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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situation woiild exist. By changing voltage and frequency unilaterally while in-
forming no one but their own appliance designers, they could quickly capture
1009^ of the appliance market. Similarly, the recent Bell & Howell vs. Kodak case
hinged on Eastman's use of the camera-film "interface" to obsolete competitive
products and bring new systems into the market while foreclosing competitive
response.

In this instance, in order to settle a private antitrust suit, Kodak agreed to
disclose. IS months before the first shipment, the specifications of any new film
product (a market in which Kodak is alleged to iiossess monopoly power) to
(lualified camera manufacturers who request the information. A similar provi-
sion in the computer industry would be one significant step in reducing IBM's
monopoly power.

Softivare

Software (the instructions that tell the computer what to do) has been used
by IBM as a market control technique at several different levels.

An article from this month's Datamation magazine, (shown as Attachment
8). "IBM's Operating System Monopoly." .>-ets forth the software that runs the
computer is also used to further lock out competition. By including software



5098

in the price of the system, competitive offerings are foreclosed. Moreover, by
bundling the operating system with the central processing unit (CPU), IBM
maintains absolute control over the useful life of the software and the system.
This control was recently used to "disconnect" competitive terminals from
IBM systems. Terminals generally interconnect with a computer system over
telephone wires — a standard interface available to all. Thus independent termi-
nal manufacturers were permitted entry into this market. Soon a variety of
superior price/performance products became available. When faced with the
growing success of the independent terminal manufacturers, IBM simply an-
nounced that they would no longer maintain the software necessary to allow
non-IBM terminals to interact with IBM computers. The mere announcement
of this move severely impacted the sales, profits, and access to capital of the
targeted competitors.

Media Standards

During the early transition from TAB equipment to computers, IBM fought
competition by pointing to the investment represented by the data already in
the customer's files in the form of punched cards; moving up to a compatible
IBM computer, the customer would avoid the otherwise "horrendous conversion
costs and the other problems" that would probably be encountered if a competi-
tive machine were selected. As a result, IBM's conversion of its customer base
from TAB to computer was almost total.

The Department of Justice, in filing suit against IBM on antitrust grounds
in 1952, recognized that IBM's absolute control over the production of 80-column
punch cards and their mandatory use on IBM's equipment, effectively tied the
two products and permitted excessive profits.

Seeking to remedy this situation, the 1956 Consent Decree required IBM to
reduce its share of the 80-column punch card market to 50% over seven years.
Shortly thereafter, IBM "discovered" magnetic as the media for computer data
storage and shifted away from punch cards. Thus, in one simple, but bold
stroke, IBM escaped the thrust of many of the provisions of the consent decree
and retained their market power.

IBM's ability to unilaterally set de facto industry standards for the various
media used to record computer data provides yet another form of market control.
In March of 1973, for example, IBM announced three new media : the "diskette,"
the "Winchester" data module, and the Group Coded Recording system for high
density tape. IBM has, as usual, kept the specifications of these products secret.
As a result, no competitor can offer a compatible product until well after IBM
ships theirs. In the meantime, the consumer is limited to a single source of
supply — ^IBM.

To make matters even worse, IBM refuses to sell (at any price) the calibra-
tion tapes and discs needed to insure compatibility when the media is used on
competitive machines.

As we recently testified before the House Commerce Committee during hear-
ings 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 be-
cause their employment would unlock a major element of their market control.
(Additional information on this problem is contained in the statement sub-
mitted by the Computer Industry Association to the House Subcommittee on In-
terstate and Foreign Commerce on April 22. 1974.)

So far, we have looked at anti-competitive strategies dealing primarily with
the design and production of the computer system itself. Other, even more subtle,
strategies depend upon when IBM does things and on what they tell their
customers.

Timing of New Technology Insertion

As noted earlier. IBM's Director of Marketing Practices characterized 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 tlie level of
technology available to the user. Their motivation is obvious — nothing can be
allowed to prematurely obsolete the equipment IBM has out on lease.

IBM's risk-lease strategy requires that every new product or concept be sub-
jected to careful analysis by one or more top management task forces in order
"to determine what, if any, adverse impact it might have on the installed rental
base. If the otherwise obsolete product or technology is locked in place by soft-



5099

ware or long term leases, the newer technology is withheld from the market ; if
replacement by a competitive product is inevitable, the advanced technology is
talcen off the shelf and brought to market.

