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 65 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 65 of 140)
Font size
QR-code for this ebook


Our first proposal was made in April 1064. Shortly after the sub-
mission of the first proposal we were notified tliat contracts were going
to be negotiated.

Just prior to the beginning of those negotiations rumor had it that
IB:M had resubmitted their proposal and was offering a computer four
times the capabilitv of tlie 6600 at a substantially lower price.

Soon official notification was made to CDC tliat botli laboratories had
selected another manufacturer.

Six montlis later we learned that negotiations with IBM had not been
concluded, and we were invited back for further negotiations.

Ultimately, Control Data received the contracts; however, only
after price concessions of over $6 million and costly concessions on
performance improvement and guarantees.

The temporary loss of the Bettis and KAPL contracts, and the
aggressive selling of large paper machines by IBM, again brought
('ontrol Data orders to a virtual standstill for many months.

We don't have fidl information on the mnnber of the 360-90 series
computers that IBM produced. This was the computer series that was
in competition with our 6600 at that point in time.

However, we do know that this number was veiy limited and, in
fact, we believe certain models were never produced at all.

^Moreover, we also know that they suffered huge losses on the develop-
ment and manufacture of these models; losses far greater than any
corporation would normally be willing to accept unless the purpose
was to submerge competition.

By 1964 it was apparent that unless the U.S. Government again
Mould bring antitrust action against IBM we would have to resort to
legal action ourselves, and we began to build up a file of evidence of
unfair practices.

Early in 1965 we requested the Oppenheimer Law Firm in St. Paul
to analyze the situation in the light of the antitiiist laws and to pre-
l)are a presentation for (^ontrol Data's board of directors.

On July 15, 1965, a presentation was made to the Control Data
Ijoard and the Oppenheimer firm was authorized to begin to collect
evidence from Control Data's marketing staff on IB]\rs marketing
practices, which, when taken together with its market share should
spell out a violation of tlie antitnist laAvs.

The results of this investigation were submitted to the Antitrust
Division of the U.S. Justice Department as grounds for a Government
investigation of IBM which might lead to a suit by the Government
against IBM.

It was further planned that such legal efforts could serve the addi-
tional purpose of providing the foundation for a suit by Control Data
in the event the U.S. Government failed to act.

Starting in Januai-y of 1966 Control Data submitted a number of
written memorandums to the Antitrust Division and had numerous
conferences in AVashington in an effort to point out the need for imme-
diate sovernmental action ae:ainst IBM.



t 5474

I submit for the record memorandums submitted to the Justice De-
partment in January of 1966.

[See exhibit 6.]

5lr. DoxAGHUE. This document describes in detail the abuses that had
-occurred up until that time. The Justice Department exhibited some
■enthusiasm for Government action.

Tlie chief of the Antitrust Division, however, told us in October of
1966 that the chances of the Government taking action before April 1,
1968, were very slight.

Now this particular data was important to Control Data, since it
was possible that statutes of limitations might expire on certain allega-
tions concerning IBM's practices, vis-a-vis our 1604 computer.

Our collection of data on unfair marketing practices continued
through 1967 and into 1968. In the fall of 1968 it was the considered
judgment of Control Data's management that the Department of
Justice was not going to take any action against IBM.

Indeed, in early 1968 — December of 1968 — our legal counsel visited
the Depai-tment of Justice and was informed that no legal action was
contemplated.

Tlierefore. on December 11, 1968, Control Data filed suit in the U.S.
district court in Minnesota. I have a copy of that complaint, sir, which
I will also submit for inclusion in the record.

[The document referred to appears as exhibit 2 at the end of Mr.
Donagliue's oral testimony.]

Mr. DoxAGHUE. The corporation undertook this action with full
realization of the magnitude of the task that lay ahead. Preparation
and aggressive pursuit of the lawsuit against IBM would obviously
require an enormous effort extending over many years.

This wouldn't be an ordinary lawsuit. It would be technically com-
plex and there would be an enormous number of documents involved.

IB^I's defense would be massive and shrewd. Many of our em-
ployees, particularly those in the upper echelon of management, would
be required to assist the lawyers as well as participate as witnesses at
the trial.

