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 5 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 5 of 140)
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(<Z) Pre-announcements

IBM competition must cope with software which is pre-annnunced and not
even available from IBM. Further, competitive software products and services
must be continually modified to interface with IBM products and services that
have been released prematurely or redesigned specifically to eliminate competi-
tion rather than to better serve the customer.

(e) User Discrimination

Finally, IBM's competitors who use IBM equipment frequently find themselves
discriminated against by IBM — i.e., they do not require the same .services as do
other IBM customers, but, they still must pay for sucli unused products and/or
services due to semi-bundled prices.

(/) Pricing A dvantage Due to Size of IBM

Due to the size of IBM's market base, they have a pricing advantage over
competitors. The cost of a software (or hardware) product can be initially



4860

spread out over such a large potential base that a unit price can be set at a low
enough level to exclude comi^etition.

VERTICAL vs. HORIZONTAL SEPARATION

ADAPSO/SIA does not believe that the classical anti-trust relief of dividing
IBM into several computer hardware companies (i.e., a vertical break up) will
be to the short- or long-term benefit of the public, of otlier users of computers,
or of the software products industry.

Tills proposed vertical restructuring of IBM could result in incompatibility
between IBM computer hardware and software and also in increased costs in the
overall development of software products. Therefore, ADAPSO/SIA recommends,
as an alternative structure to reduce IBM's influence over and share of the com-
puter market, that IBM be separated into at least two organizations — a hard-
ware organization and a software products/services organization.

Since IBM now controls the software products and services markets, ADAPSO/
SIA further believes that the Justice Department must place special safeguards
and restraints on IBM to prohibit their continued control over these markets.

PROPOSED RELIEF

If the Justice Department and the Government expect to improve and simplify
the operational use of computers and to reduce the costs of programming for
Government users and the business world, the following steps must be taken :

1. IBM may not directly or indirectly tie in its hardware and software market-
ing efforts. To that end, IBM must be required to separate its software develop-
ment and marketing so as to be separate and independent from its hardware
operations.

2. All IBM software, both existing and planned, must be priced on a basis which
yields a return and reflects all associated costs, separate and apart from its hard-
ware.

3. Safeguards must be implemented to insure that a competitive software indus-
try, once established, will remain outside the domain of IBM. One such safeguard
would be to require that the entire new IBM software organization receive in-
formation on new IBM developments only at the same time tliat it is released to
independent software companies.

4. The IBM software organization would be required to release comprehensive
software interface specifications to all interested independent software companies
at the same time it releases it to its hardware organization.

5. Neither IBM nor its software organization should be allowed to announce
any software products prior to availability for general use.

SEPARATION OF THE IBM SOFTWARE ORGANIZATION FROM THE IBM HARDWARE

ORGANIZATION

The new IBM software organization should be separate from the IBM hard-
ware organization as follows :

1. Separate physical equipment purchased on an "arm's length" basis from any
manufacturer, with no favored terms and conditions.

2. Separate physical facilities.

3. Separate ijersonnel, with no standardized policy of transfer or promotion
between organizations.

4. Separate accountability published and made available to the same extent
as would be produced for a completely separate public coi"porate structure.

5. Separate name, which is not identified with IBM for advertising or market-
ing purposes.

6. Prohibited preferential references or recommendations to third parties by
either organization, except on an objective basis fairly reflecting competitive
terms and conditions.

7. No advances of capital or loans between divisions, except on terms available
generally to third parties.

8. Exchange of services and products between divisions only on the "arm's
length" basis as available generally to third parties.

THE 1056 CONSENT DECREE

ADAPSO/SIA believes that the Justice Department can quickly develop a
competitive software products industries by applying the principle of the 1956
Consent Decree which states in part :



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IBM is hereby enjoined and restrained from conditioning tlie sale or lease of
any standard tabulating or electronic data processing macliine (which shall
include any machine unit on a separate base even if in normal use it is mechan-
ically or electrically connected with another such machine unit) upon the pur-
chase or lease of any other standard tabulating or electronic data processing
machine.

