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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a combination of the computer division's resources with other
Bendix activities would prove beneficial. Such a combination
could well make profitable use of the existing development,
manufacturing, and distribution facilities. One possible com-
bination might be within Bendix 's numerically controlled
machine tool area of interest. Undoubtedly, there are other
opportiinities which can and should be appraised.



(2) The Opportunities To Become an O. E. M. Supplier to
the Computer Industry Should Be Considered



Although the business of making computers appears to
be unprofitable because of the competitive situation, it is quite
possible that a profitable business could be developed as a sup-
plier of components, special equipment, or input -output gear
to the other manufacturers. Since the supplier in this instance
is selling directly to the manufacturer of the computer system,
the problems and costs associated with an extensive marketing,
programming support, and service program are avoided.



5177

Bendix's experience as a computer manufacturer might also
serve to make it a more qualified supplier of this market than
some of the smaller companies in the field.



(3) Merger with One or More Other Companies in the
Computer Field Should also Be Considered



The point has been made throughout our report that
success in the computer business requires a sizable invest-
ment and a relatively large scale operation. There are almost
a dozen companies that are now competing for a share of this
market - and will fail to get it. Individually, these companies
are too small and their resources too limited, at least with
respect to their computer operations, to topple the three or
four leading contenders.

It is possible that the merger with one or more of these
companies could result in an organization of sufficient size
and with large enough resources available to capture one of
the top spots in this industry.

These represent three possible routes wherein Bendix's
investment and experience in the computer business might be
redirected in a manner which would provide a higher return on
your shareholder's investment than appears probable under the
present circumstances. There may possibly be others that
should be examined as to their feasibility.



5178



11. FINALLY, EVENTUAL LIQUIDATION OF THE DIVISION MUST
BE CONSIDERED IF ALL OTHER COURSES OF ACTION FAIL



This alternative might offer Bendix the lowest loss on its invest-
ment from a short-term point of view, but the cost must be viewed in the
light of the over -all Bendix position, not just that of the division alone.
The impact of such a niove could be very detrimental to the Bendix repu-
tation and might handicap current or future corporate moves into other
commercial or industrial markets, since potential customers would be
concerned that here again Bendix might withdraw from the field.

It appears that, for the immediate future, Bendix must move for-
ward with every outward appearance of remaining in this business, while
the three alternative means of redirecting the division's effort are being
explored in detail.

Unfortunately, the foregoing presents a rather dismal picture of
the computer division's present position and its prospects.

We have arrived at our conclusions with considerable reluctaince
and only after long and careful consideration. We have sought out and
obtained the best information available on this market and its probable
future from qualified sources within and outside our firm. Our findings
and our line of reasoning have been carefully reviewed with those of our



5179



partners considered to be qualified in this area, for it is all too easy,
in a situation such as this, to find that the competition is too great and
calls for withdrawal. We would much rather present an action program
that has a realistic chance of success and recommend that Bendix move
forward with courage. In this case, however, we sincerely believe that
the better choice for Bendix is to redirect the efforts of the division or
liquidate the business.

In summary, it seems to us that large size is a must for success
in the computer business and thus, in the end, in addition to IBM, only
three or at the most four other companies will survive as suppliers of
complete computer systems.

At the moment, there are at least four major companies and a
host of lesser ones competing for these positions. While Bendix is
fully their equal in its technical and manufacturing abilities, several
of them are more experienced in commercial activities governed by
market requirements rather than technical excellence of product. Also,
they are more accustomed to situations where the initial investment is
high with ultimate profits by no means assured and, in any case, several
years away. Furthermore, several of them currently occupy a more
advanced p)osition in the market place than Bendix.



5180



In our judgment, the probability of success for Bendix by itself is
not worth the risk. It must either combine forces with others now in the
field, redirect its operation toward supplying auxiliary or peripheral
equipment, or withdraw entirely from the leased commercial computer
business as such.

These alternatives need further study before a final conclusion can
be reached.

