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 68 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 68 of 140)
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that System/360 marke^l a new era in the development of computers. Esurient
marketing by Defendant IB:m of System/360 resulted in unprece<lented customer
orders and, as a corollary, with the installation of the new computers, brought
about Defendant IBM's anticipated resurgence of market position. Of an esti-
mated .$3.7 billion in computers installed worldmde by United States manufac-
turers during 1966. Defendant IBM installed api)roximately .$2.5 billion or 68
percent. During 1967, the estimated value of worldwide installations of com-
puters by domestic manufacturers rose by almost .$2.2 billion over installations
during 1966, to .$5.9 billion. Defendant IBM's installations rose by $1.7 billion,
to approximately .$4.2 billion during 1967. thus accounting for over 77 percent of
the increased value of 1967 installations. Furthermore, Defendant IBM's installa-
tions during 1967 represented an increase over its instaUations in the preceding
year of api>roximately 70 percent, substantially exceeding the growth rate for
the other domestic computer manufacturers during 1967 which was alwut 40
percent. Accordingly, when measured by incremental dollar values. Defendant
IB^I's sharcvs of the interstate and foreign computer markets increased from
between 62 and 70 percent duiing 1966 to between 70 and 76 perc-ent during 1967 :
moreover. Defendant IBM's computer installations during 1968 have continued
at such high levels that its sliares of said markets, whetlier measured in cumu-
lative dollar values or incremental dollar values have and will substantially
exceed its 1967 shares.

(e) Despite the continued extraordinary growth of the interstate and foreign
computer markets, the small sliares thereof held by Defendant IBM's competitors
by 19G7, individually or as a group, almost paralleled in size the shares held by
the firms which were attempting to compete in 1962. Thus, in terms of incremental
dollar values, the second largest domestic manufacturer's worldwide installations


of computers during 1967 amounted to about 5.9 per cent of the total worldwide
installations by United States manufacturers, followed by the third largest, with
about 5.6 per c-ent of the total. The next live tirms each accounted for from 2 per
cent to 4 per cent of the total and the remaining firms combined accounted for
approximately 1.7 per cent of the total. In terms of cumulative dollar values, the
second largest domestic manufacturer's worldwide installations of computers at
the end of 1967 was estimated at approximately 7 per cent of the total installa-
tions. The next seven firms each accounted for from .7 per cent to 5.3 per cent of
the total. All other firms combined accounted for approximately 1.5 per cent of
the total.

(f) Relative to the value of completer installations by any of its competitors,
installations by Defendant IBM are immense. During 1966, Defendant IBM's
estimated incremental dollar value of worldwide computer installations exceeded
its next largest domestic competitor by over $2.2 billion or 9 times, whereas dur-
ing 1967, Defendant IBM exceeded its next largest competitor by over $3.8 billion,
or over 12 times. Relative to the ninth largest domestic computer manufacturer,
Defendant IBM's estimated incremental dollar value of such installations during
1967 was more than $4.1 billion larger, or SO-fold larger. In terms of cumulative
dollar values. Defendant IBM's estimated $12.5 billion in worldwide installations
at the end of 1967 exceeded its next largest domestic competitor by approximately
$11.3 billion or 10 times. Relative to the ninth largest manufacturer. Defendant
IBM's estimated cumulative dollar value of such installations at the end of 1967
was almost 100 times greater.

(g) Defendant IBM's shares of and relative size in the computer markets are
closely reflected in its shares of and relative size in the computer submarkets.
Given its dominant position in the computer markets, over the years Defendant
IBM's shares of many computer submarkets have approached and even exceeded
90 per cent. While on occasion certain other companies, in spite of Defendant
IBM's power and activities, have managed to obtain shares of certain submarkets
somewhat larger than their shares of the computer markets, these rare successes
liave typically been destroyed or overwhelmed by Defendant IBM's overall power
in other compiiter markets and submarkets, and Defendant IBM has emerged
with sliares of such submarkets equal to or exceeding its shares of the computer
markets generally.

Barriers to effective entry into the computer markets and siibmarketft

(h) Over the years, a number of domestic companies attempting to complete
with Defendant IBM have abandoned their efforts to manufacture and market
computers. The few companies which have remained have been unable to pene-
trate Defendant IBM's dominance. This has been due to the structure of, and the
existence of substantial barriers to effective entry into the computer markets
and submarkets, which structure and barriers have been consciously nurtured,
complemented and constructed by Defendant IBM. Thus, despite the fact that
at the end of 1967 the cumulative dollar value of worldwide installations by
United States manufacturers exceeded the value of installations one decade
earlier by almost 3,000 per cent, and the incremental dollar value of such installa-
tions during 1967 exceeded the value of such installations during 1957 by over
2,200 i)er cent, the number of companies individually accounting for at least one-
half per cent of either the cumulative or incremental dollar value of such in-
stallations had remained essentially constant at approximately 10. Moreover,
aside from these, the incremental dollar value of worldwide computer installa-
tions during 1967 by all other domestic manufacturers combined accounted for
significantly less than 1 i^er cent of the total.