Electronic data processing machine shall mean a machine or device and attach-
ments therefore used primarily in or with an electronic data processing system.

Standard tabulating machine or standard electronic data processing machine
shall mean a tabulating machine or an electronic data processing machine manu-
factured by IBM and made generally available to its customers.

IBM's own senior patent attorney spoke of the interchaugeability of hardware
of software in the following public statement.

First, in some respects computer programs and hardware are interchange-
able ; hence one can say that a new computer program is similar to a new machine.

ADAPSO/SIA respectfully insists that the principles of the 1956 Consent De-
cree be enforced relative to IBM's current and previous practice of tying to-
gether the software machine and the computer hardware machine.

In summary, we believe it is imperative that the Justice Department bring all
legal weapons to bear in order to develop a competitive software products
industry.

Attachments : (4).

Attachment 1

ADAPSO SEEKS PERMANENT EXCLUSION OF IBM FROM DATA CENTER ACTIVITIES

New York, N.Y., February 26, 1973 — The Data Center segment of the As-
sociation of Data Processing Service Organizations (ADAPSO) called for the
permanent exclusion of IBM from the data center business in its position paper
released today dealing with the government's anti-trust litigation against
IBM.

Two position papers were devised representing the views of the industry from
ADAPSO's Software Section (Software Industry Association) and the Data
Center segment. The major thrust of the software position (released February 14,
1973) was to insure fair competition in the market place by recommending
to the government the separation of hardware from software in the IBM Cor-
poration through the technique of "maximum separation."

The ADAPSO Data Center Section position calls for the formalization, through
the courts, of IBM's voluntary withdrawal from the data center business for six
years and that the courts make this decision permanent.

Further, the position requests that IBM's exclusion from the furnishing of
data center services is complete, eliminating the opportunity for a "back-door"
reentry into the data procesing services industry.

The Association of Data Processing Service Organizations (ADAPSO) founded
in 1961 represents more than 650 firms and branches offering computer products
and services.

Attachment 2

DATA CENTER SECTION — STATEMENT OF POSITION APPROVED: FEBRUARY 2, 1973

The data center segment of the computer industry was in large part created as
a direct consequence of the entry of the 1956 antitrust consent decree against
IBM Corporation. That decree separated out IBM's data center services business
into a separate corporation. Senice Bureau Corporation (SBC). The decree was
twice modified thereafter and continues in effect. Although separation of IBM's
data center services from its other businesses was not complete and some tie-ins
persisted, separation has accordingly been a characteristic of the independent
data center segment from its inception and "tie-ins" and economically unjustified
joinders of activities have therefore presented a relatively lesser problem to it
than to other segments of the computer industry.

For whatever reason, the effect of the recent private settlement by IBM of
the antitrust litigation against it by Control Data Corporation (CDC) has been
to completely sever IBM's data center business from IBM by transferring it to a
competitor, CDC. The data center segment believes that this transfer should
resolve the special tie-in problems of its segment, provided that (a) the complete
separation is formalized by court decree, so that it is not subject to later change
by private action (b) it is made permanent and not limited to the six years
which IBM has consented to stay out of the data center segment and (c) it is
made clear that IBM's exclusion from the furnishing of data center services is

40-927 O - pt. 7-3



4862

complete and includes commercial and scientific data processing services ; batch
processing; remote job entry processing; timesharing services; data preparation
services; and facility management operations. Such exclusion should also pro-
hibit the supply of any support activities which would, in effect, represent a
"back door" entry into the data processing services industry.

Attachment 3

STATEMENT OF GENERAL POSITION

The Association of Data Processing Service Organizations, Inc. (ADAPSO)
is the trade association of the computer services industry. It is composed of 661
data centers, software houses, time-sharing organizations, facilities managers
and other vendors of data processing services and software products. It presents
this Statement of General Position with respect to the competitive structure of
the computer services and software products industry for the guidance of the
Justice Department in the pending Government litigation against IBM Corpora-
tion, as well as the Congress, the computer industry and the public at large.