This completes our reporting on our present assignment. The best
answers we have been able to obtain to the specific questions covered by
the proposal letter are contained in Section 7 on page twenty -two of this
summary. The following series of appendixes contain the source and
derivation of quantitative and other data used in this discussion.

Very truly yours.



5181

APPENDIXES
INTRODUCTION

The following appendixes, describing recent developments in the
computer market, while intended to stand as a complete current report,
will be more meaningful if the reader has thoroughly familiarized him-
self with the Survey of the Market for the Bendix G-15D Computer dated
February 1958. Much basic information is contained in the prior report
that is not repeated in the following material. Therefore, familiarity
with the prior study will add Continuity and a more complete background
of data on which to evaluate the recent developments in the computer
market.

At the very beginning of the study, it became apparent that exami-
nation of that segment of the market of most interest to Bendix, namely,
the engineering and scientific segment, could not be analyzed competently
without first determining that segment's relationship with the rest of the
market. For this reason, we felt compelled to present first a brief
description of recent developments in the entire market to enable the
reader to have a better understanding of developments concerning that
segment of special interest. Appendix A, therefore, presents a brief
discussion of developments in the total market, while subsequent appen-
dixes deal with the market segment and equipment of special interest to
Bendix.



40-927 O - pt. 7-23



5182



APPENDIX A (1)



RECENT DEVELOPMENTS IN THE COMPUTER MARKET

During the three intervening years since our last appraisal of the
computer market for the Bendix Corporation, a number of significant
changes have occurred. An appreciation of the magnitude and importance
of these changes is essential to the development and utilization of a fore-
cast of probable future events within this market.

While still a rapidly expanding market, its rate of growth has de-
celerated since the peak years of 1956-1957. Though undoubtedly affected
by the 1958 business adjustment and deferment of computer procurement
in anticipation of the availability of transistorized equipment, there are
still sound indications that the market has progressed from a period of
explosive growth to one of slower, but steady, expansion.

In addition to its tremendous size, the market has seen at least
two other recent developments of significance to both users and manu-
facturers. These have been the introduction of a new generation of
computers that utilize the latest developments in transistorized con-
struction, core memories, and advanced logic, and the growth of intense
competition in all segments of the market. Within the past few years, at
least 16 manufacturers have entered the field; nearly all of them major



5183



APPENDIX A (2)

corporations of considerable size, some on an experimental basis,
but others heavily committed to capturing a future profitable share
of the market for themselves.

These two developments have contributed greatly to a certain
amount of confusion in the market place, by tending to obscure seg-
mentation of the market by system price, size, or application. This
is illustrated in Exhibit A-1, following this page. The average or
typical system is shown as a point, while the broad range of capabilities
and prices that are possible through the addition of peripheral equipment
and system modules is represented by the length of the bar. It is also
important to note that the prices shown do not reflect used computers
that have been discounted or systems that are possible through combina-
tions of equipment, such as the IBM 1620-1410.

Since 1957, more accurate historical data have become available
to aid in the analysis of the computer market. In view of Bendix's
specific data needs with respect to the engineering and scientific market
for the G-15, G-20, and G-25 systems, we have used the same basic
size and application categorizations that were employed in our 1957-1958
report.

It should be pointed out, however, that the recent trend toward
modular system design tends to obscure these traditional market divisions.



5184



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5185

APPENDIX A (3)

Similarly, the range of capabilities that are now possible through the
addition of peripheral equipment clouds the picture even more. These
changing conditions should be kept in mind as the market develops, so
that the data and estimates contained in this report may be kept in their
proper perspective.

1. THE TOTAL ANNUAL RENTAL VALUE OF ALL INSTALLED
COMPUTERS IS ESTIMATED TO EXCEED $450 MILLION AT
THE END OF 1960

The rental value of installed digital computers of all sizes and
applications has almost tripled since the end of 1957. It is estimated
that this figure reached approximately $450 million at year- end 1960.
Although the industry remains essentially rental -oriented, it is signi-
ficant to note that the purchase value (in contrast to rental value) of
outstanding equipment is currently well in excess of $1. 6 billion, also
almost three tinnes the 1957 value.

