United States. Congress. Senate. Committee on the.

The Industrial reorganization act. Hearings, Ninety-third Congress, first session [-Ninety-fourth Congress, first session], on S. 1167 (Volume pt. 7) online

. (page 38 of 140)
Online LibraryUnited States. Congress. Senate. Committee on theThe Industrial reorganization act. Hearings, Ninety-third Congress, first session [-Ninety-fourth Congress, first session], on S. 1167 (Volume pt. 7) → online text (page 38 of 140)
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John R.. Moore, division president an-
nounced.

Mr. Moore said the computer line,
called RECOMP, "was designed for a
small, specific market of industrial appli-
ciations" and it was "a management de-
cision not to continue in this field." Au-
tonetics, however, plans to continue its
work on computers for military and space
use "which has constituted the great bulk
of our computer activity," the official said.

The division, which entered the field
in 1959, declined to specify annual vol-
ume of the RECOMP line, but it is under-
stood some 100 have been sold or leased;
prices of the two-model line range from
$65,000 to $95,000. The division didn't de-
tail reasons for dropping the computer but
it was said that Autonetics faced either
expansion and updating of its line -and
consequently further investments — or
abandonment of it entirely.

RECOMP computers in inventory will
be sold and service personnel will be ab-
sorbed into Autonetics' computer and data
systems division to provide continuing
service for users of machines already in
operation. Many of some 300 RECOMP
workers will be transferred to other jobs
within Autonetics, the division said.



5290

Exhibit 3.— William Rodgers Article Re "IBM on Trial"
[From Harper's, May 1974]

IBM ON Trial: Monopoly Tends To Corrupt

(By William Rodgers)

In the constellation of multinational corporations, one illuminates the eco-
nomic firmament more than any other. It is International Business Machines,
whose 575,000 stockholders early this year owned 146,061,750 shares with a sale
value even in a depressed market of $36.5 billion. Their company, the undisputed
colossus of the computer industry, has made many of them millionaires. It has
enriched to the level of affluence anyone able to acquire and retain two or three
hundred shares since the computer market developed in the 1950s. Its products
and services are sold in four out of every five nations on earth. Last year, on
revenues of $11 billion, it earned $1.58 billion, up 23 percent from 1972. Its re-
serves and marketable securities are so extensive that income from interest
alone would put IBM on any select roster of American corporations. Measured
by its revenues, IBM ranks sixth in the United States. No one knows for sure —
only IBM itself has the confirming or refuting data— but the company probably
commands 75 to 80 percent of the computer business in the United States and
more than half of the world market. IBM concedes that it gets perhaps 35 per-
cent of the industry revenues, but the courts and its competitors scorn that
unsupported estimate as nonsense.

Whatever the extent of its monopoly, IBM has reaped well over 90 percent of
profits generated in the computer industry in this country. All the other com-
panies, including some of substantial size — Honeywell, Burroughs, Control Data,
Univac, National Cash Register— scrounge with varying degrees of success for
what's left. IBM could probably obliterate any or all of them if it chose, or if it
dared provoke further antitrust litigation of the sort in which it already is ex-
pensively involved. Computer divisions of Philco, RCA, and General Electric
have been demolished over the years in unequal combat with IBM. But IBM
now needs competition and tolerates it for appearance's sake, suffering meager
growth among its harmless foes as evidence of pluralism in the computer world.

THE KINGDOM OF IBM

In its sixty-year history, IBM has accumulated, besides its dominance over a
highly profitable and expanding industry, a remarkable reputation among multi-
national corporations. It is a reputation that developed from the personal style
and perseverance of Thomas J. Watson, Sr., who ran the company as a family
fief from 1914 until shortly before his death in 1956. Watson was a benevolent
tyrant who, as an associate of the legendary John Henry Patterson of the Na-
tional Cash Register empire in Dayton, Ohio, had been fined and sentenced to a
year in prison on a conviction of antitrust violation before Patterson fired him
in 1913. When he was exempted from serving the sentence after the court ordered
a second trial, which never occurred, Watson was hired to run a small, newly
formed company making tabulating devices, grocery-store scales, cheese slicers,
and other "business machines." The company was christened IBM in 1924.