1. ADPSO regards the linking together of separate products and activities of
IBM and other computer manufacturers as constituting the fundamental anti-
competitive computer industry problem. It believes there are no economies of
scale which would preclude free and fair competition in the computer industry,
were it not for such joinder. This Statement of General Position therefore urges
the elimination of "tie-ins" and economically unjustified joinders in whatever
form. It will be followed by independent Statements of Position by ADAPSO's
separate Sections ( Software issued February 14, 1973 ; Data Center's Position
enclosed) furnishing their recommendations as to how such joinders may be
eliminated in their industry segments.

2. In addition to the siJecial and in some resi^ects unique interests of its Sec-
tion.s, however, all ADAPSO members are also users of computer hardware.
ADAPSO therefore joins in the overall efforts of the Government to bring free
competition to the hardware industry by way of such remedial action as will be
in the interest of the iiser puWic generally.

3. Reluctantly ADAPSO must also advert to a procedural matter of overriding
importance, because without its resolution there may be no timely anti-trust
relief at all. To this point the resources, devoted by the Government to the prosecu-
tion of its antitrust litigation against IBM Corporation have been inadequate to
the task. That suit is now over four years old. but pretrial proceedings have not
vet been completed nor any trial date set. The inadequancy is perhaps best epito-
mized bv the Government Staff's need to rely for a large part of its discovery on
the preparation conducted by Control Data Corporation (GDC), a party to pri-
vate antitrust litigation involving IBM. desptie protests of the Court and many
private interests including ADAPSO.

The vice of such unprecedented Government reliance upon private interests
has just been demonstrated by the alleged destruction by CDC of important trial
preparation materials. Government counsel has asserted that the effect of the
destruction will be to hinder and delay preparation of the instant case for trial.

ADAPSO calls on the President, the Attorney General and. if necessary-, the
Congress, to make available and allocate adequate human and financial resources
to the prosecution, to insure that the case will be brought to final judgment at the
earliest possible time, with the Government's case being fully and properly pre-
pared. Only in this way can we be sure that the interests of all parties, including
the public, will be adequately represented.

Attachment 4

POSITION PAPER ON THE INCREMENTAL MARKETING OF COMPUTER SERVICES AS AN

UNLAWFUL TIE-IN SALE

Statement of Position

Coercion should be presumed and an unlawful tie-in held to exist, whenever a
seller marketing a product in a separate line of commerce also markets a not in-
substantial volume of computer sen-ices, and where the following circumstances
are present :

1. The first (tying) product is patented or copyrighted, or otherwise a la\^•ful
monopoly of the seller.



4863

2. There exists some special relationship between the seller and the purchaser
which is independent of the particular purchase-sale relationship giving rise to the
questioned transaction, such as by way of dealership, franchise or license.

3. The seller offers its computer services only to those purchasing the tying
product and not generally.

4. The tying product is important to the business of the computer services orga-
nizations in the pertinent marl^et.

5. The seller is of large size relative to the computer services organizations in
the i)ertinent market.

6. The seller operates in an oligopolistic or monopolistic line of commerce.
The number of these circumstances necessary to justify the presumption will

vary, depending on the facts of each case. Thus, where 4, 5, and 6 are present,
as in the case of communications carriers and banks, 1, 2, and 3 are not required.
The existence of all six should never be necessary.

Discussion

ADAPSO welcomes and encourages fair competition in the computer services
industry from any source — conglomerate, congeneric, manufacturers' subsidiary
and independent. However, that competition must be fair.

ADAPSO has fought competition from subsidiaries of communications com-
mon carriers and from banks, because of its deep concern about the inherently
coercive character of their cross-market activities. It intends to continue its
fight to insure that the computer services industry remains competitive.