Industry sources indicate that annual sales, composed principally
of revenue from rental installations, will reach $700 million by 1965,
and the total purchase value of installed equipment will reach approxi-
mately $4 billion. Long-range projections indicate that annual revenue
may be expected to reach about $1 billion by 1970, with a corresponding
purchase value of $7 billion to $8 billion. Exhibit A-II, following this
page, depicts the historical growth of this market since 1955. in terms
of annual rental value and system size.



5186



EXHIBIT A-II

BENDIX CORPORATION

ANNUAL RENTAL VALUE

OF ALL INSTALLED COMPUTERS

1955-1960



500


























/


350
300












/ '
























'


250
200
150
100



















/










/








/ :::::::::::::::: 43%








/ llllll


50




y


























^y^ ^














id - -


































— ■3j.iMiM\i*jM.:^\}.v^i^^


^§^m^^


W^v^?^^'"^



SIZE AND
PURCHASE
PRICE



LARGE
COMPUTERS

(OYER
$1 MILLION)



MEDIUM
COMPUTERS
(JIOO.OOO TO
$1 MILLION)



SMALL

COMPUTERS

(UNDER $100,000)



1960



5187



APPENDIX A (4)



(1) Large Systems Currently Account for about 53% of the
Total Annual Rental Value of All Installed Computers



The share of total rental value captured by large systems
has declined steadily since 1955, when it was approximately 6 6%.
The extremely high cost of these large systems continues to make
it possible for a relatively small number of installations to account
for a large share of the revenue, but the market for the large sys-
tems is confined to those users large enough to utilize the capacity
and able to afford it. Thus, the growth rate of large system revenue
is slowing more rapidly than other-sized systems.



(2) Medium Systems Currently Account for about 43% of Total
Annual Revenue



In 1955, medium systems captured about 33% of the total
annual revenue and during the past five years have increased
that share to 43%, mainly at the expense of the large systems.
The medium category remains the most rapidly growing size
segment of the market. During the period 1955-1957, when
small computers were driving a wedge into the market, the
medium systems managed not only to maintain their share of the
revenue, but continued to increase it. The availability of second
generation large computers in 1960 caused a slight reduction in
the share of total revenue going to medium computers, but it is
anticipated that it will recover quickly and unquestionably be the



5188



APPENDIX A (5)

work horse of the industry. Wide capacity and price ranges have
developed in this medium- size category, as shown in Exhibit A-I.



(3) Small Computer Revenue Has Stabilized at about 4% of the
Total Annual Revenue



Prior to 1955, the least expensive digital computer available
was the IBM 650 which started at around $3, 500 a month. In 1955,
small computers entered the market to meet a need for equipment
below this price, primarily in the engineering and scientific field.
The G-15 and others of a similar type achieved immediate success
and proceeded to capture a share of total computer revenue. The
growth rate of this share seems to have stabilized at about 4% of
the total during the past three years and gives every indication of
remaining fairly constant with respect to total annual rental value.
This is in part due to the current modular design approach and the
availability of peripheral equipment which makes it possible for
small computers to graduate into the medium category rather easily.

Another limiting factor on the growth rate of the small com-
puter share of the market stems from their orientation to the
engineering-scientific application area. This segment has reached
maturity much more rapidly than the data processing area and its
rate of growth is decreasing accordingly. Exhibit A-III, following
this page, illustrates the distribution of new rental revenue*



• "New rental revenue" or "new money" represents the net gain in the annual rental value
of installed equipment from year-beginning to year-end.