Watson had a fierce temper, a pietistic affinity for the eternal verities, an evan-
gelist's fervor for business, and an unswerving compulsion to work. He developed
his own version of reinforcement psychology before the world had heard of
B. F. Skinner. In the kingdom of IBM, men were alike in style and manners-
well groomed, well barbered, courteous and attentive, dressed in dark suits, pol-
ished shoes, and mandatorv white shirts that identified them as members of the
Watson-IBM family. They lived and worked and generally prospered according
to a paternalistic, autocratic code that guided their conduct, aspirations, and
progress upward in— or out of— the company. On this Victorian principle of
"doing right," and on the principles of meeting ever larger sales quotas, of total
subordination to one's job, of clean living and clean thinking, IBM was built. Its
reputation for probity, strict attention to business, and concern for its customers
extended around the world. ^. .. ^

Concurrent with developing its benevolent image across the continents and
the decades, IBM established one of the finest sales and customer-service organi-
zations in all industry. Although a little late moving into the computer busi-
ness after World War II, IBM took virtual possession of the business by recruit-



5291

ing scientists and technicians and by retraining its army of salesmen and
engineers.

Locking in customers and freezing out competition, witliout notably impinging
on its reputation for wholesomeness and fair play, characterized IBM marketing
operations as far back as the 1930s. The Justice Department in the Roosevelt
administration brought an antitrust action against IBM and Remington Rand,
which in the precomputer era shared the lucrative tabulating-machine-and-card

l)U.sill6SS

In 1935 a federal court found that IBM had under lease 85.7 percent of all
tabulating machines, 86.1 percent of all sorting machines, and 82 percent of all
the punch-card installations then used by American business and the government
itself. Remington Rand had all the rest of the business under an agreement vsdth
IBM. This "mutual sufferance" arrangement was dissolved in 1936, in a ruling
upheld by the Supreme Court.

Twenty years later, the government, in an antitrust case that terminated with
a consent decree, tried to compel IBM to make way for competitors, and to
curtail the company's power to sustain its monopoly. By then the computer had
revolutionized the data processing business, and the decree scarcely gave the
company pause.

The Government struck again in 1969 with the largest antitrust case ever
launched against any company, a case scheduled to go to trial late in 1974. In
the five-year period between the initiation of the litigation and the beginning of
the trial, IBM will have grown by more than $1 billion in sales each year.

This latest antitrust action was, in part, the government's acknowledgement
of complaints and protests from competitors charging that IBM had not allowed
entry and growth beyond a token level, to other companies in the industry. The
complaints further alleged that IBM had devised a sophisticated system of pred-
atory practices with which to destroy competitors attempting to gain a foothold
in the business. The IBM empire, said its surviving competitors, had become too
immune to the restraints of i)Ower, too dangerous and ruthless to be tolerated in
the social and industrial community.

Today the company's competitors and the government are up in arms against
it both in the marketplace and in the courts. Besides the federal government's
suit, which wasn't pressed for four years because of a lack of prosecutorial in-
terest on the part of the Nixon Justice Department, there are presently pending
against IBM twelve punitive and treble-damage suits initiated by companies and
individuals seeking $4.3 billion collectively. In one suit last fall, a U.S. District
Court in Tulsa, Oklahoma, awarded $259.5 million to the Telex Corporation.
Earlier in the year, IBM settled, prior to trial for $110 million, a damage suit
filed in December 1968 by Control Data Coriwration. The disclosures made in both
cases tended to cast some doubt on IBM's image of self-righteous probity.

THE END OF THE MONOPOLY

Questions of immeasurable significance, questions raised in Congress a cen-
tury ago when debate raged over the issue of regulating corporate power, have
been brought into focus with such clarity that their resolution can no longer be
indefinitely delayed. The escape of multinational corporations from the bonds of
sovereign authority, the anxiety and runaway prices provoked by the world
energy crisis, the incestuous affinity between company directories and min-
istries of the state all arouse political agitation for more supervision over world-
wide industrial empires. IBM is by no means alone in provoking cries for re-
straint. It i.s, however, a corporation distinguished by the extent of its monopoly
over what has become a basic industry. It is uniquely alone in its need to de-
fend itself against the Justice Department, which wants to break it up into a
number of separate entities, and against private and corporate damage claims
for more than four, possibly seven, billion dollars.

