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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to possess monopoly power, to qualified camera manufacturers who
requested the information. • -a

A similar provision in the computer industry would be one signifi-
cant step in reducing IBM's monopoly power.

Another block is in the software area, the instructions that tell a
computer what to do. An article from this month's Datamation, shown
as attachment 8, entitled "IBM's Operating System Monopoly" sets
forth how IBM uses system software to lock out competition.

If I might quote very quickly, the author notes that :

"IBM currently monopolizes the development and support of IBM operating
systems.

This monopoly, which started almost 10 years ago, has played continuous
havoc with IBM 360 and 370 users.

In 1970 the operating systems were the one piece of software that IBM chose
not to unbundle. Was it an act of kindness?

Comijetition does not happen spontaneously, especially in the area of operating
systems. Some software companies can "pick up the crumbs." However, there
is no effective or economical way for a would-be competitor to break into the
field.

It is an interesting article and I suggest, when you have time, you
read it.

By including software in the price of a system, competitive offerings
are foreclosed. Moreover, by bundling the operating system with the
central processing unit, IBM maintains absolute control over the useful
life of both the software and the system.

For example, this control was recently used to disconnect competi-
tive terminals from IBM systems. Terminals generally interconnect
with a computer system over telephone wires — a standard interface
available to all.

Thus, independent terminal manufacturers were permitted entry
into this market. Soon a variety of superior price-performance prod-
ucts became available.

When faced with the growing success of the independent terminal
manufacturers, IBM simply announced that they would no longer
maintain the software necessary to allow non-IBM termin)als to
interact with IBM computers.

The mere announcement of this move severely impacted sales,
l^rofits, and access to capital of the targeted competitors.

IBM's ability to unilaterally set de facto standards for the various
media used to record computer data provides yet another form of
market control.



5078

To make matters even worse, IBM also refuses to sell — at any
price — the calibration tapes and disks needed to insure compatibility
when media produced by others is used.

As we recently testified before the House Commerce Committee on
hearings on the International Voluntary Standards Cooperation Act —
H.R. 7506 — standards are employed in many industries as a market
control technique, but in our industry the dominant company resists
the development of standards because their employment would unlock
a major element of their market control.

So far, w^e have looked at anticompetitive strategies dealing primar-
ily with the design and production of the computer itself.

Other, even more subtle, strategies depend upon when IBM does
things and on what they tell their customers.

As noted earlier, IBM's director of marketing practices character-
ized the timing of new technology insertion as one of the key factors
underlying the company's control over the value and cost of data
processing.

As the dominant force in the industry, IBM carefully controls the
level of technology available to the user. Their motivation is obvi-
ous — nothing can be allowed to prematurely obsolete equipment IBM
lias out on lease.

No innovator in our market, because of IBM's enormous prestige,
image, and market share, can successfully introduce a new concept in
computer technology unless IBM supplies its seal of approval by
announcing a similar product.

Without IBM's blessing, the product or concept is doomed to be a
commercial failure regardless of its intrinsic or economic merit.

On the other hand, this means that it is next to impossible for a
competitor to gain commercial acceptance of an innovation ahead of
IBM.

On the other hand, IBM can, and does, use "artificial" innovations
to stifle competitors. By moving an interface, shifting the location of a
controller from peripheral to main frame, changing a communications
protocol, or some similar "improvement," IBM can effectively obso-
lete any competitive product it wishes.

This ability to introduce new products, media, or approaches that
completely changes the rules of the game without warning is another
element of IBM's monopoly power.

In this way IBM is able to keep all of its competitors off balance,
force them to spend excessive amounts of development dollars to
catch up, and squeeze them into a position where the competitor must
recover his investment and his profit, if any, in 3 or 4 years, while
IBM can recover its in 5 or 6 years.

To a layman this much market control on IBM's part may well
sound inconceivable. However, the well cultivated IBM image coupled
with the lack of sophistication on the part of the consumer — again, a
fact of life in our industry that has been a carefully nurtured by-
product of IBM's dominance— makes it not only conceivable but nearly
insurmountable.