5189



KXIIIHIT A-IU
. .VDIX CORPORATION

ANNUAL INCREASES IN RENTAL VALUE,

INSTALLED COMPUTERS

1955-1960



NEW COMPUTER

EXPENDITURES

(S MILLIONS)



LARGE (OVER $1 MILLION)



v«EDIUM ($100,000 TO $1 MILLION)



SMALL (UNDER $100,000)



KAsea^iim



1957 1958

YEAR



5190



APPENDIX A (6)

entering the market since the end of 1954, and graphically shows
the wedge that small computers created. It also indicates that
the growth pattern for small computers has followed essentially
the same pattern as the large and medium-size systems, though
several years later. Each of these will, in time, follow the
normal "S" curve pattern of most products.

The following table portrays, by size, the shift in per cent
distribution of total annual rental value of all computers for the
indicated years.



Year


Small
1%


Medium


Large


1955


33%


66%


1956


2


34


64


1957


3


36


51


1958


4


39


57


1959


4


44


52


1960


4


43


53



2. THE NUMBER OF INSTALLED COMPUTER UNITS REACHED
AN ESTIMATED 4, 886 BY THE END OF 1960



Between 1955 and the end of 1960, an average of 900 units of all
sizes were installed each year, raising the total computer population
from about 363 installations in 1955 to about 4, 886 installations in 1960.
The following table depicts the cumulative annual installations and share
of total units by size.



5191



Total
Year Units



Medium



Number Per Cent



Number Pet Cent



APPENDIX A (7)



Large



Number Per Cent



1965
1956



363
883



1957 1.629

1958 2,615

1959 3,876

1960 4. 886



24
128
329
591
914
1.284



15
20
23
24
26



260
594
1.034
1.657
2,494
2,990



72<7o

67

64

63

64

61



79


22<y»


161


18


266


16


367


14


468


12


612


13



In terms of numbers of units installed, it is evident that the propor-
tion of large and medium installations is declining, while the proportion of
small units is increasing. A comparison with an analysis of the total rental
value by size points out the difference that is made by the extreme prices of
the various size units.



3. THE PER CENT DISTRIBUTION OF REVENUE BY COMPUTER

APPLICATION HAS SHIFTED SIGNIFICANTLY IN RECENT YEARS



Originally, computers were used predominantly in the engineering
and spientific field, secondarily in the data processing field, and lastly
in the relatively new and confined field of process control. In recent
years, there has been a significant shift in computer utilization to the
point where data processing is now the primary application. The follow-
ing table illustrates the per cent distribution of annual rental revenue by
applications.



.Application


BA&.H
1958 Report

58'^

40

2


BA&H 1960

Individual Machine

Analysis


1960
Industry
Sources


Engineering and Scientific
Data Processing
Process Control


36<^

62

2


35«^

63
2



Total



100^



loo<!b



100^



5192



APPENDIX A (8)



(1) The Business Data Processing Application Is the Most
Significant Growth Area



Data processing applications currently account for the
largest single share of total computer revenue. This application
also appears to represent the probable segment of greatest future
growth. Competing manufacturers seem to have recognized this
trend and are mounting efforts to share in this field. The basic
approach being employed by most of them is to increase machine
flexibility for engineering and data processing work, thus en-
couraging and benefiting from a trend toward greater dual
utilization of equipment.



(2) Engineering and Scientific Work No Longer Represents
the Principal Application of Digital Computers



There is no longer any real distinction between engineering-
scientific and data processing equipment. This increased machine
flexibility has come about as a result of the pressure in the market
place for dual usage and the desire on the part of msiny manufac-
turers to build in as wide a range of capabilities as possible, in
order to expand the potential market for a basic system. While
some machines have slight advantages for one use or the other,
the equipment generally is moving toward wide application in
both areas.



5193



APPENDIX A (9)

While there is, and probably will remain, a market for
strictly computational engineering and scientific applications, it
will continue to decrease in size with respect to the total. The
major share of the market will be served by machines having
capabilities in both areas. This is simply because technical
problems involve an increasingly larger amount of basic data
handling and processing as the user becomes more sophisticated
in the use of computers. Similarly, expanded use of operations
research techniques by management calls for computational
capabilities in a data processing machine that are not too differ-
ent from those required by the technical personnel within the
company.