How could the monarch among multinationals, its logotype known across the
world, with its all but hallowed reputation, stumble into obvious pitfalls and
expose the dingy underside of its carefully polished image?

And what are the economic, moral, and social implications of a national re-
source company like IBM being brought before several courts, perhaps for years?
How can a nation punish or restrain an industrial resource of such magnitude
without inflicting punishment or crippling restrictions on the economic system
with which it is inextricably entwined?



5292

It is IBM's position that none of these supposed evils can or should befall it.
But the Justice Department argues that law and order must restore competi-
tion and a fre market . and it hopes to apply an old measuring rule, which
holds that competition is stifled when three or four companies carry off 50
percent or more of any category of business. IBM is prepared to plead that it
is being discriminated against, that the old measuring rule is invalid, dis-
honored by numerous exceptions. The argument has compelling substance. Com-
panies like Kodak, Xerox, and Western Electric, among others, mock almost
any definition of monopoly. Four automobile manufacturers don't possess just
50 percent of the business ; they have all of it, excluding imports.

What is worrying IBM, aside from the possibility of fifteen damage suits
relieving the company of perhaps billions of dollars, is the prospect of a new
and galling relationship with the federal government. For the Justice Depart-
ment's suit covers many of the issues of the Telex case, in which IBM was found
guilty. The verdict is under appeal, but the evidence supporting it, evidence
from IBM's own internal records, has entered the public domain and is available
to all litigants, including the government. The evidence appears to be impres-
sive — so much so that last fall Thomas D. Barr, partner in the Manhattan law
firm Cravath, Swaine & Moore, which is defending IBM in the government suit,
redefined the case. In a dialogue with Chief Judge David N. Edelstein of the
U.S. District Court of Southern New York, Mr. Barr saw the issue to be decided
as one beyond the evidence. Barr said :

"I think we have, in a sense, your Honor, almost a classic confrontation be-
tween two different concepts of what the antitrust laws are all about and what
our system is all about."

Whether or not his defense strategy is successful, Mr. Barr was probably
right about the implications of the case determining for years the relationship of
the antitrust laws to "our system." By going to trial in the Telex case, IBM
lost the secrecy of its internal documents, and what emerged from these docu-
ments was a blueprint inadvertently proving, at least to the court, that IBM
was a predatory monopoly. Having sacrificed in all likelihood its capability of
proving it is neither a predator nor a monopoly, it is obliged in the government
suit to satisfy the courts that its monopoly status is a good thing, an extension
of the public interest.

In other suits, where litigants have assembled to seek redress, IBM must wear
them down by delay and attrition, seeking individual settlements before trial
in amounts less than claimed by its adversaries. With more money and stay-
ing power than all its opposing litigants put together, the company might prevail.

A BLOW TO CONTROL DATA

The pending confrontation between IBM as defendant and the government
and companies as prosecutor and plaintiffs had its genesis in the '60s and in
the character and temperament of corporation management. In 1965 Control
Data Corporation was the only computer company in the country besides IBM
to show a profit. William C. Norris, president of Control Data, led a group of
gifted scentists in demonstrating a remarkable ability to raise capital on Wall
Street. It was a time of easy money, to be sure, but Norris raised a lot of it.
New advances in miniaturization of components, circuits, and systems persuaded
investors that golden times were ahead even for upstart companies daring to
compete with IBM. Because growth possibilities seemed so vast, they were per-
suaded, too, that IBM, under restraints imposed in the 1956 antitrust consent
decree, would tolerate competitors. Or. that point they were woefully wrong.

Norris entered the market with his famed Model 6600, the largest computer
in the world, a multimillion-dollar system designed for aircraft production,
government, and heavy industry. The promise of its arrival sent Control Data
stock soaring from 32 to 161 in a matter of months. Coincidentally. IBM an-
nounced that it intended to market an improved version of the Control Data
machine. The news discouraged prospective CDC customers. IBM never manu-
factured its version of the Model 6600, but its presumed imminence caused CDC
stock to plummet. Outraged, Norris complained to the Justice Department. He
denounced the management hierarchy of IBM, then ruled by Tliomas J. Watson,
Jr.; his younger brother, Arthur, who became Ambassador to France during
Nixon's first term ; and T. Vincent Learson, who succeeded to, and is now retired
from, the office of chief executive. The government procrastinated, and in Decem-
ber of 1968 Norris filed a treble-damage suit against IBM. A year later, on the
last day of the Johnson administration, the Justice Department filed its own
action charging the company with a wide range of monopolistic practices.