Many of the advances in our industry have been made by the smaller
competitor who substituted a new, lower cost component or subsystem
for an older design ; for example, substituting semiconductors for core
memories or providing off-line capabilities in a printer controller so



5079

that it does not use CPU time. Although I did say that such innova-
tions can be freely brought to mr.rket, I did not say that IBM would
allow them to become commercially successful.

When a change in standards, hardware or software interfaces, prices,
or the timing of new teclinology insertion fails to keep one or more
competitors in their proper place — small and weak — IBM has two
additional ti-ump cards to play.

The first involves notifying the customer that IBM cannot, or will
not, provide field engineering support or maintenance of the computer
so long as a competitive device is attached to the system.

This strategy has been used extensively, and I might say, very effec-
tively, against the vendors of add-on memory subsystems.

Since I wrote this, the front page of Computer World this week
came out with a verified report that in the State of Massachusetts IBM
salesmen were sending out letters to 370 135 users suggesting that
there is no such thing as a plug-compatible memory and that IBM
probably would not maintain their computer if they bought a com-
petitive product.

This is, according to IBM's acknowledgment, totally contrary to
corporate policy. They don't understand how it happened, and so forth.

It is the third instance of this in our industry in 2 years.

The "refusal to maintain"' strategy lacks credibility in those cases
where the competitive device is not physically integrated with the host
computer, the computer terminal, for example.

IB]M has recently begun informing customers that IBM cannot or
will not guarantee the performance of the system if a non-IBM device
is used in conjunction with it.

A recent, rather blatant, example of this ploy was in California's
Teale Data Center Procurement where IBM simply put the caveat in
as part of their proposal.

I've discussed a number of the strategies employed, singly and in
combination, by IBM to maintain its market control and to suppress
competition.

Unfortunately, time and space limitations prohibit detailing the
literally dozens of other anticompetitive strategies that IBM employs.

This does not imply that the latter are any less effective than those
discussed above. Many of them are classic monopoly tactics.

For example, the use of long-term leases with punitive cancella-
tion penalties to foreclose competition; the lowering of prices on
products where they face competition coupled with compensating
price increases on products where competition is not a factor ; the an-
nouncement of "phantom products" to block legitimate competitive
offerings; refusals to deal — for example, IBM will not sell com-
ponents or subassemblies to other manufacturers at any price; the
intentional withholding of planned product improvements — for later
introduction as mid-life kickers^ — all calculated to obsolete competi-
tive products without impacting IBM's own inventory; and lastly,
reciprocity.

Virtually all of the strategies I have mentioned are encompassed
in the 15 priA'ate antitrust suits and the Federal antitrust action now
pending against IBM.

Attached to my testimony are a number of documents taken from
both the TeJex and Greyhound v. IBM cases. To me they clearly docu-



5080

ment some of the attitudes and decisions of IBM's top management
committees and, if I may say, quite a bit of arrogance.

[See exhibit 1 at the end of witnesses prepared statement.]
Mr. BiDDLE. After reading these and other IBM documents now in
the public record one cannot avoid believing that Judge Christensen's
finding and Mr. Faw's memo as to the source of their monopoly con-
trol comes much closer to the truth than do the protestations of their
attorneys.

The latter contend that IBINI is besieged on all sides by more than
1,000 able competitors and is watching its market share decline from
its already paltry 38 percent.

One may well ask, if this contention is true, how is it that not one
single entrant into this market in the past decade has achieved rev-
enues that even approach 1 percent of IBM's ?

Is there any doubt as to why the members of our industry petition
the courts and the Congress for relief ?

The fundamental intent of our Nation's antitrust laws is to protect
consumers not competitors. One may well ask, how has the user of
computers and of data processing services faired during these past
two decades of IBM monopoly control ?

As I noted earlier, IBM's key underlying competitive strategy has
been to maintain maximum product differentiation, to avoid any
meaningful industry standardization, and to provide upward mo-
bility within its own line.

