



5042

Regardless of the difficulty, the potential reward is enormous and I can only
hope, for the sake of improving value to the user, that several organizations will
see the reward and make the necessary effort.

PRODUCT INNOVATION BY IBM

Once a computer manufacturer has established a substantial lease base of com-
puter systems which provide predictable revenue on a regular basis, the level
of ultimate profitability of any given computer line depends in large part on the
length of time over which revenue is received. The most profitable computer
product is one that remains relatively stable and is not quickly displaced by
products which demonstrate improved cost-performance characteristics. A manu-
facturer with a large base of computer revenue is, therefore, reluctant to intro-
duce, prematurely, a new, more productive product which results from his re-
search and development activities. The timing of the introducing of new prod-
ucts which may displace products producing lease revenue is one of the most
critical factors in the business.

A holder of a small market share, who wishes to make a substantial invest-
ment to increase that share, is less reluctant to obsolete his own product in the
marketplace than is the more dominant supplier, since he expects to divert pres-
ent users of competitors' systems to his own. If UNIVAC, for example, could
obtain 10 percent of IBM's market share, it would more than double its own
share. On the other hand, if IBM were to obtain 10 percent of the UNIVAC
market, its own market share would hardly be affected.

A smaller supplier can afford (and has more reason) to take higher risks by
introducing new technology as quickly as it is available.

These factors make it tempting for a large supplier like IBM to hold back new-
developments from the marketplace until their introduction is made necessary
by competitive pressure or the need for a new and different product to continue
its own market growth.

In the history of the computer business, there is evidence that IBM has, on
occasion, attempted to prolong product life by withholding new technology from
the market. These attempts have often been short-lived because competitors have
attempted to penetrate the market with improved technology and lower costs
for equivalent performance. IB^kl's reaction to these moves has been to be
tolerant to the point at which they believe their market share is substantially
threatened, then to release new or revised products designed to restore or im-
prove its previous competitive position.

On the other hand, IBM had advanced technology substantially in several fields.
Their contributions to the improvement of magnetic storage technology, par-
ticularly that of disc storage, have been pioneering ones, as have their contribu-
tions in the general-purpose input-output device field.

There is a developing tendency toward the development of ''packages" of com-
puter systems and programs designed to fit specific needs, rather than continue
to offer the "general-purpose" computer which is all things to all people. There
are several significant elements of this new direction. First is the provision of
specialized terminal devices which permit easy access to and from the computer
by lay operators — department store clerks, supermarket clerks, and bank tellers,
for example. In some cases, as with the automatic bank tellers now being in-
stalled, the customer himself communicates directly with the computer system.
IBM seems to be taking a strong position in the development of these specialized
systems, as indicated by their recent announcement of specialized systems for
the banking and grocery retailing industries.

Thus, IBM is not always first with new product technology in all fields, but
in specific fields it has been a leader and its product realization of whatever
level of technology it decides to implement is rarely less than excellent.

THE TOTAL SERVICE CONCEPT

Many capital-goods industries generate a close relationship between suppliers
and users of equipment which involve complicated combinations of providing
the product, financing it, servicing it, making improvements, and assisting the
user in applying it. But none seems to have generated tlie degree of cooperation
between suppllier and user that exists in the computer field.

Much of the pattern of close relationship was adopted from the office-machine
field, in which companies such as IBM and Remington Rand had developed a
highly service-oriented combination of products and services long before the ad-



5043

vent of computers. Until 1956, when it agreed to do so as a part of a consent
decree in a suit by the U.S. Government, for example, IBM would not sell its
punched-card equipment to users. Instead, IBM made the equipment and a host of
services available to users for a fixed monthly charge. Title to equipment was
never passed to the user.

The characteristics of the computer, with its need for a high degree of spe-
cific knowledge and expertise in installation, maintenance, and programming,
heightened the desire for the "full-service" concept of user support by suppliers.
As the sophistication, particularly of computer programming, has increased, this
desire has become stronger until today everyone in the computer business is pro-
viding a combination of equipment and sen-ices to its users.

As one might expect, this close cooperation develops a "following" in a spe-
cific user for the most compatible and useful combination of products and services
suitable to that user. Occasionally, the close relationship also causes users to
become dissatisfied with the combination of products, service and people, and to
change suppliers, or "migrate," from one supplier to another, seeking a more
nearly optimum combination of product and senice assistance. Thus, a high
degree of "brand" association is developed, whether it be brand loyalty or brand
suspicion, by the users of computers.