(i) A significant deterrent to effective enery into the computer markets and
submarkets is the potential entrants require massive aggregations of capital for
research and development, to find computer leases, and to provide associated
software and maintenance services.

(i) The vast quantity of computers which Defendant IBM has installed, as
well as the extreme complexity of computers, gives Defendant IBM a substan-
tial advantage over competitors or potential competitors in the sale or lease of
computers in that :

(i) The numl>er and variety of programs available for use on any manufac-
turer's computer, as well as personnel trained to write programs for, operate and
maintain the computer, are all proportionate to the number of computers which
that manufacturer has installed.

(ii) A substantial number of customer personnel engaged in use or procure-
ment of computers were trained on Defendant IBM's computers or formerly


emi)lo.ved by Defendant IBM, and tliey thus are more familiar witli and pre-
disposed toward Defendant IBM's computers. Moreover, due to the complex
nature of computers and. in general, the short supply of trained personnel, com-
puter customers frequently are compelled to rely upon a computer manufactur-
er's representations and apparent reputation.

(iii) There is considerable customer resistance to change computer manufac-
turers. In addition to the cost of hardware, a customer spends substantial sums
in training personnel to use the computer, in programming, and in preparing his
data and his site for the computer, a large proportion of which expenditui-es ma.v
have to be duplicated if the customer replaces that computer with another manu-
facturer's computer.

Profits and pricing power

(k) A number of computer manufacturers have l)een forced to abandon tlie
computer markets and submarkets due to inability to realize profits and, indeed,
most companies which remain have absorbed signifieant losses. Defendant IBM,
on the other hand, has continuously enjoyed substantial profits and a wide choice
of profitable alternatives in the manufacture and marketing of its computers.

(1) Defendant IBM exercises price leadership in the computer imUistry, and,
therefore, the sale and lease prices and other terms and conditions of computers
manufactured and marketed by other companies must in large part be determined
by them relative to prices, terms and conditi(ms established by Defendant IBM.
Moreover, Defendant IBM's pricing power is enhanced because over the years its
product line has blanketed the industry, whereas the smaller companies have
typically been forced to concentrate on the design, manufacture and marketing
of more limited product lines.

22. The manufacture and marketing of computers is one of the most rapidly
growing and important segments of the X'nited States economy and contributes
sul)stantiall,y to the technological leadership of the nation as well as its national
defense. Despite the entry of a Final Judgment directed against Defendant
IBM's power and activities in the tabulating systems industry. Defendant IBM
built upon its power witliin that industry to achieve similar dominance in the
computer markets and submarkets by the mid-1950's and has retained such power
up to the present time.

Exclusionary p radices

23. Defendant IBM, directly and through its sulisidiaries, has wilfully acquired
and maintained monopoly power in the computer markets and submarkets, or has
had tlie specific intent to obtain such power, in that it has consciously, delib-
erately, or intentionally engaged in the following acts, behavior, conduct and
practices, among others :

Deiielopmrnf, dclivrrif, and pcrfornwnre of hardivare and software —
''Paper machines and pliantom compntern''

(a) It has misrepresented the status of design, development, production, and
performance of certain of its computers, and programs or software for certain
computers, particularly with regard to the capabilities and availability of large
size computers, time sharing computers, and compatibility between models
of computers, all for the purpose or with the effect of depriving customers of
the opijortunity to accurately evaluate competitive computers, thus obtaining
or retaining customers for itself and depriving Plaintiff and other manufacturers
of sales ;

(b) It has, as a means of obtaining or retaining customers and depriving
I'laintiff and other manufacturers of sales, offered to lease, sell, or make delivery
of, and has entered into agreements to lease, sell, or make delivery of computers,
software or programs which were not yet in production, for which it was not
read.v to commence production, and as to which it had no reasonable basis for
l)elieving that production or delivery could be accomplished within the time
periods specified by such offers or agreements :

(c) It has. having prematurely announced and marketed its computers to
deprive its competitors of sales and due to computer develojiment and production
deficiencies arising from such prematurity, frequently changed and delayed its
previously announced or promised delivery schedules as well as announced
or introduced changes in. or cancellations of, certain types or models of computers,
their si>ecifications and alleged capabilities, thereby creating confusion in the
market and, at great cost to its competitors and its customers, deferring procure-
ments until its competitive deficiencies could lie discovered or overcome and maxi-
mizing its revenues on outdated computers on lease :