5293

Four years later, early in 1973, IBM settled out of court by giving Norris one
of its subsidiary companies and cash amounting to $110 million. In a prelude
to the settlement, IBM surrendered to CDC lawyers millions of pages of previously
classified in-house data. Norris spent $3 million for a computerized index of these
files, which Telex and other litigants studied and researched. It was said to be a
compendium of evidence highly useful to the forthcoming government antitrust
trial. But immediately upon reaching an accommodation with Norris, IBM
got back the voluminous index of microfilm, papers, and tapes and, as Fortune
magazine reported, destroyed them by erasure, acid bath, and mulching vats.

Irked by IBM's destruction of the CDC file and index, Judge Edelstein imposed
a fine of $150,000 a day on IBM for failure to purge itself of contempt by yielding
up some twelve hundred documents that he had asked for and IBM had failed
to produce. In what sounded like a reprise of a theme by Mr. Nixon, then in
retreat from a summer of Watergate hearings and disclosures of "lost" and
withheld documents, IBM pleaded its version of executive privilege and con-
fidentiality between lawyer and client.

Judge Edelstein retorted that since CDC counsel had looked at the material
for months he wanted to see it, too, on the ground that it was doubtless germane
to the government's suit against IBM. Before one day of the unprecedented fine
had passed, the company persuaded another federal court in Connecticut to grant
a stay, and the $150,00-a-day contempt sentence went to appeal. Even while
cadres' of lawyers sparred with the Justice Department — coaching company
managers in pretrial depositions and negotiating a settlement with Norris —
special task forces at IBM's world headquarters in Armonk, New York, analyzed
certain information that distressed the Watson brothers, Vince Learson, and
other high-ranking executives. In antiseptic color-coded rooms, to which sales,
manufacturing, and financial data were channeled from points of origin across
the country, management detected signs of growth developing among small
companies specializing in products and systems "plug compatible" with IBM
mainframe units — or, as they are called, central processing computers.

Plug compatible, or peripheral, equipment is a large part of the computer
industry. In fact, it is all of the equipment served by a central processing unit,
which may be seen as a powerhouse supplying all sorts of attachments that make
up computer submarkets — disk drives, magnetic-tape drives, impact printers,
memory systems, communications controllers, direct-access data storage products,
and so on.

In 1970 IBM took in more than $1.1 billion in revenues from peripheral prod-
ucts that were plug compatible with its mainframe units. All other manufacturers
of plug compatible equipment combined took in a little more than $100 million on
products designed for IBM computers. Thus the competition's share amounted to
comparatively little. But it was growing. Although IBM's volume was increasing
by more than $1 billion a year, other companies were making their way into
fringe markets which provided very substantial revenues indeed. It was also clear
that other companies were making products superior to those made by IBM.

A task-force analysis, produced in secrecy at Armonk. disclosed in documents
that reached the court in the Telex trial that IBM did not shrink from turning up
unpleasant intelligence about itself. The company assessed the quality of its own
products and compared it to the competition's. Of twenty-six pieces of equipment
evaluated, sixteen produced by IBM were found to be "deficient," four were
superior, and six equal to those of competitors. Thus it was that the company
confessed to itself, and by extension to the court, that it took in hundreds of
millions of dollars in sales on products that were inferior to those manufactured
by its hard-pressed competitors.

The better equipment cost customers a good deal less than IBM sold theirs
for — and still made Memorex, Telex, California Computer, Transamerica, Mar-
shall Industries, and a couple of others some money. This was IBM's own fault,
since the company had been allowing itself as much as 50 percent profit on these
items. Even after improving the quality, the competitors sold the equipment at
a profit.

