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 44 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 44 of 140)
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proved in detail here in the United States.

So what I will say to you is really an account of the concerns, the
fears, the kind of risks which users and governments fear they might
ha^-e to face through IBM's dominant position.

First of all, they have heard and read about many of the cases —
the various cases that are going forward in the United States — being
pursued by the U.S. Government, and the Telex case. And they are
concerned because it would be the duty of the Commission to explore
whether similar abuses — whether what indeed have been described as
predatory acts — have been done in Europe as well as in the United
States.

That is a first possible concern which would have to be proved in
conrrete form, yes or no. But it's a reason for concern and anxiety.

Secondly, I have already mentioned the problem of standards; but
without any doul)t. this does already present a major concern to users,
to governments, to other people in the industry.

IBM inevitably sets world standards, and these are not necessarily
those which have been agreed by the International vStandards Organi-
zation; and if I may put it a little bluntly, ev^en saintly behavior by
a giant forces competitors to run behind.

This means that it is not enough to have thought up a useful and
vahiable innovation. It has to conform to the IB]M standard.

I think the problem is the lack of predictability, the lack of trans-
parency and foreknowledge of changes. This automatically gives a
premium to the leading company which sets the standards, and makes
difficulties for other companies which are having constantly to follow
and adapt their products to fit the IB]M standards. It's inherent in
the situation, and it doesn't necessarily imply great wickedness on the
part of IB]M. But it is a problem, and a source of great concern.



5327

Xow, users, both public and private, are concerned to have a free
choice of equipment. And without any doubt, there is concern lest,
by being locked in to a certain kind of software like IBM software, it
is not possible to shift to cheaper equipment except by paying a high
price. So the cost of change is high, and this means that the customers
who are really IBlM's customers are to some extent imprisoned. And
this reduces the transparency and openness of the market. Our pre-
occupation in the European Community is to have an open, competi-
tive market.

There is also a concern that this difficulty of change, that this leader-
ship in standards, may not necessarily mean that the most advanced
technology can win out in the marketplace.

Finally, I think I would add a rather general and basic point. There
is a fear, a concern, about control by a single, immense concentration
of power, of economic power. This is also a concern.

Mr. Xash. Is that because it is an American firm ?

Mr. Layton. No: it has nothing to do with it being an American
company. I've made a distinction between the two. We are talking
nt the moment about one company.

If tliis were a European company, it would still present a problem.
In fact. I think that's a good question. You put me the question: Sup-
posing IBM were to become, by some magic, tomorrow, a European
company. Would the problem he over? And the answer is "No."

Now, I don't say that it is easy to document or prove or remedy
these concerns. But you asked me why they w^ere there and what Avere
the fears? And tliose are some of the fears which are very widely
expressed.

Mr. Naspi. What recourse, what alternatives, in your judgment, does
the EEC have to take action to rectify the concerns you indicate?

Mr. Layton. So far, we have only been able to identify two pos-
sible recourses. One is the essentially modest effort we are making to
keep in being certain European companies, and we certainly welcome
the remaining in being of competive other American companies; that
is one thing.

And the second is if there is concrete evidence of abuse of a domi-
nant position, then it would fall on the Commission to bring a case
against IBM. But the "if" is very important. The concrete, detailed
evidence has to be brought together ; and if these allegations turn out
to be well substantiated, then there is this second possible recourse.

]Mr. Nasii. We had the privilege of meeting Willy Schleider several
times. I am sure that if such evidence exists, he will micover it. I will
continue to read the report. As you know, the Justice Department
is litigating, getting ready to go to trial, with respect to its antitrust
suit against IB^NI. seeking diverstiture as a relief.

Would you react positively or negatively should the Department
seek as part of its case to restructure the World Trade Corporation
as well ?

Mr. Layton. This is really music of the future, if I might translate
a German phrase, and speaking ])ersonally, make the folloAving re-
marks: If we in the Community, if the Commission, were to find there
were substantind evidences of aliuse of a dominant position, if such a
situation were to arise, then presumably the Conununity would also
face the question of whether there would need to be any form of relief.



