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 39 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 39 of 140)
Font size
QR-code for this ebook


teletype machines he had invented and conspired with American Telephone and Telegraph
Corporation to keep them oflf the market, thus preserving for AT & T its monopoly over
the teletype business through all the intervening years.



5295

experienced, sophisticated management of IBM was aware of the risks ; it was
explicitly advised of them by executives within the inner circle. The stakes —
control of the market — were too tempting.

Otis Page, who quit IBM after eighteen years and went to Memorex in 1971,
was a member of the task force at Armonk that helped plan the debacle. Before
he left, he also helped prepare IBM's defense against the government antitrust
suit.

He is no apologist for the management of Memorex, which he also has left:
"These companies should know their business better. Memorex attracted capital
on the assumption that IBM wouldn't do anything. Yet IBM does have awesome
power. It is like the federal government, but on any order of magnitude its con-
duct hasn't been as bad, nothing to compare with Watergate. There is no question
that IBM was wrong and did some bad things. Learson, Watson, the rest of them
couldn't just sit there on all that strength."

Gary Friedman, a founder of ITEL, with years of management experience at
IBM, is reputed to possess acute perceptions about the company's style. Fried-
man remembered "some guys going down to Wall Street to meet with securities
analysts" during the price war. When they grasped the implications of it, one
of the analysts asked :

"What's going to happen to Memorex?"

"Probably kill them," was the response.

One of the architects of the price-cutting structure was Berton Hochfeld, now
a computer-industry analyst with Eberstadt & Company, a Wall Street firm.
Even when he designed the price cuts, he counseled against them.

"I was worried about the law," he said. "The company's own counsel advised
them about antitrust implications, too. I asked them what contingency fee I
should budget for treble-damage suits. They didn't want to hear about it. Legal
counsel was ignored."

Hochfeld is as bright and unsentimental about the contradictions of big-business
policy as anyone in the computer industry. Having accomplished for IBM the job
he was required to do, he is nevertheless conscious of the need for restraining
monopolies.

"The principles of antitrust, as conceived in law, are more important than
efficiency and the growth of corporations," he said. "The country cannot survive
if we cannot have honest competition. This industry needs to be restructured,
with divorcement according to product function ; with divestment of peripherals,
central processing, programming, plug compatibles, financing from each other.
The users of computers and related equipment have the right to move from one
vendor to another."

It is the courts, Hochfeld feels, that offer the best hope of fundamental reform.
"Let the courts become a mechanism of social activism as a way of preventing
the conscious parallelism that has perverted competition among large oil com-
panies." Relying on consent decrees, limiting IBM's share of the market to some
fixed measure — 50 percent, for example ; even breaking the company up, as the
oil trust was broken up at the turn of the century, will not make competition
flourish. History, says Hochfeld, will repeat itself unless the judiciary sustains
diversity and pluralism in American industry.

A goading force for pluralism and competition and a new voice in the dialogue
within the computer world is the Computer Industry Association, organized in
1972. Its members that year did a gross business of $800 million, a mom-and-pop-
store volume by comparison with IBM but an amergent factor nonetheless. The
CIA president is Dan L. McGurk, a former Rhodes scholar and former president
of Xerox Data Systems, and, with Jack Biddle, its executive director, an articu-
late spokesman for both independent companies and computer users.

McGurk sees IBM as hard to reform. "Even when its price fell more than $38
a share after the Telex decision," he said, "IBM stock had a market value greater
than any two companies' in the world. Competitors can handle only small or
isolated markets. Sooner or later they run into IBM or it runs into them. Its
share of the market is not decreasing. By a stroke of. the pen almost any com-
pany can be put out of business.

"We are not anti-IBM. It is a very great company and a national resource.
But it is the goal of every great company to become a monopoly. Even if you
become a monopoly legally and morally, a paragon of ethical virtue, when you
become an economic and monopolistic ix)wer. that power should be broken. There
are laws against it. This indu.'stry needs relief from monopoly now. Without it,
the monopoly can thrive but the industry cannot."



5296

There is, indeed, a conceptual difference in law to be resolved. In one view
monopoly exercises its power to prevail. In another, government and law exer-
cise suflScient power so that competitors can prevail, too.

