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 67 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 67 of 140)
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achieve a healthy balance appears to l)e the most serious defect in this plan.



5487

The Dlan presumes that all overseas operations would be consolidated in the
AVorld Trade Corporation. The results in World Trade Corporation being the
lir-est entity with nearly a full range of products and full integration from
coiuponents to final device. The product line would extend from System 3
to S70/155 The power of the World Trade Corporation is certainly great enough
under the approach of this plan to dominate the other entities. Unless the
rourt could prevent the World Trade Corporation from competing in the U.S.
market, it appears the World Trade Corporation would repeat history by
ultimately dominating the industry.

\t the other end of the spectrum, there are companies which would have the
Svstem 3 product line with low profit margins and high marketing costs. The
Service Company, holding the out-of-production leases, would be faced witli
intense competition from the five computer companies each trying to "churn
the lease base" to get their equipment installed. This suggests that there couhl
be substantial deterioration in the rental and purchase prices of older equipment.
The practically of establishing a Terminal Company, in the 1970 plan, also
rests upon the extent to which the other companies are divorced from the termi-
nal business. The plan does not specifically address this issue. Assuming there
are no restrictions on the other companies, it appears that the terminal opera-
tion might not survive except as a supplier of a limited variety of volume pro-
duced devices.

In reflecting on this plan, members of Control Data's management were con-
cerned about the risk of adversely affecting the U.S. position of dominance
in the world market and minimizing the possibility of turmoil that some think
would result from the dismemberment of IBM into sufficiently small entities
to dissipate IBM's market power. Therefore, a second plan was developed
suggesting relief measures that would lessen IBM's monopoly power in the
general computer market by a combination of structural relief and injunctions
prohibiting IBM's monopolistic practices in that market. Additional, the sug-
gested measures would immediately insulate and therefore avoid IBM's potential
dominance of the related markets of data services, professional services and
remote terminals.

This relief proposal differs substantially in that it is not directed specifically
to restructuring the computer systems business. The approach recognized
practical problems with restructuring the computer systems operations and
instead looks to containment to prevent the spread of IBM's monopoly power
into related growth industries.

Here structural relief involves limited divestiture, and dP'orcement of related
activities. Specifically, the plan calls for divestiture of the Components Division,
the Service Bureau Corporation, and the Office Products Division. The plan
would divorce IBM from the remote terminals, data communications, profes-
.sional sei-vices, and educational .services business. The plan calls for injunctive
prohibitions against essentially the same practices provided for in the Depart-
ment of Justice memorandum. I also have a copy of this relief plan which I
would also be pleased to submit for the record.

This plan is intended to recognize the distinct and yet interrelated character
of the many markets or sub-industries that comprise the electronic data process-
ing sector of the economy. It is important to recognize that the effectiveness of
the proposed relief is dependent upon the implementation of the entire group of
measures because of their interrelationship.
The suggested measures are :

Divestiture of IBM's Components Division and prohibition of IBM from
re-entering the business of manufacturing semiconductors or other
components.

Divorcement of IBM from the business manufacturing and marketing
remote terminals and communications-oriented equipment, including data
preparation equipment applicable to remote terminals.

Divestiture of the Service Bureau Corporation (SBC) and divorcement
of IBM from the data services and time-sharing businesses.

Divorcement of IBM from the business of providing professional services,
and education/training (other than providing those services associated
directlv with its computer sales), and divestiture of Science Research Asso-
ciates (SRA).

Divestiture of IBM's Office Products Division and divorcement of IBM
from the type of business conducted by that Division.



5488

Mandatory use by IBM of higher order languages, and mandatory dis-
closure of product specitications and design technology leading to hardware
and software compatibility.

Prohibitions against unfair and predatory pricing practices, including (a)
bundling, (b) hidden discounts, (c) discriminatory pricing, and (d) "fight-
ing machines."

Prohibition against marketing "paper machines."
These measures of structural and injunctive relief must be coupled with a
suitable means of ix)licing. To enhance its effectiveness, the court decree should
contain provisions permitting IBM competitors and customers to bring enforce-
ment actions.