This brand association serves as a powerful stimulus to the provision of cus-
tomer satisfaction by the various suppliers. In recent years, the market for com-
puters in this class has been primarily a replacement market rather than the
forming of new associations with first-time users of computers. Perhaps as much
as 90 percent of the product delivered in recent years in the U.S. has replaced
computers ali-eady in use. Satisfied present customers, therefore, represent the
largest market for additional revenue.

In addition to the substantive matters of product characteristics and services
provided, a great deal of the attitude of users is based on a kind of charisma
about the supplier : his intent to remain in the business, long-term ; the direction
of his product and service orientation, and the apparent technical capability of
his organization, as determined by day-to-day contacts with his various sales,
maintenance, and technical support personnel.

From the point of view of the supplier, this ciiarisma is extremely important.
It represents his franchise on his present market share and is an important
contributor to his exiiectation of increased market share. In short, it is a charac-
teristic to be developed and retained at all costs. This is particularly true since
the dramatic withdrawals from the market by General Electric and RCA Corpo-
ration in the past three years, after decades of participation, reminded users
that the computer business is an expensive and quite risky one, requiring devo-
tion of vast amounts of capital and top management attention for survival.

IXGREDIENTS OF SUPPLIER SUCCESS

The closeness of relationship between supplier and user and the tendency for
many computer systems to be leased rather than purchased, places many strin-
gent demands on the organization which aims to succeed and continue to succeed
in the computer systems business. First, as in any other major capital-goods
business, desirable product characteristics, high-product quality, and competi-
tive prices are a necessity. Next, the charisma requirement noted earlier must be
satisfied. To satisfy these requirements, the successful supplier of computer sys-
tems must engage in a very high level of research and development activity.
This activity must be applied not only to the equipment, but to "software," the
very complex computer programs provided by the supplier to enable the user to
get the most out of his computer. While research and development work on the
computer equipment was the most important part of this activity for some time,
more recently research and development on software has become the most im-
portant to the user, since the potential performance of the computer system
has been improved to the i>oint that the al)ility of the user to make use of it is
limited by software rather than equipment characteristics. Today, to hold a fran-
chise in the computer systems market, a supplier must spend enormous sums of
money and engage very sophisticated professional talent to develop and train
users in the use of his software offerings. Selections of computer suppliers b.v
users are now often made on the basis of software characteristics rather than on
equipment characteristics.

Once a supplier has fulfilled these requirements, he has need for large amounts
of money to finance the equipment leased from him by his users, specialized
financial skills to understand the financial implications of a mixed sale-lease



5044

business and, finally, a large installed base of systems in the hands of customers
to supiK)rt the extensive maintenance and technical support services demanded
by the total service concept.

Attempts have been made to break-apart this "package" of services tradi-
tionally provided by the computer system supplier and some of these have been
successful. When peripheral devices are obtained from independent suppliers,
maintenance arrangements with that supplier or with independent computer
maintenance companies are required. A growing amount of software, developed
by firms which do not supply computer systems, is being acquired by users, and
independent consultants and programming firms are employed to augment or
replace the services offered by the computer system supplier.

These businesses have been moderately successful on a fairly small scale
to-date. but they represent a potential source of competition for at least some
portions of the total service traditionally provided by the computer system
suppliers.

The largest group of users, however, still appears to wish to retain a single
point of responsibility for computer equipment, software and maintenance to
avoid the necessity to determine for himself whether equipment failure, faulty
maintenance or faulty software has caused his system to fail.

Further separation of these services from the supply of the product is a feasible
course in many cases, but a considerable economic or .service advantage must be
provided to convince the large body of users that the resulting dilution of resjwn-
sibility for the total service is worthwhile.