Harper's Letters

ibm on trial

William Rodgers' "IBM on Trial" [May] is blatantly misleading and in many
instances demonstrably false. In addition, it draws conclusions about IBM and
the data-processing industry that are contradicted by the findings of the two fed-
eral courts that have examined IBM's position in the industry.

Certainly, IBM and its legal affairs are proper subjects for public commentary.
And I believe IBM is mature enough to accept critical points of view. However,
I must object when a writer chooses to support his personal opinions with stri-
dent denunciations that contradict, misrepresent, or willfully ignore facts that
are a matter of public record. For example, IBM has had two trials. IBM won
one and lost one and successfully prevailed in four efforts by competitors to
enjoin certain IBM practices. All those were brought under the antitrust laws.
But Mr. Rodgers mentions only the one IBM lost.

The article's errors and omissions are pervasive ; the following specific ex-
amples should give your readers some idea of how they were misled :

Statement: IBM is a "monopoly" in the computer industry, an "undisputed
colossus." In a similar veiw, Mr. Rodgers quotes unnamed, "surviving competi-
tors" as saying that the "IBM empire" is "too immune to the restraints of power,
too dangerous and ruthless to be tolerated in the social and industrial
community."

Fact: The two federal judges who have passed on the question have con-
cluded after trial that IBM does not monopolize the computer industry.

Judge A. Sherman Christensen in the Telex case decided — in a ruling IBM
now is appealing — that IBM had monopolized a narrow market defined as
"peripheral devices plug compatible with the CPU's (computers) of IBM." How-
ever, Judge Christensen also concluded the following about IBM competitors and
IBM's position generally in the computer industry : ". . . competitors include
many large diversified companies with important skills and substantial financial
resources, and many competitors are strong, independent and growing. . . .
Between 1952 and 1970 the number of competitors in the EDP industry multi-
plied more than 136 times from 13 to 1773. . . . Broadly defined the EDP indus-
try appears competitive and dynamic."

Judge Walter E. Craig, in dismissing the Greyhound Computer Corporation
suit in July of 1972 after eight weeks of trial, found that IBM was not a monop-
oly and that "the defendant's place in the industry has been achieved as a result
of superior skill, foresight and industry. . . . There is no evidence of any attempt
to monopolize on the record."

Statement: IBM "probably commands 75 to 80 percent of the computer busi-
ness in the United States. . . . IBM concedes that it gets perhaps 35 percent of
the industry revenues, but the courts and its competitors scorn that unsupported
estimate as nonsense."

Fact: The 35 percent figure is not IBM's, and it is not an "unsupported esti-
mate" ; it was a result of a court-administered industry census. In the Telex deci-
sion, the only one which dealt with percentage figures. Judge Christensen did
not "scorn" the 35 percent as "nonsense." He specifically found that IBM's share
of industry revenue was "35.1 percent in 1970."

Statement: Computer divisions of Philco, RCA, and General Electric were
"demolished" in "unequal combat" with IBM.

Fact: The computer divisions were not "demolished" but, as Judge Christen-
sen found, were acquired by Sperry Rand-Univac and Honeywell, whose competi-
tive positions were "enhanced" by these acquisitions. And the Philco-Ford com-
puter divisions recently reported electronic data-processing revenue in 1972 of
$79 million in a computer-industry census.

Statement : In 1913 Thomas J. Watson, Sr., was "exempted" from serving an
antitrust sentence "after the court ordered a second trial."

Fact: In 1913 Mr. Watson was indicted and convicted along with many other
officials of National Cash Register Company, but Mr. Watson's conviction was
reversed by the court of appeals : The government then proposed a settlement ;
Mr. Watson rejected the offer, and the government dropped the case against
him. He was not "exempted" from serving a sentence ; he won the case.



5297

statement: "Coincidentally, IBM announced that it intended to market an im-
proved version" of Control Data Corporation's Model 6600, but "never manu-
factured" it.

Fact: IBM never announced "it intended to market an improved version" of
the CDC 6600. Two years after the announcement of the CDC 6600, IBM did
announce a model of the System/360 that was more powerful than the CDC
6600, and IBM manufactured and delivered a number of them.

Statement: IBM settled with CDC "out of court by giving Norris one of its
subsidiary companies and cash amounting to $110 million."