IBM's persisting market dominance is founded in its monopolistic .share of
the general purpose computer market, certain IBM-induced structural character-
istics of the computer business that particularly entrencli and magnify a domi-
nant market share, and IBM's exploitation of certain unfair market practices.
IBM has created and buttressed its power with a set of "technological and
market tie-ins" which enhance its ability to structure the market in ways to
insulate its market position from competition.

In addition, IBM threatens to extend its domination of the computer market
to the related markets of data senaces, professional services, education and re-
mote terminals — all markets suited to effective competition among smaller
companies.

In summary, I consider that the decision to bring suit against IBM was ex-
tremely courageous on the part of Control Data's management. However, if the
Government had jiursued its suit against IBM earlier we would not have taken
this step. In retrospect this was also a very sound step from the business view-
point. In addition, the settlement also involved a sound business decision. In
fact, Mr. Norris, our Chairman and Chief Executive Officer has called this "the
best business decision" he had ever made.



Exhildt 2. — Copy of Complaint, Control Data Corp. v. IBM

In the District Court of the ITnited States for the District of Mixxesota,

Third Dhision

Civil Action No. :
Filed :

Control Data Corporation, plaintiff,

vs.

International Business Machines Corporation, defendant.

complaint

Plaintiff, Control Data Corporation, brings this action against Defendant,
International Business Machines Corporation, and complains and alleges as
follows :

I. jurisdiction and venue

1. This complaint is filed and this action is instituted imder Sections 4 and 1<3
of the Clayton Act (15 U.S.C. Sections 15 and 26). and pursuant to 28 U.S.C. Sec-
tion 1337, in order to recover damages for past violations and to obtain injunc-
tive relief against continuing violations of Section 2 of the Sherman Act (15
U.S.C. Section 2).

2. Defendant International Business Machines Corporation (hereinafter "De-
fendant IBM") maintains offices, transacts buisness and is found within the
District of Minnesota.

11. parties

3. Plaintiff is a coriJoration organized under the laws of the State of Delaware
with its principal place of business and administrative headquarters in Bloom-
ington. Minnesota. It is the assignee of and successor in interest to Control Data
Corporation, a Minnesota corporation organized in 1957. Plaintiff is engaged in
the development, design, manufacture and marketing of computers, related



5489

l)erii)lier:il equiinneut, supplies and services iu comiietitiou with Defendant IBM.
I'laintilf niantains mannfacturini;-. research, and sales facilities throughout the
United States and in a uuniber of foreign countries.

4. Defendant IBM is a corporation organized under the laws of the State
i>f New York and is engaged in the development, design, manufacture, and
marketing of computers, related peripheral equipment, supplies and services.
Defendant IB:M maintains manufacturing and research facilities at numerous
locaticns throughout the United States and ahroad, and markets its products
and related services from well over 1,000 offices located in the United States and
in at least 105 foreign countries.

III. DEFINITIONS

5. As used in this Complaint, unless otherwise indicated or qualified :

(a) "Computer" means a general purpose stored program digital computer
system which is an electronic device designed to solve many types of data
processing or computational problems, the exact nature of which problems
may have been unknown at the time of its de.sign ; in solving such problems, all
iiiuintities and variables of data are represented by alphameric characters
which are expressed as discrete or discontinuous electrical impulses and trans-
ferred into and stored in the device together witli one or more programs or
sets of instructions, also represented by electrical impulses, which internally
stored programs direct or cause the performance of sequences of arithmetic
and logical operations with respect to the data as well as such internally stored
programs. "Computer" includes input and output devices and their control units ;
storage, arithmetic, control and logical units; and associated basic software.

(b) "Peripheral equipment" means those units of a computer, as above de-
Hned, consisting of such equipment as input or output and external information
storage devices.

<cl "Tabulating equipment" means machines and devices used for entering,
converting, receiving, classifying, computing, and recording data by means of
punched paper or tabulating cards. Tabulating machines and devices may be
electrically connected to computers (in which case, they are included within
tile detinitions of "computer" and "peripheral equipment''), or an interconnected
group or grouping of such machines and devices may perform their task me-
chanically or electro-mechauically entirely independent of a computer, generally
controlled by means of externally wired programs (in which event they are
referred to as "tabulating systems").