"\Miether the early computer user started with an IBM punch card
accounting machine, or by having his data processing work done by
the IBM Service Bureau Corp., or by renting his own computer, he
soon found that conversion to a competitive system was virtually
impossible.

IBM software is so intertwined with its operating and data storage
systems that they cannot easily be separated. One user, testifying in
the Telex v. IBM case, indicated that the problem of converting
from an IBJNI system to a competitive system was so complex and.
therefore, so risky he would not cliange vendors despite almost price/
performance advantages that might be available.

A variety of strategies have been employed by new entrants to this
market in their efforts to penetrate this barrier.

The limited penetration they have achieved in their relatively stable
market shares over a 20-year span would indicate tliat no strategy
has succeeded.

The level and quality of IB^NFs service and support and their care-
fully nurtured image, have kept the user reasonably well satisfied and
passive.

Of course, few usere have anv idea of the costs and penalties, the
withheld technology, and the behind-the-scene practices being em-
ploved to keep competitors in line.

The user in our industry has little idea of wliat his world might
be like if there wei'c. in fact, true competition for his business.

Only in recent months, as a result of V.^. v. IBM. CDC v. IBM.

Greyhound v. IBM. Telex v. IBM. and other antitrust suits, has the

computer user begun to see the scope of IBM's control over his destiny.

Even so. he remains largely passive. Perhaps because this is the

wav it has alwavs been.



5081

In my openintr remarks, I noted that the IB:M Corp. has an avre-
some amout of economic, market, and political power.

I hope that I have been able to provide this committee with some
insig-hts into the extent of this power and its sources.

This one company can, if it so chooses, bring the economy of
America to a grinding halt. Its self -perpetuating management answers
to no one.

The controlling shareholders care very little about what manage-
ment does or how they do it, so long as they keep piling np profits.

Their employees are well taken care of and happy ; their customers
are passive; their competitors impotetit.

There are no checks and balances.

Our European and Asiatic trading partners recognize the import
of what I have reported here. They, too, fear total IBM dominance.

At present they are striving to stem the tide by pouring massive
subsidies into their indigenous computer industry.

So far, it has done little to shake IBM's hold on their computer
industries. Gradually, nontariff trade barriers are being erected in
the hope that the American stranglehold of their industry will be
broken.

To date these XTTB's have impacted the exports of U.S.-based
manufacturers; however, it has had little effect on IBM.

Our Government moved to remedy this problem on the last day of
the Johnson administration. Almost 6 years have elapsed.

During this period IB]\I and its attorneys have used every con-
ceivable tactic to delay its coming to trial. Well they might, for their
net aftertax profit per day is $4.5 million.

They have been chastized by two Federal judges for destroying
the index to evidentiary material prepared by Control Data.

They have been held in contempt of court for refusing to turn over
documents; and they have created diversion after diversion.

Two appeals to the Supreme Court have been denied, and now,
3 months before the trial is to start, they are laying the groundwork
for another.

Each day's delay is worth $4.5 million net aftertax profits, so why
not drag it out ?

Clearly they have the ability to do so. The defendant's legal staff
outnumbei's that of the Department of Justice by more than 10 to 1.

Obviously, in a case involving depositions of more than 1.000 com-
panies, over 500 witnesses, and some 1,500,000 pages of evidentiary
material, this imbalance gives IBIM a distinct advantage over the
Antitrust Division of the Department of Justice.

In the meantime the capital markets have turned their backs on
all but a few industry ])articipants. Many have concluded that IBM's
market power will not be curbed and that its control over competitors
Avill remain unchecked.

The refusal to invest in IBlNI's competitors makes predictions of their
demise a self-fulfilling prophecy.

Even now IBM is putting the finishing touches on its 1977 product
line. If the internal documents now in the public record are at all in-
dicative, the strategies are already in place to insure a continuation
of IB^NI's market power and control for many years to come.



5082

Relief from the IBM monopoly will not come from the application
of backward-looking antitrust concepts and simplistic relief plans.

Imaginative solutions must be developed— solutions that bring the
benefits of free and open competition to the computer marketplace
and that serve the best interests of our industry, the investment com-
munity, and the public.