Xevertheless, the management of Control Data felt that the lawsuit
was necessary for our survival.

The task was indeed enormous. A paralegal staff of approximately
120 people were engaged in the disco^•eI■y process, in screening be-
tween 25 and 40 million documents in various IBM files throughout
the countiy.

Of these, more than 1 million documents were copied on microfilm
as being relevant to our allegations. An automated data base was es-
tablished and software developed for an information retrieval system
to provide access to relevant documents.

Of the 1 million documents that were copied onto microfilm, between
80.000 and 100,000 were put into the automated data base.

This required extensive coding, key punching, verifying, and so
forth. AVe employed over 10 full-time laAvyers on the case and had an
additional 20 lawyers available on a part-time basis.

It is our understanding that IBM employed about five times as
many.

For their part, Ave estimate that IB^NI reviewed over 120 million
documents of Control Data's and they copied over 6 million of these



5475

as bein<:; relevant to either their defense or to a counterclaim that they
had filed against Control Data.

Up until the time of settlement in January 1DT;> our lawyeivs had
taken over 100 depositions from individuals throughout the United
States, and at the time of settlement the bulk of our effort had not
reallv be<rini.

As^ I sfated Ave did settle our case with IBM in January 1973. The
settlement called for the transfer to Control Data of their Service
Bureau Corp. subsidiary, and the payment to Control Data of $101
million.

Out of tlie $101 million, $15 million was for the settlement of Con-
trol Data's costs incurred in the preparation of the lawsuit.

It is impossible to estinuite what the total costs would have been if
we had proceeded to trial. But when you consider the additional efl'ort
involved in the construction of the case and the fact that we intended
to use our computer data base with direct access by terminal during
the trial, the costs involved would have been very large.

Xow, sir. I would like to address the issue of structural relief. As
Control Data's lawsuit proceeded the corporation retained an econo-
mist to look into the question of structural relief for the industry
with a view for increasing competition without a substantial cost to
the economy as a whole.

In 1070 a document was jjroduced by this consultant entitled,
"Achieving Etfective Competition in the Computer Industry."

I have a copy of this document and would be pleased to submit it for
the record, if you so desire.

[The document referred to appears as exhibit o at the end of Mr.
Donaghue-s testimony.]

Mr. DoNAGiiTJE. On September 1, 1970, a copy of this document was
submitted to the Department of Justice.

The divestiture measures in this plan are quite extensive and in-
volve the formation of five computer systems companies, a Federal s^-s-
tems company, a terminal company, a components company, and a
service company engaged in leasing, nuiintenance, and support of out-
of -production systems.

In addition, four vertical divestitures breaking off the Service
Bureau Corp. which Control Data has since acquired as part of our
settlement with IBM. the Office Products Division, Science Research
Associates, and World Trade Corp.

"With respect to the five computer companies, it was realized that
this would require some plant splitting. Specifically, the engineering
function and some manufacturing lines would have to be transferred.

In addition, the software functions would have to be distributed.
The plan does not envision giving each company a full line of pe-
ri]^heral products.

Forming the entities contemplated in the 1970 plan in such a fashion
as to achieve a healthy balance appeal's to be the most serious defect
of this plan.

The plan presumes that all overseas operations would be consoli-
dated in the World Trade Corp. This results in World Trade Corp.
being the largest entity, with nearly a full range of products and full
integration from components to final device.

The product line would extend from System 3 to -570-155. And this
was at that point in time in 1970. The power of the World Trade Corp.



5476

is certainly great enough under the approach of tliis plan to dominate
the other entities.

Unless the court could prevent the "World Trade Corp. from com-
peting in the U.S. market, it appears the "World Trade Corp. would
repeat historv^ by ultimately dominating the industr}'.

At the other end of the spectrum there were companies which would
have the System 3 product line with low profit margins and higli
mai'keting costs.

The service company, holding the out-of-production leases, would be
faced with intense competition from the five computer companies with
each trying to churn the lease base to get their eciuipment installed.

This suggests that there could be substantial deterioration in the
rental and purchase prices of older equipment.