As this merger of machine capabilities expands, the
economic pressure to use one machine for both applications
will mount. Thus, it would appear that the benefits to be
derived from application specialization through equipment
design orientation no longer exist to a significant degree.
There is real reason to suspect that the same is true as far
as the benefits of sales specialization in the E&S or data
processing areas are concerned.



5194



APPENDIX A (10)

(3) Process Control Is the Slowest Growing Field of Application

Opportunities seem to exist in the future in the area of com-
puter process control, and ultimately this more "exotic" applica-
tion of computers may prove to be a more substantial market than
the engineering and scientific area. At present, about 2% of the
total annual rental value is going into this area, and at least one
manufacturer has indicated that it would specialize in this field.
However, process control applications require justification on a
more limited basis and do not lend themselves readily to dual
application. The process control computer market is one of
relatively slow growth currently, but industry sources indicate
that it will grow to very substantial proportions in the long-range
future.

THE COMPUTER INDUSTRY CONTINUES TO BE DOMINATED
BY ONE MANUFACTURER



IBM continues to direct the industry and, with the exception of the
smaQl machine market, continues to enjoy an overwhelming position in
the entire field. In the small computer market, IBM had no competitive
product and other manufacturers, stepping into this gap, were able to
gain a foothold in the past five years. However, IBM has recently intro-
duced the model 1620 and will aggressively seek to restore its complete
dominance in all sizes of equipment in the near future. Published reports
of orders received indicate that this is not wholly speculation.



5195



APPENDIX A (11)

(1) There Is a Small Portion of Total Annual Rental Value
Left by IBM for Other Manufacturers To Share

An individual machine analysis of the entire market reveals
that IBM and Remington Rand leave a very small share of the total
annual rental revenue to other manufacturers. The following table
shows the complete dominance of these two suppliers, both of whom
are heavily committed to^ and deeply entrenched in the large and
medium -size machine field, where most of the rental dollars are
concentrated.



Manufacturer


1955


1956


1957


1958


1959


1960


IBM


91"?.


se^o


19%


737o


IQPio


70?o


Remington Rand


9


10


14


18


17


18


Others


-


4


7


^


13


12



Total 100% lOOqb 100% lOO^ 100% 100%

As the following data indicate, the area of the small computer is
the only area where there has been any real measure of competition
and, as previously pointed out, this was essentially because IBM
had no successful competitive machine in this size category.

PER CENT OF ANNUAL RENTAL VALUE OBTAINED BY MANUFACTURER







1960








Manufacturer


Lar^e




Medium


Small


Total


IBM


77%




68%


-1o


70%


Remington Rand


19




17


-


18


Bendix


-




-


35


-


Royal McBee


-




-


35


-


Burroughs


-




9


16


5


Others


4




6


14


7


Total


100^




100%


100%


100%



5196

APPENDIX A (12)



(2) Recent Product Announcements Indicate That IBM and
Remington Rand Continue To Dominate the Computer
Equipment Field



Of the 18 large computer systems being offered to the
market at the present time, nine are IBM products and five
are Remington Rand's. The remaining four are offered by as
many manufacturers.

In the medium-price category, there are 15 machines
available, of which only three are IBM products, but they
account for 75% of all the installations to date. A considerable
amount of competition has entered this particular segment of
the market, probably in the hope of replacing a large number
of the more than 1, 500 IBM 650 's that are currently in use.

In the smsdl computer segment, we also find that com-
petition has increased several times over. In 1957-1958, the
G-15 faced four competitors in the less than $3, 000 price class.
Today, there are more than a dozen models being offered, with
no more than two from any one manufacturer.



This appendix has dealt primarily with recent developments in the
computer industry and their probable effect upon the future. To the extent
practical, general market conditions have been set forth with respect to



5197



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 33 of 140)