(d) "Hardware" means the mechanical, magnetic, electrical and electronic
devices and other tangible components of a computer, including peripheral
equipment, as contrasted with software or programs.

(e) "Programs" or "software" are routines or sets of instructions which con-
trol the operation of the hardware. Programs or software can be of several types,
including operating system programs, compiler and assembler programs, and
applications programs. "Operating system programs" are programs controlling
such elements of the fundamental operation of the computer as flow of jobs
and data within the computer. "Compiler and assembler programs" are pro-
grams wliich translate higher level languages and special codes to a form
acceptable to the computer, "Applications programs" are programs developed to
perform certain predetermined computations for specific jobs or problems and
usually function in conjunction with an underlying operating system program.

(f) "Compatibility" or "compatible" means that one model or class of com-
puter will translate, execute and process instructions or data which another
model or class of computer also translates, executes, and processes without
siguificant conversion or modification of the instructions, data or either computer.

(g) "C<imputer markets" or "interstate and foreign computer markets" means
each and every one of the three markets defined in Paragraph 17, and ".sub-
markets" means each and every one of the submarkets within each of said
three markets, as identified in Paragraph 18.

IV. TRADE AND COMMERCE

Ulxiunj (if the itultistri/

6. Defendant IBM has manufactured and marketed the vast majority of the
world's computers. A large part of the computer industry built upon and is the
successor to the tabulating system industry, having substantially displaced the
tabulating system industry due to the far greater capabilities of computers.



5490

Computers are capable of processing immense quantities of data and solving
extremely complex problems at speeds measured in millionths and billionths of
a second. By contrast, tabulating systems were suitable only for the relatively
slow and routine tabulating of information, although tabulating equipment
continues to be used both by itself and in conjunction with computers.

7. In 1952, Defendant IBM owned approximately 90 per cent of all tabulating
systems in use in the United States. In that year, the United States of America
filed a civil action alleging that Defendant IBM had violated and was in viola-
tion of Sections 1 and 2 of the Sherman Act in that it had monopolized, attempted
to monopolize and was then monopolizing interstate and foreign trade and
commerce in the tabulating industry and had entered into contracts, agreements
and understandings in luireasonable restraint of interstate and foreign trade
and commerce in tabulating equipment and tabulating cards.

8. This litigation culminated in 1956 with the entry of a Final Judgment
by consent of the parties which Judgment included requirements, among others,
that Defendant IBM offer customers an opportunity to purchase as well as lease
tabulating systems and computers, cease engaging in the service bureau business
except through a separate corporation (subsequently, its subsidiary. The Service
Bureau Corporation), and grant nonexclusive licenses under its existing and
future patents relating to computers and tabulating systems.

9. The first experimental electronic digital computer was conceived and con-
structed commencing in the late 1930's, and several early computers were built
during World War II for defense applications. The first commercial computer
was delivered in 1951, and by 1953 approximatey 50 small computers were
installed in the United States, some of which had been installed by Defendant
IBM. By the end of 1956, approximately 570 computers had been installed in the
United States, having a cumulative value of about $340 million. The growth of
the computer industry has been very rapid since that date, with over 37,000
computers installed in the United States at the end of 1967, plus approximately
17,000 additional computers manufactured by United States companies and
installed in foreign countries as of that year end. Tlie total purchase value of
these United States and foreign installations was approximately $18 billion.

Growth of defendant IBM

10. Since delivery of its first commercially marketed computer in 19-53, De-
fendant IBM has experienced imposing growth, due principally to the manu-
facture and marketing of computers. In 1967, Defendant IBM was the eighth
largest industrial company in the United States in terms of revenues and tlie
fifth largest in terms of profits. The total stock market value of Defendant IBM's
common shares has recently approached .$42 l)illion. the highest of any private
corporation in the world. Such value exceeds the combined value of the shares
of approximately two-thirds of the companies which comprise the Dow-Jones
industrial average.