The practicality of establishing a terminal company in the 1970
plan also rests upon the extent to which the other companies are di-
vorced from the terminal business.

The plan does not specifically address this issue. Assuming there
are no restrictions on the other companies, it appears that the terminal
operation might not survive except as a supplier of a limited variety
of volume produced devices.

"What I am trying to point out here is that we looked at this total
divestiture plan, and no matter which way one tried to cut or slice the
company up, it became a very difficult problem.

The problem was trying to keep some company — some part of that
organization — from substantially dominating the industry and jet
preventing the companies that were carved up from disappearing
from the scene because of the way they were split.

So, in reflecting on this plan, members of Control Data's manage-
ment were concerned about the risk of adversely affecting the U.S.
position of dominance in the world market, and also minimizing the
possibility of turmoil that some think would result from the dismem-
berment of IBM into sufficiently small entities to dissipate IB^I's
market power.

Therefore, a se^-ond plan was developed suggesting relief measures
that would lessen IBjNPs monopoly power in the general cx^mputer
market by a combination of structural relief and injunctions pro-
hibiting IBM's monopolistic practices in that market.

Additionalh', the suggested measures would immediately insulate,
and therefore avoid, IBM's potential dominance of the related markets
of data services, professional services, and i-emote terminals.

This relief proposal differs substantially in that it is not directed
specifically to restructuring the computer systems business.

The approach i-ecognizecl practical problems with restructuring the
computer systems operations and instead looks to containment to pre-
vent the spread of IBM's monopoly power into related growth
industries.

Here structural relief involves limited divestiture and div^orcement
of related activities. Specifically, the plan calls for the divestiture of
the components division, as had been mentioned in some earlier testi-
mony, the service bureau, which they have divested, and the office prod-
ucts division.

The plan would divorce IBM from the remote terminals area,
data communications, professional services, and educational services
business.



5477

The plan calls for injunctive prohibitions against essentially the
same practices proA'ided for in the Department of Justice
memorandum.

I also have a copy of this relief plan and I would also be pleased to
submit it for the record.

[See exhibit 4.]

Mr. DoNAGHUE. This plan is intended to recognize the distinct and
yet interrelated character of the many markets or subindustries that
comprise the electronic data processing sector of the economy.

It is important to recognize that the effectiveness of the proposed
relief is dependent u[)on'tlie implementation of the entire group of
measures because of their interrelationships.

The suggested measures in detail, then, are :

Divestiture of IBM's Components Division and prohibition of IBM
from reentering the business of manufacturing semiconductors and
other components.

Divorcement of IBM from the business of manufacturing and mar-
keting remote terminals and communications-oriented equipment,
including data base jjreparation equipment applicable to remote
terminals.

Divestiture of the service l)ureau and divorcement of IBM from data
services and time-sharing businesses.

Divorcement of IBM from the business of providing professional
services, and education or training — other than providing those serv-
ices associated directly with its computer sales — and divestiture of
Sciences Research Associates.

Divestiture of IBM's Office Products Division and di\orcement of
IB]\[ from the type of business conducted by that division.

^Mandatory use by IB^SI of higher order languages, and mandatory
disclosure of product specifications and design technology leading to
hardware and software coni})atibility.

Prohibitions against unfair and predatory pricing pi-actices. includ-
ing, (a) bundling, (b) hidden discounts, (c) discriminatory pricing,
and (d) fighting machines.

Prohibtion against marketing "paper"' machines.

These measures of structural and injunctive relief nuist be coupled
with a suitable means of policing. To enhance its effectiveness, the court
decree should contain provisions permitting IB^I competitors and
customers to bring enforcement actions.

IB^I's persisting market dominance is founded in its monopolistic
share of the general purpose computer market, certain IBM-induced
structural characteristics of the computer business that particularly
entrench and magnify a dominant market share, and IBM's exploita-
tion of certain unfair marketing practices.

I I)M has created and l)uttressed its power with a set of ''technological
and market tie-ins" which enhances its al)ility to structure in ways to
insulate its market position fiom competition.