Fact: IBM did not "give" CDC a subsidiary or $110 million in cash. The actual
terms of the mutual settlement (IBM had countersued against CDC for anti-
trust violations) were: CDC purchased an IBM subsidiary for $16 million. IBM
agreed to provide $2.6 million per year for ten years to assure the employees
of that subsidiary (its former employees) their full, existing fringe benefits.
IBM agreed to purchase from CDC $4.8 million per year of EDP services and $6
million of research and development work per year for five years. In addition,
$15 million of CDC legal fees and expenses were paid by IBM.

Statement: The Justice Department "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."

Fact: Nonsense. There is no such rule and never has been.

Statement: 'Mr. Rodgers characterizes Berton Hochfeld, whom he quotes at
length, as one of the "architects" of IBM's so-called "price-cutting structure" who
"designed the price cuts," thereby accomplishing "for IBM the job he was re-
quired to do."

Fact: Mr. Hochfeld worked for IBM for just over two years after he finished
his schooling. He was one of the hundreds of "financial analysts" at IBM and
never held any kind of managerial position. Mr. Hochfeld conceded under oath
that he was never responsible for setting any prices on any IBM products.
Furthermore, Mr. Rodgers does not reveal that Mr. Hochfeld, after leaving IBM,
worked as a paid consultant and witness for Telex.

Mr. Rodgers has taken up the cudgels of a few of IBM's competitors and
ignored the unprecedented product and price improvements in computers passed
on to consumers by the intense competition in the industry. That he is free to do,
but we believe your readers and IBM should not be abused and misled by Mr.
Rodgers' demonstrable distortions.

Frank T. Caey,
Chairman of the Board, IBM.

William Rodgers Replies : On the basis of Mr. Cary's critique of my article,
one could develop an Orwellian thesis that corporate innocence flourishes in pro-
portion to the magnitude of litigation against it.

Unlike Mr. Cary, Harper's readers will doubtless see my article as an examina-
tion of his cori>oration rather than as an attack against it. If he and his col-
leagues will look again, they will find that it was the failure of American law
and government that I primarily criticized. It is the failure of government to at
least restrain predatory power that has put the government in complicity with
corporate power.

I am very sorry I imputed to IBM people I interviewed loftier managerial
status than they deserved. I would have identified Berton Hochfeld as a con-
sultant to Telex had I known he was one, so that readers could assess the validity
of self-serving comments. My oversight of this fact is criticized by Mr, Cary,
and appropriately so.

Whether or not the late Thomas J. Watson, Sr., "won" his antitrust case after
conviction in 1913 is highly questionable. This case is recounted fully in my book
Think, soon to be reissued in an uixlated paperback edition by New American
Library. Certainly it is fair to say that he won exemption from serving a sentence
when, three years after he had been fired from National Cash Register Com-
pany, the ca.«ie simply withered away through a tiolle prosequi, meaning the pros-
ecution simply dropped it. I don't want to deprive Mr. Watson of any victory — if
that's what it was.

Mr. Cary says computer divisions of Philco, RCA, and GE were not "demol-
ished" in "unequal combat" with IBM but only "acquired" by other corporations.
This is slicing language close to the bone. Demolition by acquisition is not uncom-
mon. And if any company's position was "enhanced" in the process, it was IBM's.



5298

The reference to a "measuring rule" cropped up in old antitrust and monopoly
studies. As I explicitly stated, it never amounted to doctrine. Perhaps I need not
have brought it up.

It is quite true that I did not dwell on the laudatory things said in the courts
and other forums about IBM over the years. I did not purposely omit them as a
literary technique to make IBM look wicked. My essay was an account of IBM
trials, not of its virtues.

As for the question of whether IBM get.s — or commands or controls — 75 per-
cent of the computer-industry market or, as it claims, 35 percent, that is surely
an issue to be determined in the government antitrust trial headed for resolution.
There are many different markets in the industry to which IBM's share of these
markets gives it monopoly power and how that power is exercised.

For there is indeed an IBM empire. The company is, in fact, the undisputed
(except by IBM) colossus of the industry. And it has the power, however
achieved, to destroy most competitors at will. "VMiat the courts and the govern-
ment will do about this, if anything, remains to be seen.