11. In 19.55, gross I'evenue of Defendant IB^I and its subsidiaries from all
activities was .?696,294,457. Five years later, in 19<j(). such revenue had almost
tripled to $1.816,882,2.59. By 1967. revenues of IBM and its subsidiaries had again
tripled to $5,345,290,993. representing an increase in revenue of $4,648,996,536 over
the 1955 level or over 650 per cent. The 1967 revenues exceeded 1966 revenues
by over $1 billion or slightly more than 25 per cent. Revenues for the first nine
months of 1968 were .$4,908,971,604. representing an increase over tlie com-
parable 1967 period of $1,159,385,281 or more than 31 per cent.

12. Xet earnings after taxes of Defendant IBM and its .siTbsidiaries amounted
to $72,695,855 in 1955. In 1967. IBM's net earnings after taxes amounted to
$651,499,558, representing an increase of $578,803,703. or almost 800 per cent
over the 1955 level. The 1967 net earnings exceeded 1966 net earnings by
$125,369,366 or almost 24 per cent, and net earnings for the first nine months of
1968 exceeded the comparable 1{^>67 period l>y over 37 i>er cent, after giving
effect to the 10 per cent income tax surcharge ajiplicalde to 1968.

13. In 1955. net return of Defendant IBM and its subsidiaries on gross revenue
(net earnings after taxes as a per cent of gross revenue from sales, service and
rentals) was approximately 10 per cent. In 1967. net return of Defendant IBM
and its subsidiaries on gross revenue was approximately 12 per cent, reflecting an
increase in said net return of almost one-fifth over the 1955 level.

14. In 1965. Defendant IBM spent $210.9.32.946 on re.search and development
activities alone, an amount in excess of the value of computer shipments by any
other manufacturer in tliat year. This was an increase of almost $90,000,000 over



5491

the amount it spent in 1961. Defendant IBM has continued to siieud in excess of
5 per cent of its total revenues annually for product research and development,
expenditures substantially exceeding the dollar value of annual computer ship-
ments which most other manufacturers individually have been able to achieve.

15. During 19G7, sales, service and rentals by Defendant IBM and its subsidiaries
of computers accounted for well over two-thirds of its gross revenues. Most
revenues were derived from lease rather than sale of computers. Defendant
IBM is the largest manufacturer-lessor of personal property in the world, with
in excess of 80 per cent of its computers on lease the purchase value of which as
of year end 1967 was approximately .$11 billion.

16. Worldwide emplovment by Defendant IBM and its subsidiaries during 1967
grew by over 23,000 to more than 221,000. As of May 31, 1966, Defendant IBM and
its subsidiaries employed approximately 55,000 salesmen, systems engineers and
customer engineers throughout the world of which approximately 32.000 were
employed by Defendant IBM in the United States, its territories and possessions.
The number of such employees has increased substantially since that date.

Definition of markets

17. The parts of trade or commerce wherein Defendant IBM has committed the
violations of law hereafter alleged consist of (i) the manufacture of computer.^
l)y United States companies or other companies and the marketing or distribution
of such computers in the United States by such companies, (ii) the manufacture
of computers by United States companies or by foreign companies controlled by
tliem and the marketing or distribution of sixch computers in foreign trade or
commerce by such I'nited States and foreign companies, and (iii) a combination
of (i) and (ii). any one of which individually constitutes a part of trade or
conunerce among the several states or with foreign nations within the meaning
of Section 2 of the Sherman Act.

IS. Within each of said three markets exist several product submarkets, iden-
tifial)le on the basis of unique or distinctive features or characteristics of the
computers or unique requirements or preferences of the eiistomers in such sub-
markets. Such sulimarkets may lie delineated, for example, on the basis of (ii
differing capacity and processing si)eed of the comi)uters. as generally retlected
in different sale and lease prices, (ii) differing application or mode of opera-
tion of the computers, as often reflected in the differing industry classification
of the users of such computers, or (iii) combinations of (i) and (ii). Each sub-
market of each of the tliree markets identified in Paragraph 17 individually
also constitutes a part of trade or commerce among the several states or with
foreign nations within the meaning of Section 2 of the Sherman Act.