In addition. Il^M threatens to extend its domination of the computer
market to the related markets of data services, professional services,
education, and remote terminals — all markets suited to effective com-
petition among smaller companies.

In summary. I consider that the decision to bring suit against IBM
was extremely courageous on the part of Control Data's management.

However, if the Government had pursued its suit against IBM



5478

earlier we would not have taken this step. In retrospect this was also a
very sound step from the business viewpoint.

In addition, the settlement also involved a sound business decision.

In fact, Mr. Norris, our chairman and chief executive officer, lias
called this "'the best business decision" he had ever made.

Senator Hart. Thank .you very much. I'm really not sure what
conclusion to draw from the chronology, and I'm satisfied that vary-
ing- conclusions, depending upon who looks at it will be drawn. But
from your testimony it would appear that in January of 1966 Control
Data went to the Department of Justice; that in December of that
same year Control Data filed its action.

The Department, just about 3 years after Control Data, went to
hie its action, and trial is expected to begin tliis year.

That would be close to 9 years after filing the complaint. Is my
chronology correct ?

]Mr. DoxAOHUE. ^fostly Senator, except on one point. We did file
a memorandum with the Government in 1966. We did not file our
complaint until December of 1968.

Senator Hart. 1968 ?

Mr. DoxAGHUE. Yes. Through 1967 and 1968 we were compiling-
evidence, and we went to the Justice Department in December of 1968
and asked were they goiiig to do anything: and the answer was that
no action was contemplated, so on the lltli of December we filed.

Then, on the last day of the Johnson administration they filed. So
they actually did file 1 month after us, l)ut 1 month before, for some
reason, they contemplated no action.

Senator Hart. I think Mr. Chumbris had a comment.

j\Ir. Chumbris. Thank you very much, ]Mr. Chairman.

Mr. Donaghue, hrst we thank you for comiiig-. Unfortunately.
Mr. Donaghue, we didn't get your statement until about 5 p.m. last
night and it's regrettable.

I only bring this up because we have had this problem before. I'm
onl}^ saying it for the record so that people who come before the
subcommittee in the future will bear in mine! that you and many other
businessmen have a particular problem. You want to present it to the
subcommittee in your best light, but when we don't get a statement
until the end of a long day of heai'ings, we have to take the statements
of all the witnesses who are going to testify and then spend the rest of
the night analyzing those statements. It really isn't conducive to the
best type of a legislative hearing.

That's why we have the rule that statements should be submitted
72 hours in advance, so that staff can go over them, the Senators can
go over them, and then they will be able to engage in colloquies with
the witnesses for a more complete record.

The significant point is that some of the material that's in your state-
ment and the two statements that are to follow are basic but conti'o-
versial. If Ave had those statements last week then we would have been
able to engage in colloquies Avith the prior witnesses on those issues
for a more complete record.

I think it makes the plea that you were trying to stress before the
subcommittee more difficult, because Ave don't get a complete record.

XoAv. I mentioned earlier during the hearings, that Mr. Hellerman.
Avho Avas handling computer industries issues, and I took the trouble



5479

to go to California to visit plants and attended a 3-day conference
of the computer industry about 18 months ago so we could learn how
computers were made and learn of the problems facing the industry.
That was fine, but we have not been able to get the details that you
were to bring out in your paper and the papers of two economists.
AVe're learning some of the details for the first time. This is the first
hearing I can remember in 17 years, Mr. Chairman, with the impor-
tance of this particular issue before us, that not one, including IP)]M,
not one of the companies Avhich are concerned about this particular
problem bothered to send us the background material of Avhat the key
issues were going to be during the course of these hearings.

Xow, with Genera] :\Iotors, A.T. & T. and with the oil industry
hearings coming up we have had plenty of opportunity eitlier to go
to them or they come to us to give us this basic data.

It seems to me it places this subcommittee and some of the Senators
at a disadvantage in trying to get to the key issues.

Xow, I will say that Jack Pierce, on behalf of the Compu.ter Indus-
trv Association, 2 or ?> months ago, did furnish some background which
has been helpful. And Mr. McGurk and ]\Ir. Biddle. when we were in
California 18 months ago. were very courteous and helpful in arrang-
ing toure of some of the plants we A'isited.

