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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the option of basically making an electromechanical device that takes
its instructions from the CPU.

The net effect of that is that it restricts the peripheral manufac-
turer's opportunity to be innovative in the way he does his electro-
mechanical design.

And, frankly, in data ]5rocessing today that is one of our major
remaining areas for breakthroughs, higher speed printers, higher speed
tape drivers, and so forth. IBM has preempted that.

The other is that the customer — at least when this initially hap-
pened — wanted the benefit of a competitive product and the competi-
tive controllers flexibility, but in effect the customer is forced to buy
two : The one that came with the CPI" and the one that did not.

The minutes of IB]M"s management committee indicate that future
strategy Avill exploit this more and more because — and I can see
why — in Telex v. IBM^ Judge Christiansen set out injunctive relief
that could have helped unlock this industry.

And Mr. Katzenbach managed to convince Judge Christiansen that
there were technological necessities that justified eliminating that
injmictive relief.

I consider Judge Christiansen a very wise man, but I also do not
think he fully understands the design of a computer well enough to
understand that that technological necessity is more myth than fact.

INIr. O'Leary. How is the user supposed to be better off by taking
things which are outside of the box and putting them inside ?

Mr. BiDDLE. Frankly, I do not know. The only person I know that
is better off in that practice is IBM.

]Mr. O'Leary. You go on to discuss IB^M's hardware interfaces and
the fact that they are kept secret until the first new product shipment
and describe the lag time before a competitor can catch u]).

How would standards help alleviate that problem, if at all ?

Mr. BmnLE. Well, Mr. O'Leary, CEBEMA, the other trade associ-
ation in our industry, is secretariat of the X-.3 Committee of the
American Xational Standards Institute.

For 6 years, this committee had been working on the development
of an I-O interface standard so that all manufacturers would be work-
ing to a common standard for the benefit of the user.

In that 6-year period there had been relatively little progress. And,
in fact, they had taken a U.S. position that we would resist further
efforts by the International Standards Organization to develop stand-
ards in tins area.

Our association intervened, and at the moment it looks like we are
making ]:)rogress in this area. PTowever, let's be frank : IBM has a lot
to lose if there were standards.



As we indicated in our House Commerce Committee testimony, the
small company is very much hampered in the standard making process
because it is costly, but even if he can succeed in pushing for a do-
mestic standard, IBM's participation in the standards-making bod-
ies from all free world countries that participate on the international
level allows them to block us there.

This is not a national problem, it is an international problem. The
lack of standards has been used in our industry as a monopoly
tactic.

Mr. O'Leary. Mr. Faw's memo talks about how IBM has estab-
lished the value of data processing usage and how it controls value.
It then makes reference to timing of new technology insertion.

You discussed both the power of IBM's image and the alleged use
of artificial innovations. Can you give me an illustration of what you
mean by "artificial innovations" ?

Mr. BiDDLE. As I prepared my testimony I had half a dozen in mind,
but they escape me at the moment. If you would address that question
to Dan McGurk tomorrow, or if he can come forward, I think he might
be able to respond.

Mr. O'Leary. You obviously feel that IBM has enormous market
power. Is the key to that power the fact that it is in a number of
interrelated markets, main-frame support services, software mainte-
nance, all of them put together ?

Mr. BiDDLE. Yes, it certainly is. And with their recent announce-
ment in the Comsat area, it indicates they plan to be in some more.

There is — I believe— a memo that sheds some light on that subject.
I don't find it at the moment but there is a memo in the files, the pub-
lic record, from, I believe, Mr. Learson to, in effect, his management
group that puts them down rather severely for thinking that they
could be selective in terms of what market share they would hold in
each market segment.

And concluded, and so told them, that you cannot be selective;
you must go for our fair share in all market segments.

And as you read their material it is obvious that their concept as
to their fair share of the market is 70 percent. Anything less is un-
acceptable. I suspect they feel that anything more would bring down
antitrust suits.