Because of its enormous prestige, image, and market share (to this day almost
every computer, regardless of manufacturer is called an IBM machine — every
data center, the IBM room), no innovator can successfully market 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 one hand, this means that it is next to impossible for a competitor to
gain commercial acceptance of an innovation ahead of IBM. Time sharing (the
concurrent utilization of a single computer by multiple users) is an instructive
cae.8 in point. General Electric was convinced that this concept was an important
new tool which would allow more eflBcient utilization of the computer's capa-
bilities. GE struggled for several years in an effort to gain market acceptance of
the concept.

Sometime after GE had withdrawn from the computer market, IBM "intro-
duced" this innovation and it was immediately and widely accepted.

On the other hand, IBM can, and does, use "artificial" innovations to stifle com-
petitors. By moving an interface, shifting the location of a controller from peri-
pheral to mainframe, changing a communications protocal, or some similar
"improvement", IBM can effectively ob.solete any competitive product it wishes.

This ability to introduce new products, media or approaches that completely
change 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 bal-
ance : 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 three or four years while IBM can recover
its in five.

No Trespassing

To a layman this much market control on IBM's part may well sound incon-
ceivable. 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.

This is not to say that IBM is able to suppress each and every technological
innovation until it .suits their profit objectives. An innovation that is tran.sparent
to the system and to user, i.e. that does not affect the architecture, function, or
performance of the data processing system may be freely brought to market by
a competitor. However, as noted earlier, it will achieve only limited commercial
success without IBM's stamp of approval.

Many of the advances in our industry have been made by the smaller competi-
tor who submitted 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 i)rinter controller so that it does not use CPU time.

Atlhough I did say that such innovations can be freely brought to market — I
didn't say that IBM would allow them to be commercially successful.

"We Can't Guarantee the Performanee of . . ."

When a change in standards, hardware or software interfaces, prices, or the
timing of new technology insertion fails to keep one or more competitors in their
proper place (small and weak), IBM has two additional trump 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 sy.stem. This strategy has been used extensively, and I
might say very effectively, against the vendors of add-on memory subsystems.
ITEL was fo-ced to fight IBM in the courts, both in the U.S. and in Europe, in
order to protect its customers from IBM's unilateral refusal to maintain their
computers when memory other than IBM's liad been added. In one instance,
after ruling in ITEL's favor, a West German judge determined that IB:M's arbi-
trary and capricious use of its monopoly power warranted forwarding the com-
plete trial record to the government anti-cartel agency.

The "refusal to maintain" strategy effectively suppressed competition for sev-
eral years. In order to survive, IBM's competitors were forced to seek relief in
the courts. They eventually won injunctive relief, but by then, most of the damage
had been done.



5100

Their sales had been slowed, their ability to raise capital impaired by their
future uncertainty, and their customers and potential customers had been
warned! The warning was simple — but painfully clear. Attach a foreign (non-
IBM) device to your computer and we (IBM) may be "'unable or unwilling" to
maintain your computer — and that would shut you and your company down,
wouldn't it?

The "refusal to maintain" strategy lacks credibility in those eases where the
competitive device is not physically integrated with the host computer — a com-
puter terminal for example. IBM has recently begun informing customers that
"IBM cannot/will not guarantee the performance of the system" if non-IBM
devices are used in conjunction with it. A recent, and rather blatant, example
of this ploy was in California's Teale Data Center Procurement where IBM made
this caveat a part of its proposal.

For a number of reasons (many of which are included in a recently filed suit
against the State of California and IBM), IBM had the Teale Data Center pro-
curement locked up from the very beginning. From this position of strength
they were in turn able to lock out competitive subsystems suppliers.

The Anti-Competitive Arsenal

I have discussed a number of the strategies employed, singly and in combina-
tion, by IBM to maintain its market control and to suppress competition. Unfor-
tunately, time and space limitations prohibit detailing the literally dozens of
oher anti-competitive 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 including ;

the use of long term leases with punitive cancellation 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 announcement of "phantom" products to block legitimate competitive
offerings.

refusals to deal — for example. IBM will not sell components or subassemblies
to other manufacturers at any price.

the intentional withholding of planned product improvements — for later intro-
duction as "mid-life" kickers— all calculated to obsolete competitive products
without impacting IBM's own inventory.

and reciprocity.