Exhibit 4. — Proposed Final Judgment: U.S. versus IBM

Proposed Final Judgment foe United States of America

plaintiff

V.

International Business Machines Corporation,

defendant

in

United States District Court for the Southern District of New York

Civil Action No. 69, CIV 200

U.S. V. IBM — Proposed Final Judgment — Summary Index

Article I. Court jurisdiction over IBM and officers and directors and Service
Bureau Corporation, World Trade Corporation and Science Research Associates.

Article II. Definitions.

Article III. Divesture of service bureau business (Service Bureau Corpora-
tion. Science Research Associates and the network services operations, un-
bundled systems engineering operations, educational services operations and
Federal Systems Division of IBM together with comparable service bureau
operations of World Trade Corporation) .

Article IV. Newly formed service bureau company not to manufacture or sell
EDP Systems, ERP Equipment or Communication Equipment until such time
as the IBM portion of its installed base is less than 35% and in no event sooner
than 10 years.

Article V. Divestiture of comjwnents business (Components Division and other
semiconductor and related elementary component research, development and
manufacturing operations of IBM and comparable operations of World Trade
Corporation).

Article VI. Newly formed components company not to produce "proprietary"
products for IBM or successor EDP Systems companies, supply such companies
with more than 50% of their respective requirements, or favor such companies in
price or conditions of sale.

Article VII. Divestiture of office products business (Office Products Division
and Information Records Division of IBM and comparable word processing,
office products and information records research, development, manufacturing
and marketing operations of World Trade Corporation) .

Article VIII. Newly formed office products company not to manufacture or
sell Communication Equipment for 10 years.

Article IX. Divestiture of small EDP Systems (under $5,000 monthly rent)
business (General Systems Division and part of Advanced Systems Division re-



5299

lated thereto and other small system, terminal and tabulating machine equip-
ment, research, development, manufacturing, marketing and maintenance op-
erations from IBM and comparable operations of World Trade Corporation).

Article X. Small EDP Systems company not to manufacture or sell large
EDP systems (over $5,000 monthly rent) until such time as its share of the
small EDP systems submarket reaches 35% or less and in no event sooner than
10 years.

Article XI. Small EDP Systems company not to manufacture or sell com-
munications equipment (except terminals) until such time as its share of the
small EDP systems submarket reaches 35% or less and in no event sooner than
10 years.

Article XII. Small EDP Systems company not to engage in the business of the
components company, the office products company or the service bureau company
until such time as its share of small EDP Systems submarket reaches 35% or
less and in no event sooner than 10 years.

Article XIII. Small EDP Systems company to reduce its share of the small
EDP Systems submarket to 50% or less within five years and 35% or less within
ten years.

Article XIV. IBM retention of large EDP Systems (over $5,000 monthly rent)
business under Court supervision for reduction in share of large EDP System
submarket to 50% or less within five years and 35% or less within 10 years.

Article XV. IBM not to engage in small EDP Systems business until such time
as its share of large EDP Systems submarket is 35% or less and in no event
sooner than 10 years.

Article XVI. IBM not to manufacture or sell communications equipment until
such time as its share of the large EDP Systems submarket reaches 35% or less
and in no event sooner than 10 years.

Article XVII. IBM not to engage in the business of the components company,
the office products company or the service bureau company until such time as
its share of large EDP Systems submarket reaches 35% or less and in no event
sooner than 10 years.

Article XVIII. Newly formed service bureau company, components company
and office products company are restrained from acquiring more than 35% of
their respective needs from new small EDP Systems Company or IBM.

Article XIX. IBM and small EDP Systems company directed to standardize
high-speed communications interfaces.

Article XX. IBM and small EDP Systems company directed to disclose in
advance product interfaces with respect to media, software, communications and
humans.

Article XXI. IBM and small EDP Systems company directed to disclose soft-
ware interfaces, standardize applications software in high-level languages, and
furnish applications software to manufacturers of EDP Systems at no charge
for ten years.

Article XXII. IBM and small EDP Systems company directed to .sell sub-
assemblies of EDP Equipment to manufacturers of EDP Systems at OEM prices
not to exceed a 100% markup on aggregate of projected factory, direct labor,
burden and materials for ten years or until shares in submarkets reduce to
35% or less.