5328

There must be some remedy if tliere were a case successfully broucfht-
And I think that all we ha^■e said today has shown that there is a
common problem. I think this is the most fundamental throught which
I'd like to leave you. This is very much a common problem which we-
face on both sides of the Atlantic.

If the time comes when the Department of Justice is practically—
and the courts in the United States are practically — considering meas-
ures of relief which have a major impact on Europe, I would have
thought that it would be very appropriate that there should be close
consult ition with the Euro)')ean Community about the form that this
should cake, recognizing that, if you like, we have a common interest
in solvi ig tlie problem.

That is the first point. Xow, the second point is my personal view of
the idea of divesting, breaking up IB^M into a number of companies..
I can only comment that the European structure of IBM might pre-
sent more problems than the American structure, if such a hypothesis-
were being considered. IBM in Europe, to the best of my knowledge,
has one production center, or at any rate for some key products, only
producing particular, major products; whereas, in the United States,
in several of its major products, there is more than one production
center which makes it easier and more logical to make out of such
a company a number of entities, each enjoying the optimal economies
of scale.

I would leave one tliought : IBM's strength is not only in its produc-
tion capabilities but also in the strength of its lease operation; and
one idea which has been sugc^ested in Europe — not in fact by me, but
I quote it to you because I find it interesting — is the concept that IBM's
leasing operation and its basic — its banking business — should be se]:)a-
rated otf from the production and develoi^ment operation and made a
leasing bank for the dis]:)Osal of the entire computer industry. Now
I offer you that thought quoted, from another European, not as a
proposed action but as another thought to add to the many ideas
which, I think, we are freely deliatino- today.

Mr. Nash. We have heard that IBM contributes significantly and
in a positive manner to the U.S. balance of payments and balance of
trade. Similarly, I might add, we have also heard that IBM con-
tributes significantly and positively to the European balance of pay-
ments and balance of trade. I am not an economist, but that concept
does perplex me. I was wondering if you have any information that
you might be able to supply now or when you return to Brussels witli
respect to IBM's contribution in the balance of payments, balance of
trade of Europe as a whole, or even individual countries in Europe ?

Mr. Layton. That is the kind of question which I would like to hear
IBM answer. I mean, I am genuinely interested in the answer. I
think it is a very interesting and important question. I think it is
much better to ffet the figures from them because I am only a second-
hand individual. But, I have been led to believe that IBM, in several
major European countries, pursues a policy of trying to have a
balance in its payments; that is to say, the im])orts and exports
roughlv lialance out in the overall national operation. And this may
mean that it has a net trade deficit in relation to th.e United States;



5329

that is to say, it imports more from the United States because it
imports Larger computers and certain kinds of special equipment
from the United States. But that in the European operations of IBM
it exports substantially to other parts of the world. That I think is
a rather likely explanation on which I am sure their own views would
be of interest.

Mr, Nash. I was wondering if there is any truth to the rumor that
we have heard, and which I know you have heard as well, respecting
the formation of a European cartel to compete against IBM?

Mr. Layton. Well, first of all. if any such cartel came into existence
the Commission would be under obligation and would take it to court.
It is certainly not part of tlie Community's policy, to the best of my
knowledge, to foster such a cartel. Just as we have tlie obligation to
take to court a company whicli abuses dominant position, so we have
the obligation to take to court cartels. In fact, if you look at the
ex])erience of applying the Community's competition policy over the
last 10 years, the policy for banning and imposing heavy fines on cartels
and restrictive practices is the part of the treaty which has been
enforced much more effectively because it is spelled out in much more
detail in article 85. Just to recall one of the larger cases last year, or
18 months ago, the Commission imposed very heavy fines on the sugar
manufacturers for having a cartel. So we would be delighted to have
detailed information about any such arrangement in order to take
action.

^h\ Xash. Thank you very much, Mr. Layton. No further questions,
Mr. Chairman.