Cross-market operations, however, are by no means restricted to banks and
communications carriers. They are increasingly becoming a feature f)f the com-
puter services industry. This is because more and more organizations whose
principal products are in separate, non-computer services lines of commerce, find
themselves with large amounts of "idle" or "excess" computer capability, created
by the inhouse capacity considered necessary to liandle peak loads during lim-
ited periods of maximum operation. Moreover, frequently such companies can
expand computer capacity over a given base quite cheaply, and are thus tempted
to do so and market the overcapacity. The computer services industry therefore
becomes an obvious and attractive target for their cross-market exiiansion.

Restrictive cross-market impact by organizations such as banks, communica-
tions carriers, computer manufacturers' subsidiaries, charities and government
organizations, has accordingly for some time been a special and perhaps key
concern of the computer services industry. The mere threat of cross-market
competition can be suflScient to discourage a budding computer ser^-ices industry
entrepreneur. This is because he knows that cross-market operator sometime.s
price their public offerings of computer services on an incremental cost basi.s—
that is, so as to recover only the incremental costs of the offering plus whatever
contribution to fixed costs is possible, but not all fixed costs allocated on an
overall product basis, plus profit.

In contrast, at least at the inception of his business, the computer services
vendor has only a single product line over which to .spread his fixed costs. He
does not have a ready and sometimes "captive" market to cover his "nut" (breali-
even costs). In certain types of offerings, particularly of time-sharing servic?.s.
he has huge start-iip costs to recover. He needs potentially large profits to attract
risk capital. ObA'iously he cannot expect to meet the competition of the cros.s-
market operator by pricing his services on an incremental cost basis.

Price competition is of course a cornerstone of American industry and enter-
prise. If the cross-market operator has advantages of scale or otherwise and
can outperform his computer services rival without restraint of trade or other
unlawful act. present law permits him to do so. Under the special circumstances
presented by the computer services industry, however, this conclusion often begs
the real issue, which is an evidentiary one.

The question of whether there in fact is restraint in cross-market operations
involving computer services can be an extraordinary difficult one to answer. Its
resolution can take so long as to preclude remedying the wrong within a mean-
ingful time frame. The intimate relationship between the two products being
sold and the esoteric nature of the computer services transactions may he very
intricate. For example, how should one cost-allocate the use of an idle computer
required for standby or to handle a peak load, or the development of a necessary
in-Iaouse program redesigned in minor part for marketing purposes? As a result,
obtaining and analyzing the evidence necessary to establish the most common



4864

and pernicious form of restraint by the cross-market operator, the "tying" ar-
rangement, can take years of litigation and enormous expense. "Tying" arrange-
ments have long been held to be per se unlawful by the United States Supreme
Court, because they force the public as buyer to forego its free choice between
the competing "tied" products and deny competing suppliers free access to the
consuming market of the tied product. The Supreme Court has said that "the
vice of tying arrangements lies in the use of economic power in one market to
restrict competition on the merits in another."

Prohibition of cross-market computer services transactions under the described
circumstances need not deny the consumer the benefits of competition from
these services. The cross-market operator has only to remove the coercive tie-in
aspect by applying the now recognized "maximum separation" principle. The
public and the cross-market operator are thus not denied any advantages or
benefits from scale — which are often small and sometimes non-existent in the
computer services industry — but simply the marketing leverage which results
from the cross-market relationship and the "full line" approach.

The independent (of IBM) computer services industry was conceived in the
filing of the United States Government's antitrust complaint against Interna-
tional Business Machines Corporation in 1952. It was born with the consent
decree entered in that litigation in 1956. It is thus a very new one. It promises
to be huge — far bigger than hardware. It "bundled" computer statistics are
broken out fully, to include operating systems, software may already be a bigger
business than hardware.

To this point the industry has been structured along classical free competition
lines. It is fragmented into a great number of small economic units. It is char-
acterized by ease of access to many parts of the market, as well as demise from
that market. It is highly competitive, but sometimes the competition is cut-
throat and destructive. It may have its modern Horatio Alger stories, but it also
has disasters.