V. VIOLATIOXS OF I,.\W

First count: Monopolization

19. For many years and to the present time. Defendant IBM, directly and
througli its subsidiaries, has i)ossessed monopoly power in the interstate and
foreign computer markets and submarkets, which power it has willfully acquired
and maintained, and Defendant IBM has there monopolized and combined or
conspired with its subsidiaries to monopolize said markets and submarkets in
violation of Section 2 of the Sherman Act.

><<'cun(l count: Attempt to monopolize

20. For many years and to the present time, Defendant IBM, directly and
through its subsidiaries, with a dangerous probability and likelihood of suc-
ceeeding, has engaged in overt acts and conduct witli the specific intent to in-
jure or destroy competition in and monopolize the interstate and foreign com-
l)uter markets and submarkets, and Defendant IB:m has thereby attempted to
monopolize said markets and submarkets in violation of Section 2 of the Sher-
man Act.

Monopoly poucr in the computer markets and suhmurkets

21. Defendant IBM for many years has possessed, or has had a dangerous
probability and likelihood of possessing, power to control prices or exclude
<-ompetition with respect to the interstate and foreign computer markets and
sulimarkets :

Market share of tlefendant IBM and relative sizes of competitors — 19.',3
through W(J2

(a) Defendant IB^M's first commercially marketed computer was the model
designated the 701, initially delivered in 1953. The only other significant com-



5492

luercial mauufacturer of computers at the time was Remington Rand, Inc., which
had acquired two companies whose flrst deliveries of computers preceded delivery
of the IBM 701 hy more than two years. By the end of 1956. measured on the
basis of total dollar purchase value of installed computers at that time ("•cumu-
lative dollar value"). Defendant IBM held over 70 per cent of the interstate
and foreign computer markets, and, when measured in terms of total dollar
purchase value of computers installed during that year (•'incremental dollar
value"), Defendant IBM held over 75 per cent of said markets. Through the
remainder of the 1950's, Defendant IBM maintained and increased its share
of the computer markets and, in the early 1960's, with the advent of so-called
'•second generatiou" transistorized computers, Defendant IBM continued to
dominate and in fact further increased its percentage share. By 1962, whether
measured in cumulative dollar values or incremental doUar values, Defendant
IBM held shares of tlie interstate and foreign computer markets ranging be-
tween 77 per cent and 90 per cent.

(b) During the 19o0's. several companies in addition to Defendant IB:\I and
Remington Rand. Inc., developed and began to manufacture and market com-
puters. Despite very rapid growth of the computer markets, however, and whether
measured in terms of cumulative or incremental dollar values, throughout the
period 1956 tlirough 1962 none of the said companies obtained more than a 5
percent share of any interstate or foreign computer market and cumulatively all
of these companies did not achieve more than a 15 percent share of any market
and t.vjyically held well below this share. Similarly, during this period.' installa-
tions by Remington Rand. Inc. declined to where, by 1962. they approximated 7
to 8 percent of said markets measured in cumulative dollar values and 3 to 4
percent measured in incremental dollar values.

Market share of defendant IBM and relative size of enmpetitors — 1902
to present

(c) During the period 1962 through 1965, several of the other computer manu-
facturers began to experience modest success in marketing computers ; there
were indications of a possible challenge to Defendant IBM's predominant posi-
tion in the interstate and foreign computer markets. As a result of orders for
computers received during 1962-19(i4, United States computer manufacturers
competing: with Defendant IB:\I together accounted for shares approximating
35 percent of the incremental dollar value of installations during 1964 and 1965
in said markets, although Defendant IBM's shares of said markets measured in
cumulative dollar values at each year end remained well above 70 percent.

(d) On April 7. 1964. Defendant IBM announced and began to formally market
its System/360 series of computers which it said represented the most important
new product announcement in Defendant IBM's liistory. Defendant IBM stated



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 67 of 140)