Article XXIII. Office products company directed to sell subassemblies of office
products equipment to manufacturers of EDP Systems at OEM prices not to
exceed a 100% markup on aggregate projected factory, direct labor, burden and
materials for ten years.

Article XXIV. IBM and small EDP Systems company report product line
revenues and earnings to Antitrust Division.

Article XXV. IBM and small EDP Systems company restrained from inter-
locking directorates.

Article XXVI. IBM and small EDP Systems company restrained from making
price concessions to customers awaiting delivery and installation.

Article XXVII. IBM and small EDP Systems company restrained from price
concessions, "free usage" or "buy-backs."

Article XXVIII. IBM and small EDP Systems company restrained from
price fixing and market allocation.

Article XXIX. IBM and small EDP Systems company to make their products
available on non-discriminatory terms.

Article XXX. IBM and small EDP Systems company restrained from :
(a) Premature announcement.



5300

(b) Penalties and charge backs on sales personnel.

(c) Abusing incentive compensation for sales personnel.

(d) Educational discounts. .

(e) Financial support to educational users having more than 50% IBM
or small EDP Systems company EDP Equipment. ^ _

(f) Marketing EDP Equipment to certain educational users receiving
federal support.

(g) Absorbing customer taxes. „ ^ v. r^r^ a
(h) Using leasing agreements which cannot be cancelled by 90 days

notice. ^ ^ 4.^.

(i) Discriminating against persons who are customers of other manu-
facturers of EDP Systems.
(3) Disparagement.

(k) Threats or undue influence on employment of persons interested in
competitive EDP Equipment.
(1) Interference with contract,
(m) Prefential deliveries to discourage competition.
(n) Rigging specifications,
(o) Refusal to lease hardware to competitors.

(p) Refusal to license software to competitors or customers of competitors,
(q) Practicing reciprocity. ..

(r) Promoting sales by emulation or simulation of competitive EDP
Systems.

(s) Supporting restricted user organizations.
Article XXXI. IBM and small EDP Systems company restrained from claim-
ing damages for past infringements.

Article XXXII. IBM and small EDP Systems company restrained from acquir-
ing exclusive patent rights.

Article XXXIII. IBM and small EDP Systems company restrained from
acquisition of exclusive know-how.

Article XXXIV. IBM and small EDP Systems company restrained from dis-
criminating in patent royalties.

Article XXXV. IBM and small EDP Systems company directed to grant royalty-
free licenses under existing patents.

Article XXXVI. IBM and small EDP Systems company directed to grant
rovalty-free licenses for future patents.

Article XXXVII. IBM and small EDP Systems company restrained from
disposing of patents to avoid licensing competitors.

Article XXXVIII. IBM and small EDP Systems company directed to grant
foreign patent immunity.

Article XXXIX. IBM and small EDP Systems company restrained from cross-
licenses or grant-backs.
Article XL. Right to attack IBM patents.

Article XLI. IBM and small EDP Systems company restrained from making
lifPTisp vpslrictions

Article XLII. IBM and small EDP Systems company to file patent applica-
tions or publish technical details regarding its inventions.

Article XLIII. IBM and small EDP Systems company directed to disclose
know-how.

Article XLIV. IBM and small EDP Systems company restrained from making
acquisitions of competitors, suppliers or customers.

Article XLV. IBM and small EDP Systems company directed to dedicate copy-
righted subject matter to public.

Article XLVI. IBM and small EDP Systems company restrained from utiliz-
ing software to influence hardware sales or to discourage purchases of competi-
tors' hardware and from applying for patents or copyrights on software or de-
manding pavment for testing of software.

Article XLVII. IBM and small EDP Systems company restrained from restrict-
ing use of purchased software.

Article XLVIII. IBM and small EDP Systems company directed to dedicate
all existing patents and copyrights on software.

Article XLIX. IBM directed to distribute excessive cash and marketable
securities.

Article L. Retention of jurisdiction by Court.



5301

Final Judgment
Now, therefore, it is hereby ordered, adjudged, and decreed as follows :



The Court has jurisdiction over (i) those of the directors, officers and em-
ployees of International Business Machines Corporation, a New York corpora-



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 39 of 140)