Our concern is that the antitrust suits will be resolved yea,rs into
the future. In the meantime, the damage is done. Momentarily, the
10th circuit is to hand down a decision on IBM's appeal of the Telex
decision.

In my opinion Telex will win. And perhaps one day, after it has
been fought to the Supreme Court, they'll get some $250 million.

Nevertheless, they have been driven out of the computer business.

I suspect, if we are to look at IBM's documents, we would find
that that $250 million is substantially less than the profit loss they
predicted if they did not drive Telex out of business.

Mr. O'Leary. Thank you, Mr. Chairman.

Mr. BmoLE. I might say. Senator, it was suggested yesterday that
there would be some mistruths in my testimony. If there are any then I
must say that the mistruths be in IBM's own "management documents,
because my entire testimony has been drawn from their i-ecords.

^piiator Hart. Mr. Chumbris?



5087

Mr. Chumbris. Mr. Chairman, in view of the discussion on the
proposed postponement of the care from this week until October, and
the fact that there is a matter pending before the Federal court in
October, we feel that we should be very cautious in asking any ques-
tions during the course of these hearings unless there is some item
that should be brought into focus.

In view of that, we will let each statement be made for the record.
If there are conflicts in the discussions, the conclusions and the state-
ments, those will be brought out at the proper time by appropriate
witnesses.

Thank you.

Senator Hart. Thank you very much.

[The following was received for the record.]

MATERIAL RELATING TO THE TESTIMONY OF A. G. W. BIDDLE
Exhibit 1. — Prepared Statement of Mr. Biddle

Statement of the Computer Industry Association as Submitted by A. Or.
W. Biddle, Executive Director

We appreciate the opportunity to appear before this committee to present
testimony on an issue of critical importance to our industry and to our nation.
As this committee linows, we came to this committee and asked to be permitted
to represent the views of our member companies. Since its inception, there has
been but one voice speaking for the computer industry — IBM. There are, we
believe two sides to the question before this committee. I thought we had
leaped ahead a decade to 1984 yesterday when Mr. Katzenbach suggested that
this committee should only listen to the views of those who agree with IBM.

The Computer Industry Association represents forty member companies with
combined annual revenues in excess of $1.5 billion and employing more than
40,000 people. Our individual member firms range in size from under a million
dollars in annual sales to something in excess of $200 million. (A list of our
member firms is shown on Attachment 1. Their products cover the full spectrum
of goods and services associated with computers and data processing — main-
frames, memories, tape drives, disc drives, printers, data entry devices, terminals,
software, and services such as leasing and systems consulting.

The Association was formed two years ago this month. It's objective then and
now is to endeavor to bring about free and open competition within the computer
and data processing industry — an industry that has, since its inception, been
dominated and controlled by one company — IBM.

In many respects, our Association was born of frustration. Its founders had
come to realize that no matter how superior their technology, or how good their
product, sales and senice, their existence as viable companies would remain at
the sufferance of the industry giant. They realized that efforts to build an enter-
prise on industry, skill, and foresight could be thwarted by a mere rumor that
IBM was going to announce a new product ; or by a change of an IBM hardware
or software interface; or by some other unilateral change in the rules of the
game — and that they could do little or nothing about it.

Our founders frustrations ran even deeper. They had lived through one fed-
eral antimonopoly suit against the giant, only to see it result in a consent decree
that did little to reduce the defendant's market share or power. And, although
another suit was filed on the last day of the Johnson administration, for more
than three years nothing had happened to bring it to trial.

Out of this frustration came a plea— a plea that must be answered soon if
we are to see a restoration of faith in our form of government and our free
enterprise system. Are we going to allow, as a conscious decision of public policy,
an ever increasing concentration of economic, market, and political power among
fewer and fewer large institutions, or are we as a nation going to return to the
philosophy of free enterprise and pluralism? If the answer is a reasoned decision
that monopoly is the wave of the future, we ask only that the rules of the game
be made clear. Only then can our member chief executives make those decisions
that serve the interests of their customers, employees, and shareholders.