Senator Hart. Mr. Chumbris ?

]Mr. Chumbris. Thank you, ]Mr. Chairman, I have just one observa-
tion. It relates to the share of the World market. I am reading from
]\Ir. Biddle's statement wherein, I believe there is a quote from find-
ings of facts and conclusions of law of Judge Larson in the Honey-
\rell V. Spemj-Rand case. He pointed out in the terms of total revenues
stated in dollars, and market shares in percent of revenues of the entire
industry. SR, which I believe is Sperry-Rand, and IBM have the fol-
lowing shares of EDP market — that would be electronic data proc-
essing market — in 1950: "World market, IBM — 42.9 percent; Sperry-
Rand — 51.2 percent. In the domestic market, IBM had 47.5 percent
and Sperry-Rand had 45.5 percent. Then, if we go to the back of page
15, there is a chart which shows that in 1973" for general purpose
EDP systems, December 31. 1973, IBM had 63.8 percent in the United
States : and Univac, which was Sperry-Rand, I assume, has 8.5 percent.
In the World mm-ket. IBM Imd 64.4 percent and Univac had 8.1 per-
cent. So from 1956 to 1973 there was a tremendous change between
the percentage of sales by IBM and by Univac. I believe that the testi-
mony that has been given us thus far indicated why IBM took such
a jump over Univac. Univac concentrated on the scientific approach
in computers and IBM went into the industrial or commercial aspect.
And. because of that, we have this tremendous gain in IBM over
I^nivac. If you will look at the chart I just referred to, even Honey-
well has gone above Univac.



5330

I think the facts should be determined as far as this legislative
hearmg is concerned and we will let the court case in October be taken
care of by the parties to that case. We will just confine ourselves to this
bill and look at it from our own legislative purpose. I think, we ought
to get the facts, and some of them came up yesterday by the wit-
nesses from Data Corp. and other witnesses who testified yesterday will
testify in the next few days as to wliat it w^as that shot IBM from
below Sperry-Kand in 1956 — Sperry-Eand had 51.2 and IBM had
42.9 — to a difference where Sperry-Eand has only 8 percent while
IBM has 63.8 percent.

I think that is the tj^pe testimony we ought to be developing for
the record. Is it efficiency ; is it economies of scale ; is it the product ;
is it also the service that they give, as indicated further by Mr. Biddle,
in his paper on page 26, I believe, when he was conducting an inter-
view on behalf of Bendix, and these were the responses he received.

"IBM equipment is second best in terms of price and performance."

Two, "IBM's service and support is second to none."

Three, "IBM already has software I need."

Four, "My management thinks IBM is the better choice."

And besides, he goes on, "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 is an act of God." He doesn't explain what the act of God means,^
but I guess we could get an explanation of that also. I think that is
the situation. It is exactly the same in the United States as it is
worldwide.

Do you visualize with the combinations that you just talked about
in Europe to come out with a 7720, that you might be able to do in
Europe what IBM did to Univac. That is a possibility. Is this so?

Mr. Latton. It is not excluded, but it is going to be jolly difficult.
I mean because there is now an enormous acquired marketplace. I
think it's — one shouldn't forget- — just another point concerning these
figures. The total market in 1956, which 3-ou are looking at, was. of
course, much smaller than tlie market you are looking at now. Even
so, it is true that the headstart at that time, I think, came partly
from the punchcard customer market which IBM had. But, today, the
fact that IBM has 60 percent of the installed capacity of Europe is
in sheer quantity an enormous inertial problem to Avean IBM customers
away. And, in fact, the other computer companies tend to be fighting
for the new customers, and not so much for the i-eplacement market.
Of course with the growth of the market this is still a possibility,
and you can still expect and hope to enlarge your market share. But
it is extremely difficult because of this enormous customer base and
of the cost of change. I think that this is one of the built-in structural
problems that we now have.