We do not wish to see IBM punished. They have made invaluable
contributions to our industry and to our Nation. We do not wish to see
them regulated like A.T. & T., for this would stifle their creativity
and skill.

However, we do believe that it is essential that their unilateral con-
trol over the computer and data processing industry be ended com-
pletely.

Should the Congress fail to deal effectively with monopolization of
the computer industry, the Nation will be exposed to potentially
massive economic harm resulting from unfettered abuse of the domi-
nant firm's market power.

IBM has already shown itself perfectly willing to sacrifice near-
term profits to bring competitors to financial niin, thus insuring its
monopolistic prices and profits over the long run.

Eventually, potential challengers will realize the pure folly of
attempting to introduce even technologically superior, lower cost
products in an environment of predatory IBM responses.

When potential competition is exhausted, when even the RCA's and
GE's fear to tread upon IBjNI territory, the only remaining check
upon IBM behavior will have disappeared.

The threat of eroding market shares serves as a powerful force,
spurring firms in other industries to make technological improve-
ments, keep prices at a reasonable level, and generally respond to
customer needs.

For IBM, that threat will no longer be real, as potential competi-
tors will fear the financial consequences of challenging IBM domi-
nance.

America will then be faced with an unthreatened one-firm computer
industry as complacent, as uninnovative, and wasteful as the legally
monopolized telephone industry has already been allowed to become.

Thank you.

Senator Hart. I'm sure your last statement is not universally agreed
to.

Mr. BiDDLE. As you know. Senator, we presented a statement to this
committee with our thoughts on tlie telephone problem.

Senator Hart. That exhibit that you cited to us, that is your attach-
ment 6, where it is a breakdown of some hundred-odd products. That
is an IBM evaluation of the quality of their products against their
competitors.

Mr. BiDDLE. Against those of their competitors.

Senator Hart. Our tally shows that IBM judged their product to be
deficieiit compared to those of competitors, 36 times; equivalent to
their competitors, 22 times ; and superior to the products of their com-
petitors, 9 times.

How representative a product listing is reflected in those hundred-
odd items ?



5083

Mr. BiDDLE. Well, as we scan through it, virtually all of their "sys-
tems" reflect their small system^; and their small scientific systems.

Page 8 represented not only tape and disk products in the market-
place and storage products but even unannounced products. You'll
notice their FIR project — and they assign tliis type of a name as a
confidential preannouncement handle — was equal even before it wa?
announced.

One of the interesting thing's to observe in this document is that
IBM contends in all of the antitrust cases that there is no way to de-
fine the market.

And yet, if you will notice, even the table of contents of this internal
document, which is produced quarterly and has been for j^ears, defined
the markets very neatly : Large systems, intermediate systems, small
commercial systems, peripheral products.

And yet, in Tulsa, they allege there is no such market as peripheral
products. So this represents their full product line.

Now, actually, these are simply the summary sheets of a document
that is about 200 pages thick and goes in considerable detail.

Senator Hart. The reason I was struck by that is that one of the
basic, almost primitive, notions we have about a competitive society is
that one is rewarded in proportion to the quality of his products.

And the argument goes, "'\^^ly crucify me just because I am good?"
It was for that reason that I was struck because this would suggest
that whatever the reasons for the preeminence of this producer, in his
own judgment, it is not the quality of his product.

Mr. BiDDLE. That's correct. And you will also note it was not his low
prices. If you look at attachment 11, that is simply the profit and loss
statement for a single product; the net aftertax profit is predicted to
be 35 percent.

[See attachments to exhibit 1 at the end of witnesses' prepared state-
ment.]

Mr. BiDDLE. Perhaps attachment 9, plaintiff's exhibit 472, gives us a
clue. This is a letter from Mr. T. V. Learson, the president of IBM
at that time, to one of their financial executives, where he says :

Group is looking forward to a profit at 48 montlis of some 35 to 38 percent on
memory with a profit of 25 percent on the central processing unit.