Virtually all of the strategies I have mentioned are encompassed in the fifteen
private antitrust suits and the Federal antitrust action now pending against
IBM. Attachment 12 includes a number of IBM documents taken from the
public record in the Telex and Greyhound vs. IBM cases. These documents high-
light some of the attitudes and decisions of IBM's top management committees.

After reading these, and other IBM documents now in the public record, one
cannot avoid believing that Judge Christensen's findings and Mr. Faw's memo
come much closer to the truth as to the extent of IBM's monopoly power than
do the protestations of their attorneys. The latter contend that IBM is besieged
on all sides by more than one thousand able comi>etitors and is watching its mar-
ket share decline from its already paltry 38%. One may well ask, if this con-
tention is true, how is it that not one single entrant into this market in the past
decade has achieved revenues that even approach one per cent of IBM's.

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

HOW HAS THE CONSUMER FAIRED?

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 ?

Locked in from the Beginning

As we 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 mobility within it,s own line. Whether
the early computer user started with IBM punch card accounting machines, or
by having his data processing work done by the IBM Service Bureau (SBC), or



5101

by renting his own computer, lie soon found that conversion to a competitive
system was virtually impossible. IBM's software is so intertwined with its
operating and data storage systems that they cannot easily be separated because
much of the programming would have to be redone at substantial cost. One
user, testifying in the Telex vs. IBM case indicated that the problem of con-
verting from an IBM system to a competitive system was so complex — and
therefore so risky, he would not change vendors, despite the 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,
and their relatively stable market shares over a 20-year span of dynamic market
growth, would indicate that no strategy has si;cceeded.

Conversion costs and problems are part of the answer. IBM's image is another.

IBM!

During the course of my research for Bendix in 1957 and later in 1960, I had
occasion to question many data processing managers and corporate executives
about their reasons for selecting IBM equipment. Almost without exception their
responses included :

IBM's equipment is second best in terms of price/performance.

IBM's service and support is second to none.

IBM already has the software I need.

My management thinks IBM is the better choice,
and besides.

If I buy a non-IBM system and something goes wrong, I'll be in trouble — if I
buy IBM and something goes wrong. It's "an act of God !"

In this way, the level and quality of IBM's service and support and their
carefully nurtured image, have kept the user reasonably well satisfied and
passive.

Of course, few users had any idea of the costs and penalties, the withheld
technology, and the behind-the-scenes practices being employed to keep com-
petitors in line. The user had no idea what his world might be like if there were
in fact true competition for his business. On occasion, he heard rumblings from
frustrated and disgruntled IBM competitors, but IBM assured him that all was
indeed well with the world.

Only in recent months, as a result of the U.S. vs. IBM, CDC vs. IBM, Greyhound
vs. IBM, Telex vs. 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 way its always been."

It May Also Be Fear

On a few occasions, data processing personnel and computer u.sers have
sought to step out from beneath the IB:M umbrella. Their attempts to do so
have often been met with speedy and sometimes overwhelming retribution. The
data processing manager who steps out of line may suddenly find that his boss
has been advised by an IBM salesman that "old Joe's out of touch with all the
new technology." Or perhaps, as in several states, including Delaware and
Nebraska, copies of letters disparaging the competence of the troublesome indi-
vidual in the State's DP Selection Office are circulated to members of the
legislature. I'sually, such tactics aren't required. The data processing profes-
sional experienced in working with IBM systems knows that his most profitable
career path lies in working with IB:\I systems — and he knows also that his next
'employer will, in all likelihood, ask IBM to pass upon his qualifications.

In this environment, few if any, members of the data processing industry
are willing to speak out if it might later lead to pi'oblems with IBM. Witnesses
who had agreed to testify for the plaintiff in Telex vs. IBM suddenly changed
their minds. Last month an executive in charge of data processing of a major
corporation had agreed to participate in a panel discussion before the New
York Society of Security Analysts on "Restructuring the Computer Industry,
Its Impact on Producers, Users and Investors." After receiving one phone
call, his Chairman of the Board in turn called him and instructed him to can-
cel. These are not isolated examples.