(cl) It has repeatedly cntert'd into contnicts. comuiitiiients, and letters of
intent in which it was obligated to furnish computers and software and. having
deprived its competitors of such sales, has then failed to fultill the obligations
undertaken in such contracts, commitments, and letters of intent ;

(e) It has consistently induced customers, upon the execution of a contract
with it, or even prior thereto, to expend substantial sums of money preparing
data, training personnel, preparing a site for the computer, and preparing for
the use of certain software or programs, all for the purpose or with the effect
of irrevocably tying the customer to its computer irrespective of actiial delivery
i.r performance of the computer or software thereby precluding said customers
from acquiring computers from Plaintiff and other maiuifacturers;

The actions of Defendant IBM alleged in the foregoing subparagraphs (a)
through (e) were taken with knowledge of and to take advantage of its dominant
position in the computer markets and submarkets. Because of the large dollar
investment in computers, their complexity, the difficulties of verifying claimed
specitications of undelivered products, and a history of rapid technological
obsolescence of computers, customers in the computer markets and submarkets
readily rely upon representations and promises of Defendant IBM. This is
particularly true when the representations concern a new product line of com-
puters allegedly meeting all needs of customers and compatible from smallest
to largest.

Discrhninaionj and c.rcIusifDianj i>ricinf/ pracfkcs

(f ) It has directly and indirectly offered discriminatory prices and discrimina-
tory services and technical assistance to some customers not given to other cus-
tomers, including, among others, outright discounts from standard ])ublished
prices, free •'trial" computer usage for extended periods of time, buybacks of
computer time which it may or may not utilize, discounts in the form of fic-
titious "value received" contracts, extended purchase plans, and unusual and sub-
stantial commitments of free manpower for programing, maintenance and systems
support. The recipients of such pre.iudicial favoritism are typically customers
or members of a class of customers where :

(i) Defendant IBM's market share or power is less dominant or it is threat-
ened by and encountering more intense competititon : or

(ii) Defendant IBBM stands to gain certain ancillary benefits or prestige in
furtherance of its predominant position in the computer markets and submarkets ;

(g) It has established sale and lease prices for some types or models of com-
puters at levels which would result in a signiificantly lower percentage of return
on gross receipts and investment tlian was realized from the prices established
for other computers with respect to which it has a more dominant market posi-
tion, or. with respect to which Plaintiff or other competitors have not threatened
its nnirket position, and it has used its profits or revenues from the sale or lease
of some types or models of computers to subsidize its activities with respect to
the marketing of types or models threatened by competition :

(h) It has .sold or leased computers to cutomers located in some geographical
areas at a lower rate of return on investment or sales than is realized in otiier
geographical areas ;

(i) It has sold or leased some computers at a loss for the purpose or with the
effect of hindering competition :

(.i) It has offered discriminatory prices and other concessions to hold its exist-
ing customers and to thereliy discourage them from re))lacing Defendant IBM's
computei-s with customers manufactured by others, including :

(i) The allowance of substantially reduced rentals on its installed computers
during, and sometimes be.vond. the period such computers are being replaced, but
only if they are being replaced by Defendant IBM's computers ; and

(ii) The allowance of a portion of the rentals, paid Defendant IBM by a user
with respect to an installed computer as a credit toward the purchase of that
computer or. more significantly, toward the purchase of a different model com-
puter, iirovided it is a computer manufactured by Defendant IBM:

(k) It has marketed and tied togetlier as a package certain products and
.services, sxich as maintenance services to leased com])uters as well as certain
software to sold or leased computers, rather than separately pricing each product
or service, for the purpose or with the effect of :

(i) Preventing the creation of hardware maintenance comi)anies independent
of computer manufacturers :

(ii) Hindering the development of software companies independent of coui-
puter manufacturers :


(iii) Camouflaging the grant of discriminatory prices and concessions; and
(iv) Requiring any potential competitor in tlie computer markets or sub*
markets to have large aggregations of capital in order to effectively compete ;

Exploitation of size to structure the computer markets and suhmarkcts

(1) It has set technical standards, frequently unnecessary and without prior
notice to the industry or customers, which standards were in part designed to
or had the effect of reducing the marketability of the computers or peripheral
equipment of its competitors, permanently or at least temporarily until such
time as tliey conformed to such standards or until customers determined that
the standards were not required ;

(m) It has formed joint ventures with its customers and customer groups on
a discriminatory basis to develop new computer program languages for use in
its marketing efforts, and has then used its i)redominant position in such ventures
to deny Plaintiff and other competitors and their customers participation therein
or access to the achievements thereof ;

(n) It has created an undue financial burden on its competitors and poten-
tial competitors, prevented development or growth of independent computer
maintenance organizations and a used computer market and, generally, retainetl
control over tlie majority of computers in use and promoted continuous cus-
tomer dependence on and contact with it, by consistently encouraging leasing
and discouraging sale of computers in the following ways, among others :