At the above profit level for memories, Group estimates they will be 30 percent
above competition in price.

He says, "Originally, I advised on the price memories of CPU's both
at 30 percent." They readily agree that CPU's cannot be easily dupli-
cated.

AVhat he is really saying is that it cannot be replaced because of the
software lock whereas memories can be.

I conclude that we should have a 25-percent profit on memories and raise the
price on our CPU's so that we have an overall 32 percent.

The classic monopoly tactic of lowering prices where you face com-
petition, raise them where you are protected from competition.

Mr. O'Leary. Mr. Biddle, in your statement you say — and I am
quoting :

The most significant anticompetitive policies through the 1960's were the
maintenance lock and software bundling; the provision of operating software
with no extra charge to lessees. Both practices tend to erect insurmountable bar-
'•'ors to new company entry.



5084

You are saying in effect that any competitors had to offer the full
range of those products and services ?

Mr. BiDDLE. Yes.

Mr. O'Leary. For the record, would you describe the difference be-
tween operations software and applications software ?

Mr. BiDDLE. I think, as Control Data explained yesterday— and I'm
not a technician; my 20 years has been spent on advising corporate
managers how to be monopolists until the last 2 years — the operating
system are the internal instructions that direct a computer in a house-
keeping sense.

It controls the use of peripheral devices ; it basically provides all of
the machine interfaces without reference to a specific application;
whereas the applications software is the software that does the payroll,
or calculates taxes, or performs a specific task.

Mr. O'Leary. Some of these things are more related to the making
of the CPU than others; is that not correct? For example, the opera-
tions software.

Mr. BiDDLE. The operating system is an integral part of the archi-
tecture of the CPU or it can be made so. It can also be made inde-
pendently of the CPU if you know the specifications of the CPU.

Mr. O'Leary. And at the present time are these items bundled to-
gether by IBM?

Mr. BiDDLE. Yes ; they are.

Mr. O'Leary. You described Avith reference to Mr. Learson's memo,
cutting prices on products facing competition and raising them on
the CPU where there is less competition.

You also indicated that IBM instituted long-term leasing plans for
plug-compatible products. I take it this is what is referred to by the
fixed-term plan ?

Mr. BiDDLE. That's correct ; fixed-term plan and long-term plan.

Mr. O'Leary. Would you describe what the terms were prior to the
institution of the fixed-term plan and what they became afterward?

Mr. BiDDLE. Well, prior to the introduction of these plans it had been
IBM policy, basically, to rent all equipment on a 30-day-notice basis.

As competitors became successful, IBM introduced the extended-
term plan, the fixed-term plan, which gave the customer a significant
discount. I think it was 8 percent and 16 percent.

And in turn it had substantial cancellation penalties if he canceled
before it expired. They also, though, came up with a creative little
kicker that allowed that to be extended on a month-to-month basis.
As I indicated in my testimony, when IBM comes into the market-
place on a surprise basis Avitli a complete change in design, the com-
petitor must then — or even the user if he is a so]:)histicated user and
trying to interface his own system — ^let in line to get delivery on a
system, wait for delivery of the system, take electronic instrumenta-
tion and reverse engineer it; then develop the interface so another
device can effectively work with that system.

And by that time thev've locked up the marketplace.

]\Ir. OT^EARY. Now, I want to move on to another problem. You also
indicate that IBM moved the electronic controller out of the peripheral
device and into the computer main frame.

A phrase in Mr. Fftw's memo caught my eye in that respect, "stra-
tegic location of function in boxes."



5085

Are you saying that IBM took something that was previously out-
side the box and put it inside the box so there is no longer anything to
plug into ?

Mr. BiDDLE. In effect, yes. In Judge Christiansen's findings he
observed that in moving the controller out of the peripheral it
achieved two things; actually, it achieved three.

One, it reduced the ^alue of the peripheral product in the market-
place because the electronics represented a significant portion of the
cost and the profitability; moved it into the main frame — "under the
covers" is the term that is used — lea^'ing the peripheral manufacturer



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 23 of 140)