THE ATTITUDES OF USEES

The users of computer systems are not a homogeneous group. They fall naturally
into four classes :

(1) The A'ery Sophisticated, Special-Application Users. This group, charac-
terized by the Livermore Laboratories of the Atomic Energy Commission, gen-
erally select computer equipment which they, by their own tests, have determined
to be best suited to their own use. Usually these organizations develop their own
computer programs and, on occasion, they build specialized equipment them-
selves to augment the capabilities of the chosen computer equipment. They may
even maintain it themselves. Such organizations avail them.selves least of the
services that accompany the usual computer adoption, preferring to supply the
necessary expertise themselves. Such organizations are few in number but they
tend to acquire the most sophisticated, expensive .systems.

(2) Large, Sophisticated U.sers. Characterized by some of the major airlines,
some major corporations and some departments of the federal government, these
users make a great deal of use of the supplier-provided services but they are able
to, and frequently do, combine equipment and services from a number of sources
to best meet their needs. They are capable of providing, when necessary, or
desirable, siwcialized equipment and specialized computer programs themselves
to meet specific needs.

(3) Large. Less Sophisticated Users. These organizations, typified by most of
the Fortune 500 industrials, large banks, irsurance companies, transportation,
and financial service companies, are large users of computers but they confine
themselves primarily to the role of user. They depend on supplier-provided equip-
ment and many computer programs, but retain quite sophisticated analysis staffs
capable of evaluating which of the choices of equipment and computer programs
is best for their particular need. These comprise the vast midd'e-ground of the
market where the most money for computers is spent. They avail themselves of
virtually all the supplier-provided services and are frequently quite dependent
on the supplier organization to solv^ their most difficult problems and to help
with the development of their sophisticated computer programs.

(4) Medium and Small Users. Numerically, these users are the largest group,
although they do not u.se the largest dollar-value of computers. Typically, these
users rely almost entirely on the equipmcTit and services provided by the supplier
and the pace of their adoption of computerized systems is controlled to a great
extent by the suggestions made by the computer supplier. In imp'ementing sys-
tems, they typically avail themselves of all the services of the supplier.

Thus, from the largesi and most sophisticated users we see an increasing
dependence on the supplier as we approach the smaller and less sophisticated.

The organizations of the several suppliers are structured to give the appropriate
levels of support to the various classes of users. Although practically all .serve
some Ai each class;* some of the companies specialize in serving one or another



5045

class of user. In this case, the entire supplier organization is oriented to the
principal class of user served.

Most users are quite satisfied with the siipport provided by their suppliers al-
though, inevitably, annoying, and sometimes serious, deficiencies occur from
time-to-time. Occasionally a poorly engineered porduct is placed into service and
user complaints are general until the product is made to work properly, is with-
drawn, or replaced.

Systems program, those provided by the supplier to control operation of the
computer system, typically have a number of defects and inefficiencies at first
introduction, but these are gradually identified and removed by the supplier,
after which user satisfaction is generally restored.

Typically, the user spends nearly twice as much using his computer (for
personnel and supplies) as he does to acquire it Thus, while computer price evalua-
tions are important, they are not the most significant part of the cost of computer
use and a 10 percent variation in price for performance judged to be equal might
be more than offset by other considerations.

TRENDS IN COMPUTER USE

Two conflicting trends are now apparent in the use of computers of the type
we are discussing here today. The first, and oldest, is a trend toward centralizing
the data processing resources of an organization into a large center design' to
perform data processing work on an efficient computer system designed to do
many jobs simultaneously. In connection with this trend, input data preparation
(key punching) is being removed as a function of the data processing center and
is. more and more, being performed by personnel in user organizations (account-
ing, manufacturing (etc.), coupled to the central computer site by communica-
tions lines.

The thrust toward centralization was undertaken in the belief that large com-
puter centers exhibited a considerable increasing efficiency with size. While there
has always been an increasing efficiency with size of computer, the margin over
small computers has shi-unk in recent years as inexpensive computers, and partic-
ularly the peripheral devices (auxiliary memory, printers, etc.) associated with
them, have become available.

The trend toward centralization of computer resources has run counter to the
basic management philosophy of many organizations toward decentralization
authority and responsibility to obtain more effectiveness. Centralization of the
computer resource in opposition to basic organizational philosophy was justified
as a necessary step to improve efficiency. With the prospect of improved efficiency
in smaller computers, many top managements are responding to the requests of
subsidiary managers to operate their own computer systems, in direct opposition
to the computer centralization trend still evident.