Because it is new, highly competitive, esoteric, complex, developing at a rapid
pace and endangered, the computer services industry requires protecticm against
the cross-market tie-in threat. The dangers of cross-market activities are appar-
ent. Under the described conditions, the power to coerce is clearly present. The
problem of proof is great. The industry should not be made to wait the generation
of legal precedent ordinarily needed to establish a factual presumption ; by then
it could be too late to preserve the compiiter services industry's present highly
competitive state. Recognition of a presumption of coercion in connection with
the computer services crossmarket tie-in sale by the courts, now, is necessary
and proper, and should be made to wait mo longer.



Exhibit 3. — Letter From Ameriean Satellite Corp. Re Antieompetitire Effeets oj
Proposed IBM-Comsat Joint Venture

American Satellite Corp..
Germantoicn. Md.. August 5, 1974.
Senate Committee on the Judiciary.
Subcommittee on Antitrust and Monopoly,
Washington, B.C.

Dear Mr. Hellerman : It is our understanding that the Senate Subcommiriee
(wi Antitrust and ^lonopoly. in connection with its review of the extent of com-
petition in several different industries, is presently considering various aspects of
IBM's position in th-" computer market and its relationship to the computer
related products market.

We wish to call to the Subcommittee's attention a recent development in this
area of interest : the announcement of IBM of its intention to enter the domestic
satellite arena as a co-venturer of COMSAT. It is our conviction that such an
entry will have significant anti-competitive effect upon the computer industry, the
computer related products indiistry and also on the domestic satellite industry.
Accordingly, we urge the Subcommittee to include this proposed venture as a
part of its overall review of IBM.

To assist the Committee in this review, we submit the attached memorandum
indicating, to the best of our understanding, the mechanics of the proposed entry
and what we believe will be the inevitable anti-competitive effects of such
an entry.

Very truly yours,

.loHN D. .Iackson.

Attachment.



4865

Anti-Competitive Implications of the Proposed IBM/COMSAT
Joint Venture

IBM, COMSAT (together with its wholly owned subsidiary COMSAT Gen-
eral), and CML (a company presently jointly owned by COMSAT General Corp.,
bv Lockheed Aircraft Corp., and by MCI Communications Corp.), have filed a
petition with the FCC to permit the entry of IBM into the domestic satellite
business. It is proposed that IBM will acquire 55% of the stock of CML a»f\tjiat
COMSAT General will increase its stock ownership in CML from 33%% to 45%.

ASC believes that tlie proposed IBM/COMSAT venture will have significant
anti-competitive effects on the domestic satellite field, is a violation of the anti-
trust laws and should be of serious concern to the Subcommittee. It is the pur-
pose of this memo to briefly set forth the potential anti-competitive effects of
the IBM/COMSAT venture. ^ . _ ^ ,,

As a stock acquisition the venture is, of course, subject to Section t ot the
Clayton Act. The markets affected by this acquisition and in which competition
may be substantially lessened are domestic satellite (Domsat) communications
(especially the market for high speed data transmission by satellite) ; compu-
ter interface and peripheral products ; and computers themselves.

As tlie Committee is aware from its consideration of tlie communications
marketplace, the Domsat market has a very limited number of participants.
In 1972 tlie FCC approved entry l)y AT&T, by CML (as presently organized),
by ASC, by Western Union Telegraph Co., by a joint venture between Huglies
Aircraft Co. and GT&E Services Corp.. by Western Tele-Communications, Inc.,
and bv Radio Corporation of America. As the market is presently structured,
AT&T will be the sole provider of interstate switched voice message traffic and
is authorized to utilize satellite transmission service provided exclusvely by
COMSAT. While GT&E initially received approval to compete aganst AT&T
in this area via satellite, it has now— following litigation by AT&T— proposed
to combine its svstem with that of AT&T and to utilize the same satellite trans-
mission services provided by COMSAT. Approval of that plan would nullify
the previously proposed and FCC-approved entry of GT&E and Hughes as a



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 5 of 140)