508S

If, on the other hand, we as a nation believe in the concept of competition and
in the benefits of a free enterprise system, then we must take steps to make that
system work. The legislative mandate must be clarified and the enforcement
machinery modernized and streamlined. The rules of the game must be set out
for all to understand. The entrepreneur must be able, once again, to succeed —
or to fail — on his own merits. He should not be kept in business through govern-
mental intervention if his activity is not providing economic benefit — nor should
he be put out of business by a monopolist when his existence benefits the consumer
and the nation.

We believe that free and open competition between near equals is good for
producers, consumers, and the economic health of our nation. That others share
this belief is borne out, in part, by the fact that our membership has increased
by a factor of five since we appeared before this committee one year ago.

Since that time a lot has happened. CIA activities — STDS, etc. IBM was
found guilty of monopolization and attempt to monopolize by a Federal District
Court in a private antitrust case and preparations for the trial of r.S. vs. IBM
have accelerated with the trial due to begin this October. In the meantime. IBM
has become more, not less, aggressive. Their unilateral control of the market
place remains intact and the prospects for near term relief for our industry
continue to be dim. The fact that this committee is holding hearings on this
critical industry is encouraging, as is the fact that the House and Senate have
acted favorably on the Antitrust Division's budget request. However, for the
problem before us to be solved, it must first be understood. In the hope that we
can contribute to the deliberations of this committee, we would like to make the
following key points.

1. The computer has quietly revolutionized life in America. In doing so it has
become the central nervous system of our entire economy.

2. The computer industry is dominated and controlled almost in its entirety
by one company — IBM. The extent of their monopoly control is second only to
that of AT&T's over the telephone industry.

3. The maintenance of their monopoly control is based upon a number of inter-
locking strategies — some subtle — some nakedly predatory.

4. IBM's continued control over the computer industry enables it to control
the central nervous system of our nation's economy representing a real and dan-
gerous threat to the United States.

5. The elimination of monopoly power and control of this industry requires
an understanding and appreciation of the strategies and techniques used to
maintain it.

6. Our present antitrust laws and enforcement procedures appear unable to
effectively deal with the problem.

The reasoning underlying these conclusions follows :

THE COMPUTER BEVOLUTIOX

The first commercially built electronic computer — the Univac I — was delivered
to the Bureau of the Census in 1951. The event was heralded by many as the
dawn of a new age— an age in which workers would be replaced by machines :
computers would do the menial, repetitive and dirty work, freeing man for more
productive activities and almost endlessly expanding his capabilities, but some
foresaw mass unemployment and increasing dehumanization as an inevitable
byproduct of this new technology.

In little more than two decades the computer has, in fact, had major and far
reaching impact on our nation and our way of life. To a large extent the com-
puter has made advances in other technologies possible. It has taken over the
boring and repetitive tasks and freed man's hands and mind for more creative
work. Moreover computers have made seemingly impossible tasks not merely
possible but simple. And contrary to the expectations of some, the computer
has not created widespread unemployment, but has in fact created jobs through
its contribution to our overall economic growth. As each day goes by, new appli-
cations are found for these wonderous machines — new tasks are performed with
lightening speed and accuracy.

In many respects this revolution has occurred quietly. Few of us ever .see a
computer. We are almost totally unaware of the literally thousands of com-
puters installed and operating in our country today. They sort our mail, sched-
ule our airlines, process our checks, control our electric power, print out our
paychecks, and calculate our bills. Wall Street, the federal government, the



5089

defense establishment, our transportation system, our banking system, our util-
ities, and our manufacturers are totally dependent upon the continued operation
of their computers.

It has talven us two decades to convert from clerks and reams of paper to
the high speed processing of millions of pieces of information contained on a
single magnetic tape or disc. The task of reversing this process, should it ever
become necessary, would be virtually impossible. There is no going back. Today,
the smooth functioning of our nation's economy is synonymous with, and wholly
dependent upon, the smooth functioning of our installed base of electronic
computers.