No one expects the larger computer centers to disappear in favor of a network
of smaller centers, but, in ma'^^ organizations, we expect to see a leveling off
in the growth r. "e of the larger centers and the displacement of some of their
functi( ns by smaller, less complicated computers, coupled together in a network
with each other and with the larger central computers.

The distribution of input data preparation to the users and the use of networks
of smaller computers both will increase the use of electrical communications
means to transmit computer data. The use of data communications, probably
the fastest growing segment of the computer field, has already raised serious
public policy issues not yet completely resolved by the Federal Communications
Commission and state communications regulatory bodies.

The extensive telephone communications network in place in the U.S. and most
of the rest of the world can be used to transmit computer data but it was designed
for an entirely different purpose and it is inefficient and expensive for data com-
munications use. Dpspite its high cost, computer users have found it very effective
to couple computers to comii^unications lines to perfrrm their work.

If data communications were less expensive, it would be used much more
extensively. This has led the Federal Communications Commission to conclude
that competition, rather than controlled monopv^ly, should be encouragetl to
drive down the cost and improve performance of daca communications. The
results so far hav( been encouraging, ata communications costs seem headed
for a 50 i)ercent reducf in immediately and more later. Even a* ^resent rates,
as many as 75 percent of the larger computer systems now beiu^ delivered are
equipped to use some kind of data communi ation.



5046

The expected availability of inexpensive means of data communications has
led to the conception of entirely new kinds of computer systems in which infor-
mation now stored in a large central computer may be distributed among a
number of local computer centers interconnected by data communication links.
Networks which operate in this way are already in use, for example, in the fields
of law enforcement and credit validation. The national banking system is heading
toward interconnection in such a system to handle the transfer, at electronic
speeds, of money transactions throughout the nation and the world.

Revenue to communications carriers from this source now comprises only about
3 percent of the cost of operating computers and a roughly equal proportion of
the income of communications carriers. The impact of data communications used
in conjunction with computers is growing at a very rapid rate, however, and will
at least triple in the next five years, growing about twice as fast as the market
for computers.

These volumes of data transmission will be adequate to support specialized
data communications services to most locations and we can expect to see the
development of these services proceed at a rapid pace to match the needs of
computer users.

Computer technology continues to improve the price-performance of computing
equipment and his trend is expected to continue, but the most significant element
in computer use is the people required to prepare programs, operate the equip-
ment, and prepare input data. The cost of input data preparation has been under
attack for some time and specialized devices designed to capture much of the
input data without subsequent key stroking is beginning to become economical
and go into widespread use. Other equipment is being made available which
will help to cut down the work of computer operators. In the expensive activity
of preparing computer programs, however, the key to improved effectiveness
and efficiency is the development of improved "soft" aids for computer pro-
gramers. In contrast to the aids to data input preparation and equipment opera-
tion, the solution to the cost of programing is primarily intellectual. The equip-
ment to perform this work more efficiently already exists ; it is the "software,"
or computer programs used to help the programer prepare other programs that
must be improved. Indeed, the objective in programing aids is to eliminate the
programer. There is no fundamental reason, even now. why the person who is
able to describe the problem to be solved, and to postulate the procedure to be
used in solving it, should have to learn a "foreign language" understood by the
computer. The user should be able to aescribe the problem and procedure in
language familiar to him and let the computer make the translation.

In relatively crude form, such aids presently exist, as "problem-oriented" lan-
guages used by programers to describe the problem to the computer. Ultimately,
however, the programer will be able to communicate the problem to the com-
puter, by speaking to it rather than putting instructions in writing.

Work in support of this objective is proceeding in a number of locations but
no clear-cut answer is yet in hand. Judging by the rate at which advances in
programing aids have been produced in the past, any practical solution to this
problem, adopted on a wade-scale, is not likely before the mid-1980's, but the fact
that it is feasible to consider such a solution serves to underscore the fact that
computer technology and applications are only now beginning to be developed
and that there is still a very long way to go before the ultimate usefulness of
these devices is realized.

Exhibit 2.— Speech of I. L. Auerbach Before Sixth Australian Computer Society

Conference

"The Information Revolution — Will It IMPR0^•E the Quality of Life"

(By Isaac L. Auerbach, President. Auerbach Corp.)

Sixth Australian Computer Society Conference. Sydney, Australia, May 21. 1974



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 19 of 140)