Yet to IBM these companies were parasites duplicating highly profitable at-
tachments that wouldn't have had any market at all without its computers. By
IBM's own reckoning and projections, these companies could expect continued
success and growth by marketing superior products at less cost. With uninter-
rupted success, they could be expected to capture a 13 percent .share of the
market in these lines by the late 1970s. (It was, even in projection, a comparative
pittance to a company with $11 billion in revenues in 1973, up from $7.5 billion
in 1970 and $8.3 billion in 1971.)



40-927 O - pt. 7-30



5294

Cooley's Task Force, so called because it was directed by IBM executive Henry
E. Cooley, was advised that the examination of the competitive market in
peripherals was of the most vital importance. It was designated as the "key cor-
porate strategic issue." The Cooley team, supplemented by a Blue Ribbon Task
Force, was spurred along by Tom Watson himself in its work to eliminate the
upstarts. In 1971, as chief executive, Watson wanted it understood that "irrespec-
tive of financial considerations of one or two years," the future had to be made
ready for unbroken growth. IBM had "to make the hard decisions today so that
the same problems don't have to be faced again."

PRICE WAB

According to Federal Judge A. Sherman Ohristensen in his decision in the
Telex case, it cost IBM $75 million to carry out its price-cutting campaign. This
was the amount "lost" in long-term leasing plans and predatory price cuts estab-
lished in 1971 and 1972 — price cuts which IBM, with considerable accuracy, pre-
dicted would convert competitors into "dying" companies.

The specifics of the plan devised by IBM, the techniques by which customers
were brought back into its fold and kept there, the design changes of products —
mid-life enhancement, it was called — by which competitors' inventories were made
obsolete, the calculated losses IBM took on competitive equipment and recouped
in part by price increases on noncompetitive lines are too complex for description
in a brief article. It is clear that they served their purpose.

The business that had ebbed away from IBM to small companies drifted back
with the tide. With two to three billion dollars in cash reserves on hand, IBM
adapted the old gasoline price war technique, in which the chain with the most
money could sell at a low price until competing stations were wiped out, then
restore or rearrange prices to a nicely profitable level and go on as a growth
company.

By the end of 1971, pretty much as projected, the Commercial Analysis Section,
a kind of special intelligence and think tank unit of IBM's, cheerfully informed
the management that independent companies were under control. Competing
sales in two major lines of tape and disk equipment, for example, which had
sustained Telex, Memorex, and a couple of others, had fallen off by 48 to 62
Dorc^nt.

In and out of court, IBM has said it did nothing to any company that the same
coaipany wouldn't have done if it had had the resources, which is doubtless true.
But unciiecked by the power of government, which offered them only litigative,
not immediate, redress, the companies could do nothing against the price war
strategy of IBM. The court rejected out of hand IBM's testimony that the
strategy was an experiment in marketing. It was "unadulterated predatory ac-
tion . . . willful conduct with predatory intent . . . expressly formulated, ana-
lyzed, planned and aimed by IBM specifically at its plug compatible competition."
Memorex, which showed a net profit of $3.2 million in 1970, lost $13.4 million
in 1971. Its subsequent losses were catastrophic. Its primary hope for a future,
if any, rests on a $3.1 billion antitrust suit filed against IBM last December.
The other suits moving to trial or settlement seek divestiture, injunctions, and
treble damages.^ All of these raise the same questions. Why would IBM manage-
ment, with the federal government belatedly aroused to the point of antitrust
action against the company in 1969, resort to a costly strategy of overkill in order
to wreak havoc upon companies so economically far beneath them? Beyond con-
tending that all the litigation in process is without merit, or at best is a conceptual
difference of law, high company officials make neither excuse nor explanation.
But fomier IBM managers, some of them migrants from lofty levels of manage-
ment hierarchy, are convinced that the overkill response was inevitable in the
light of the mentality and character of IBM executives. It is simply not rational,
they say, to expect the company to exercise restraints of its own volition. What
failed was the power of government and law, the only countervailing force
capable of imposing restraints on a corporation of enormous wealth and power.
Justice too long deferred invites the acceptance of risk to circumvent law. The



lAn action different from all the others was filed last September by eighty-year-old
Vernon M Buetr. Sr., an engineer and Inventor who was Watson's assistant forty years ago
Mr. Bugg, who seeks $120 million in damages, charged that IBM confiscated prototypes of



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 38 of 140)