Unfortunately, a situation has developed that threatens the operation of this
key national resource. The problem is similar to one that existed in the early
days of railroading — each line used a different track gauge. As a consequence,
freight moving across the country had to be off-loaded and reloaded at each
interchange point. The lack of a standard gauge made it impossible to interchange
cars and shift motive power as needed.

In the computer field, the lack of standards has made the interchange of equip-
ment and media between systems almost as difficult and inefficient. Few people
not intimately involved with our industry, are cognizant of the fact that each
computer center is unique unto itself. The specific combination of hardware,
software, operational procedures and practices in use serves to individualize
the data files to the point that an alternate or backup computer capable of proc-
essing that center's files rarely exists. In essence, if the computer doe.sn't run —
the company or entity doesn't function. There is simply no way to borrow the
computer next door. This is equally true of an auto manufacturer's assembly
line, an airline's re-sen-ation system, or a Federal Reserve Bank's clearing oper-
ations. In each instance they must rely upon their computer system supplier for
system service and support. There is no other alternative.

America's Juggler

The significance of what I have described above becomes clear when one
realizes that 7 out of 10 computers in America today are owned and serviced
by one entity — IBM. If, for the sake of illustration, their field service organiza-
tion were "unavailable" for two weeks, our nation would slowly and inexorably
grind to a halt. The transportation system, the banking system, the communica-
tions system, and the Fortune 500 manufacturing companies would all cease func-
tioning — layoffs would be in the millions — creating chaos almost beyond
comprehension.

Personally, I know of no other single corporation in the world with this much
potential power over a nation's economy. Although they surely wouldn't abuse
it, the very possession of this much power in the hands of a few people is
frightening. It is all the more so when one realizes that few Americans — includ-
ing their representatives on Capitol Hill — even know that it exists.

STRUCTURE OF THE COMPUTER INDUSTRY

It is, I believe, important for the Committee to understand how this situation
came about. The computer industry can be a classic case study through which
some lessons might be learned about the monopolization of high technology
industries and some insights gained as to the effectiveness of existing antitrust
laws in our present environment. Tomorrow, my colleague. Dan L. McGurk,
will comment on some actions tliat this Committee and the Congress might take
to rectify this situation.

Punched Cardx to Computers

Although most people associate the beginnings of the computer industry with
the first commercial Univac I, the data proces.sing industry as we know it is an
extension of the punched cai-d tabulating machine industry — an industry that
goes back to the 1930's.

.ludge Earl R. Larson, in deciding the Honeywell, Inc. vs. Spero' Rand case
(civil action 4-67 Civ 138. Ignited States District Court — 4th District Minnesota)
recognized the transfer of market control that took place during the transition
from punched card equipment to digital computers.

In his Findings of Fact and Conclusions of Law, Judge I^arson said :

15.14.1 In 1956, IBM was recognized as the principal U.S. supplier of
80 column TAB card equipment and SR (Sperry Rand/Univac) as the
principal U.S. supplier of 90 column TAB equipment ; both of these



5090

companies had years of experience and know-how, both in design and
production areas.

15.14.2 The tremendous customer base which IBM had because of its
domination of the tabulating industry had a good deal to do with its
position in the early days of the EDP industry, and this, combined with
the information exchange, gave them the predominant role which has
tended to perpetuate itself.

15.14.3 IBM used its dominant position in the tabulating business —
particularly its large sales and service force to quickly seize the lead
in the EDP business.

15.15.1 In terms of total revenue (stated in dollars) and market share
(stated in percent of revenues of the entire industry), SR and IBM had
the following shares of the EDP market in 1956 :





World market


Domestic ma


irket




Amount


Percent


Amount


Percent


IBM _.._


$42, 174 000


42.9
51.2
94.1


$39, 276, 000
37, 590, 000
76, 866, 000


47 5


SR
IBM'andSR".';.''""^""".".""."^'.'";;];


50,329,000

- - -..- 92,503,000


45.5
93.0









15.17 In 1956 IBM shipped about 85% of all new business and SR about 10%.

15.18 At the end of 1956 IBM had 75% of all EDP systems outstanding and
SR18%.

Against this background, it is important to note that the Department of Justice
filed an antitrust suit against IBM on January 21, 1952. The Government suit
charged IBM with monopolizing the tabulating machine industry and with
engaging in various restrictive practices in the conduct of its tabulating
machine business.