I bring this up because this is a very significant hearing. It's a tough
issue that the subcommittee is going to have to wrestle witli. But if we
don't have the information ahead of time we are not going to be able
to get. at least in this first round, as good a record as we have developed
in the other hearings — that we held and we are going to hold.

If it sounds like I'm chastising the peoi)le VN-ho are appearing before
us, I'm sorry. But it's for the benefit of the witnesses and the people
who are interested in a legislative purpose to be able to present the
statements in plenty of time.

I'm sorry, Mr. Chairman, but I liad to say this.

Senator Hart. I^et me, without softening the message, explain to
the Avitness that it's a perfectly valid comment, but it's not aimed
at him.

It is a problem this subcommittee has long wrestled with. ]Mr. Clium-
l)ris is right. The staff is nuich better al^le to develop the kind of
record that all of us try to have if the testimony is available to them
under the rules of 72 hours in advance.

It's altogether possible that there are some witnc^sses who are sensi-
tive about appearances, who would think it wrong to talk to the staff
I] months ahead of time and some inquiring rejiorter could make tliat
a very ominous and questionable piece of conduct.

The truth is it would not be fair but I suspect that there are some
who think the better course of wisdom is to stay away from us.

Mr. DoNAGiiUE. Senator, I have no hesitation at all of visiting with
the staff. As a matter of fact I have done this witli some of the staff
membei*s in the past.

It was my imjiression in sul)mitting tliis information this morning
that this is the beginning of a dialog and I was giving you a viewpoint
here.

I would like to say here and now that I'd be glad to come back
any time, either informally or formally, and i-espond to whatever
questions j^ou may have about my testimony or with respect to all
the documentation that is here.



5480

I thought we were just opening up the discussion and that this
round of hearings was the first round and that Me would be called
back, because it is a deep and complex subject that you've heard this
week. There are many different views on structurarrelief, many dif-
fering views on whether you should or should not do anything with
IBM or the industry. So, I'd say I'm available at any time.

Senator Hart. Well, I don't Imow how many "people do read the
record but the 72-hour rule should be observed.

Mr. O'Leary?

Mr. ( )"Leary. Mr. Donaghue, why did you: settle ?

Mr. DoxAGHUE. I think I mentioned, Mr. O'l^ary, that that was a
business decision made on the part of Control Data', and the reasons
are many.

One, the Justice Department had the suit underway. If you recall
my statement that if Justice had started the suit earlier we would
not have gotten involved.

Two, our suit was using a great deal of time on the part of Con-
trol Data versus management and the costs were extremely high.

Three, we felt that the offer for settlement on the part of IBM was
reasonable.

Mr. O'Leary. Was destruction of the data retrieval system a con-
dition of the settlement ?

Ml'. DoxAGHUE. My understanding is that the destruction of the in-
dex was a condition of settlement.

Mr. O'Leary. With respect to the question of relief, I note that
both of the plans call for a divestiture of IB^I's component produc-
tion facilities.

I take it you believe that that is feasible and would not retard the
advance of technology ?

Mr. DoxAGHUE. I do.

Mr. O'Leary. Second, I take it you also believe that any relief plan
has to come to grips with IBM World Trade. If relief just applies to
IBM's domestic facilities, is it your view that World Trade would
enter the U.S. market and dominate it ?

Mr. DoxAGiiuE. I don't see any way we coidd really stop them. If
3'ou break the others up into sufficiently small entities to dissipate
their market power in the United States, the Woi'ld Trade Corp. is
a single eiitity, and as you probably realize, it has becorae two dis-
tinct eiitities in recent months, but nevertheless, its manufacturing
capability, research and development capability, and marketing capa-
bility Avould certainly make it still the most powerful computer com-
pany in the world by a factor of two to three, if not four to five.

And I might also add, as far as com])uter systems growth is
concerned, IBM World Trade Corp. is in the fastest growing part of
the foreign marketplace.

Mr. O'Leary, From the point of view of one with experience in
the industry, would it make sense to link some of IB^I's domestic



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 65 of 140)