IBM's control over the destiny of the computer and data processing industry
is all-pervasive. Its power is undisputed. Those who work in industry have
accepted this as a fundamental fact and have therefore learned to live with it.



5102

THE PRICE OP CONTINUING MONOPOLY

In my opening remarks, I noted that the IBM Corporation has an awesome
amount of economic, market and political power. I hope that I have been able
to provide some insights 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 con-
trolling shareholders care very little about what management does, or how
they do it, so long as they keep piling up profits. Their employees are well
taken care of and happy — their customers are passive — their competitors are
impotent. 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 own
computer industries. Gradually, non-tariff trade barriers (NTTB's) are being
erected in the hope that the American stranglehold of their industry will be
broken. To date, these NTTB's have impacted the exports of U.S. based man-
ufacturers, however, it has had little effect on IBM.

But what about us?

THE UNITED STATES VS. IBM

Our government moved to remedy this problem on the last day of the Johnson
administration by bringing suit against IBM. Almost six years have elapsed.

During this period, IBM and its attorneys have used every conceivable tactic
to delay its coming to trial. They have been chastised 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, three months before the trial is to start, they
are laying the ground work for another appeal to the Supreme Court. Each
day's delay is worth more than $4 million in net-after-tax profits to IBM, so why
not drag it out?

Clearly, they have the ability to do so. The defendant's legal staff out-
numbers that of the Department of Justice by more than ten to one. Obviously
in a case involving depositions of more than 1,000 companies, over 500 witnesses,
and some one million five hundred thousand pages of evidentiary material, this
imbalance gives IBM 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 participants. Many have concluded that IBM's market power will
not be curbed and that its control over competitors will remain unchecked. The
refusal to invest in IBM 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 indicative, the strate-
gies are already in place to insure a continuation of IBM's market power and
control for many years to come. Relief from the IBM monopoly will not come from
the application of backward looking antitrust concepts and simplistic relief
plans.

Imaginative solutions must bt developed — solutions that bring the benefits
of free and open competition to the computer market place and that serve the
best interests of the industry, the investment community, 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
AT&T for this would stifle their creativity and skill.

However, we believe that it is essential that their unilateral control over the
computer and data processing industry be ended — completely.

Should the Congress fail to deal effectively with monopolization of the com-
puter industry, the nation will be exposed to potentially massive economic harm
resulting from unfettered abuse of the dominant firm's market power. IBM has
already shown itself perfectly willing to sacrifice near-term profits to bring
competitors to financial ruin, thus insuring its monopolistic prices and profits
over the long run. Eventually, potential challengers will realize the sure folly
of attempting to introduce even technologically superior, lower-cost products
in an environment of predatory IBM responses. When potential competition is



5103

exhausted— when even the RCA's and GE's fear to tread upon IBM territory —
the only remaining eheclv 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 improvements, keep prices at a rea-
sonable level, and generally respond to customer needs. For IBM, that threat
will no longer be real, as potential competitors will fear tlae financial conse-
quences of challenging IBM dominance. America will then be faced with an un-
threatened one-firm computer industry as complacent, as un-inuovative and
wasteful as the "legally monopolized" telephone industry has already been
allowed to become.

Thank you.

Attachments : ( 18) .

Attachment No. 1

Computer Industry Association



MEMBERSHIP ROSTER, JULY 1, 1974



Advanced Memory Systems, Inc.
Applied Data Research, Inc.
Amdahl Corporation
Applied Magnetics Corp.
California Computer Products, Inc.
Cambridge Memories, Inc.
Centronics Data Computer Corp.
Cincom Systems, Inc.
Computer Machinery Corp.
Computer Optics, Inc.
Cullinane Corp.
Datapoint Corp.
Data Printer Corp.
Dataproducts Corp.
Delta Data Systems Corp.
Digital Scientific Corp.
Electronic Memories and Magnetics
Foresight Systems, Inc.
General Automation, Inc.
Incoterm Corporation



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 26 of 140)