At the time the Government action was filed and for some years thereafter,
IBM had about a 90 percent share of the tabulating business and Remington
Rand the remaining 10 percent.

On January 25, 1956, the United States District Court for the Southern Dis-
trict of New York approved a consent decree entered in the case of United States
vs. IBM, The decree contained numerous remedial provisions directed at the
IBM TAB monopoly and to a limited extent at its rapidly growing EDP
monopoly.

In retrospect, it is clear that the Department of Justice failed to realize that
IBM's monopoly of the TAB market had already served its purpose. It provided
them with a massive customer base which could be converted over to computers
and in turn allowed them to escape from the more onerous provisions of the
consent decree.

Clearly, IMB's monopoly control was not shaken. On page 157 of his decision
(shown as Attachment II), Judge Larson presented statistics on the retail sale
value of the installed base and the market shares of each of the major partic-
ipants in the EDP industry during the period 1955 through 1967.

During this period IBM's share fluctuated between 65% and 78% — the
combined shares of IBM and Sperrv Raud-Univac ranged between 77% and
95%.

Competitive Forces At Work?

It should also be noted that some very able and well financed companies took
an active interest in the computer industry during this period. My first assign-
ment when I joined the professional staff of Booz Allen & Hamilton as a con-
sultant in 1958 was to examine the computer market for the Bendix Corporation.
At that time, the EDP market appeared to be a highly competitive one and a
number of companies were seeking to establish themselves. A partial list
included :

Sperry Rand-Univac

Radio Corporation of America *

General Electric Co.*

National Cash Register Co.

Minneapolis Honeywell Regulator Co.

Burroughs Corp.



5091

Philco Corp.*

Bendix Corp.*

Royal Precision Corp.*

North American Rockwell-Autonetics *

Control Data Corporation

Digital Equipment Corp.

Eltronics Inc.*

Monroe Calculating Machine Co.*

Packard Bell Electronics *

Thompson Ramo Wooldrige Inc.*
The U.S. vs. IBM consent decree had been signed and heralded as a significant
step towards establishing competition in the computer market place. Meaningful
competition, however, did not develop. As shown on Attachment 2, no IBM
competitor but Sperry Rand, attained more than a 5% share of the installed
computer base thru 1967.

Most of the companies enumerated above had substantial resources; most
were already major factors in markets that would, in time, become directly
involved with computers. As a result they had to enter the computer market
and prosper, if only to protect their established positions.

In late 1960. I was again asked to examine the computer market for Bendix.
They had been a competitor for some four years and achieved annual sales
of over $10 million. They had a good computer already in the market place
and several others in developemnt.

Yet, when all of the facts were in, we were forced to conclude that they had
no alternative but to withdraw from the computer industry. Our 1960 reasoning
remains valid today.

IBM and its nearest competitor can be expected to continue to hold more
than 70% of the market.

IBM has established a pattern of rental that requires the infusion of massive
amounts of capital and substantial losses before break-even.

IBM sets de facto standards for the industry— unilaterally and secretly.
Participation in the computer market requires major expenditures for hard-
ware and software development and the creation of a large, nationwide, sales
and service organization.

In our report to the client, we concluded that "—in addition to IBM [in light
of their control of 70% of the market] there is room in the market for only
two or three other companies on a profitable basis. Currently there are at least
sixteen companies almost all of which are knowledgeable, well financed firms
with an avowed purpose of making a ijermanent place in the computer business."
We went on to say, "In our opinion, all but three or four will fail to do so,
but the economic pressures and profitless sales volume that will result from
their attempts will be very costly to all concerned.

In two to five years, after the present competitive situation has shaken down,



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 24 of 140)