Now. we can go back and ask: How did IBM get there? In wliat
measure are they excellent? In what measure are they pursuing prac-
tices wliich are accused of being improper? I, Avithout doubt, believe
that though their acqi^ ired market position is a great source of st rength
it is also true that they do have major economies of scale in all these



5331

fields — and, justifiable economies of scale in production and E. & D.
And that this helps to maintain their very high profitability. There-
fore, their position is not maintained by what can be described as
illegitimate means. Their very size is a very important factor which
makes it very diflicult for competitors to break in and enhuge their
market position. There is quite a lot of evidence that it is still possible
by innovation, hj selecting particular areas of the market, to getting
over a certain threshold of size. Below a certain size it is not possible
to break in. But above a certain size, and we hope to achieve that in
Europe, we believe that we can gradually shift the balance. In the
last 2 or 3 years the European share of the market has been improving
slightly, compared to IBM's. And, incidentally, Univac's market share
has been slightly improving lately after falling a great deal. There-
fore, it is not imjjossible to shift the balance, but it is extremely
difficult.

Mr. Chumbris. As I stated earlier as we go into these hearings we
will have to develop a record. It is pretty difficult, when you make
a jump from 1956 to 1973, to know the step-by-step reasons for the
change ? But I think as we go through our heai'ings we should take
it almost on a year-by-year basis. For instance, when I was a young
man I remember the prestige car, at least in Washington, D.C., was
the Packard. That was the ultimate. We don't even have Packard
on the market today. Today, it is take your choice whether it is the
Continental or Clirysler or the Cadillac, the top car, as far as domestic
U.S. cars are concerned; or the Rolls Eoyce and the other foreign
cars coming into the market.

Another thing, I was born in ^^'ashington, and I remember when
the Washington Post was not a successful newspaper; other news-
paper's were more successful. Look at the Washington Post today. A
change in management and improvement of facilities at the Washing-
ton Post put it on the top. Two other papers tliat were giving it a
rough time back in the 1930's and 1940"s had to combine to meet the
competition of the Post in the city of Washington. That is the basic
facts of the industry. I think we have to get it on the record. I tliink
the record ought to show what happened in 1956, 1957, 1958, 1959, and
1960 up to now that developed the industry as it did.

That is all I have.

Mr. Nash. Mr. O'Leary picked up an important point and Mr.
Chumbris went into it. If I might have a moment. You mentioned. Mr.
Layton, that IBM's market share in Europe is apparently due to sig-
nificant economies of scale. I think it is important for the record to
see if we can't break down what economies of scale are ivferred to in
this instance. I can think of a variety of possible definitions. One
might be a large number of units sold by IBM to spread manufactur-
ing costs over a large base to bring down the cost per unit, including
the R. & D. costs per unit.

Another concept might be that their installed base permits the
spreading of such a large quantity of marketing and support personnel
which, m turn, contributes to the retention of the market share.

If you could elaborate on your concept, I think it would be helpful.



5332

]Mi\ Laytox. I think it includes all these elements. It certainly in-
cludes the size of the production run, writing off as a cost of research
and development of a range of computei-s or equipment. Despite the
fact that they have an immense R. & D. effort, the proportions of
turnover spent on E. & D. is smaller than in most other companies,
including European companies, because of the least size of turnover.

Certainly there are also production economies of scale because of
the lengths of the production runs. And, also, there are economies of
scale in the production of softAvare applications j^ackages. for instance,
which are sold to a variety of users. There is also a threshold you have
to cross for being able to maintain effective sales and service facilities
in a region. Ancl, if you have a very dense market coverage then you
can maintain a dense pattern of sales and service facilities. They are
able to do this in Europe on a more lavish scale than any other com-
panies — and that is a further economy of scale.

In other words, it includes all these elements. All of which means
that in the computer business there is evidence that suggests that any
major leap in market share can bring a significant advance in
profitability.

Mr. Nash. Does that imply that the minimal scale economies are at
the 60 percent scale of market or just that it has to be above the 7 and 8
percent ?

]Mr. Layton. I think it is dangerous to speak of one threshold. There
are many different kinds of thresholds.

In a study that was done for us — one estimate was suggested for in-
stance for a particular national market. There was what you might call
a maiketing threshold — that you had to have at least 7 or 8 percent of,
say, the French market, or the British market, in order to be able to
maintain sales and service facilities that are the minimal necessary for
being a viable competitor. That is just one kind of threshold.

Then, if you ask the question, "Do I wish to number amongst my
customers multinational companies?" you will note that you will have
to cross the threshold in many markets. And, immediately you have
found a wider marketing threshold worldwide. We can say "the same of
production of particular kinds of products — components, and subas-
semblies — that there are different thresholds of scale which you would
have to cross. Therefore, it is a very complex subject, there is no doul^t
about it. I think it is dangerous to say that 10 percent of the World
market is tlie threshold; if you are smaller you are unprofitable, and
if you are larger you are profitalile. It might be smaller, it might be
larger; it depends on all kinds of aspects of your management skills
and company strategy. But there is no doubt that between having 8
percent of the market and 60 percent tliere are a great many advantages
of scale which the company with 60 percent manages to achieve.

Mr. Nash. Thank you very much.

Senator Hart. Again, Mr. Layton, we are very grateful that you
could come.

^[r. Laytox. Thank you, sir.

Senator Hart. I must suggest a recess before we hear our concluding
witness, because of obligations I have beginning at 1 o'clock. In fair-
ness to the committee and in fairness to our witness, I suggest a recess
until 2 p.m.



i



5333

[Whereupon, at 12 :40 p.m., the subcommittee recessed, to reconvene
at 2 p.m. this same da3^]

MATERIAL RELATING TO THE TESTIMONY OF CHRISTOPHER LAYTON

Exhibit 1. — Council of Ministers of European Communities resolution re common
industrial policy

Brussels, 5 July 197.'f.
European Communities

the council



Resolution of the Council of-



ON A Community Policy on Data Processing

The Council of the European Communities,

Aware of the importance of data processing for all aspects of modern society
and hence for the Community and its economic and technulogical pot^itiou in the
world ;

Aware that the structure of the data processing industry in the world is un-
balanced and that the applications of data processing within the Community are
nut yet satisfactory ;

Convinced that this situation should lead the Community to contribute to the
design, development and manufacture of the various components of data process-
ing systems through competitive European-based companies existing alongside
the important companies controlled from outside the Community ; convinced that
both can prosper in an expanding market ;

Aware that effective competition is desirable and that the present situation
makes appropriate measures necessary to encourage European-based companies
to become more competitive ;

Convinced that a more efficient and economical use of resources can be ob-
tained through collaboration or, in suitable fields, through joint action on stand-
ards and applications, and thn)Ugh collaboration on public procurement policy :

Aware that associations between producers' can help to make European-based
companies competitive,

1. Intends to give a Community orientation to policies for encouraging and
promoting data processing, and welcomes the Commission's intention to submit
in 1974, after appropriate consultations, priority proposals concerning :

(a) A limited number of joint projects of European interest in the field of
data-processing applications ;

(&) Collaboration on standards and applications and in public procurement
policy ;

(r) The promotion of industrial development projects on areas of common
interest involving trans-national co-operation ;

2. Will take a decision on these Proposals no later than six months after
the European Parliament has given its opinion ;

3. Consider that it is desirable to prepare, in the medium term, a systematic
Community programme to promote research, industrial development and appli-
cations of data processing. This programme would provide for the co-ordination
of national promotion and Community financing in appropriate fields of joint
European interest, with the central aim of ensuring that by the early lUSO's
there is a fully viable and competitive European-based industry in all the
fields concerned ;

4. Invites the Commission :

To accompany its proposals with details of their financial implications, in-
cluding, where appropriate, the cost to the Communities' Budget for each of
the next five years ;

To submit annually, by 1 .July at the latest, in the light of all decisions
taken by the Council subsequent to this Resolution, a report to the Euro-
pean Parliament and the Council on all expenditure incurred as a result 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 44 of 140)