(i) Trading upon customers' fear of rapid obsolescence of computers as a
market chai-acteristic, and compounding that characteristic by rei>eatedly, and
often unnecessarily, introducing new models, rapidly changing model numbers
and otherwise creating uncertainty and confusion among customers ;

(ii) Pricing its computers to make leasing costs, either in fact or in appear-
ance, economically more advantageous than purchase costs, particularly as com-
pared with prices of its competitors ;

(iii) Increasing maintenance charges on purchased computers without cor-
responding increases for maintenance included in rental prices ;

(iv) Making available certain of the price concessions i"ef erred to in sub-
paragraph (j) above to customers leasing its computers but not market ccmi-
parable concessions to purchasers ;

(v) Establishing low trade-in values for used computers which were initially
sold new by it despite maintaining resale prices for its used computers at
levels near the price for new computers of the same model ;

(vi) Lowering charges for overtime use of rented compiiters without cor-
responding decreases in purchase prices ; and

(vii) Adjusting the discount available for purchase of installed computers on
rental with the effect of discouraging immediate purchase ;

(o) It has unreasonably stressed and exploited its predominant market posi-
tion by, among other things carrying on multimilHon dollar advertising cam-
paigns wherein it has touted, for example, its extensive installations of com-
puters in all industries and geographical areas, its software library and the
libraries of its user organizations as well as its massive force of systems analysts,
maintenance, and other personnel, all in order to lead customers to believe that
its computers, software, and total services are superior to Plaintiff's and other
competitors' and that it above all other competitors offers complete understanding
of and solutions to the diverse porblems, re(piir('ments. fears and desii-es of all
customers ;

Coercion of employers

(p) It has encouraged its salesmen and other persoiniel to employ the mar-
keting practices alleged herein and other anticompetitive practices by imposing
unreasonable quotas and severe penalties for the loss of ordei's. customers, or
prospects :

<q) It has imposed unreasonable barriers against its emloyees working for
competitors following termination of their employment with Defendant IP.M:

Coercion in and improper influence of customer procurements
(r) It has directed threats, expressed or implied, and other forms of intimida-
tion and coercion, at customer procurement i)ersonnel to influence their judgment
and induce the acquisition of its computers without regard to price or performance
and thereby discourage and prevent the acquisition of computers manufactured
by competitors ;

* 5497

(s) It bas offered computers to customers upou terms which include an un-
reasonable requirement of immediate acceptance by the customers, thereby im-
posing unreasonable pressure to decide immediately without giving due con-
j;ideration to computers of competitors ;

(t) It has, upon learning of a customer's impending decision to acquire a com-
petitor's computer, sought to delay or impede that decision by reopening the evalu-
ation or submitting new proijosals, and it has otherwise wrongfully interfered
with and attempted to terminate negotiations or contracts between customers and
competitors, thus delaying or depriving competitors of sales and creating addi-
tional exi>enses for customers ;

(u) I has unreasonably refused to extend leases of its computers, pending the
delivery of replacement computers, for customers who have contracted to replace
such computers with those of competitors ;

(V) It has participated or attempted to participate with customers in the pre-
paraion and evaluation of plans for procurement, specifications, requests for
procurement and "benchmark" tests for the purpose or with the effect of prevent-
ing such customers from enjoying the advantages of competition as well as
depriving competitors of sales ;

(w) It lias discouraged and sometimes refused to allow or to perform, tests
comparing the i)erformauce of the computers proposed by it with the performance
of the computers proposed by competitors, and on certain of those occasions where
competitive tests have been insisted upon and undertaken, it has misrepresented
the performance of its computers on such tests ;

(x) It has unreasonably exploited the fact that a substantial number of pro-
curement personnel employed by customers formerly were employed or trained by
Defendant IBM or trained on its computers and it has caused or arranged for
its officers, directors or employees to serve as officers, directors, consultants to,
or employees of customers, as well as causing or arranging for representatives
of customers to hold similar positions with it, all for the purpose or with the
I'ffect of influencing customer procurement decisions and depriving competitors of
sales ;

Reciprocal marlcetivff practices

(y) It has built or located its plants and other facilities near the geographical
locations of certain key customers, or it has referred to the probabilities of such
action in the course of its efforts to market computers, for the purpose or with
the effect of inducing he acquisition of its computers ;

( z) I has utilized its reciprocal buying power to influence the computer procure-
ment decisions or customers ;

(aa) It has discriminatorily bestowed favors on certain selected customers, or
their (employees, by offering or making grants of funds or other economic assist-
ance to such customers or employees, but tying said grants or assistance to a con-
dition that its computers be acquired or retained by such customers ;

(bb) It has unfavorably represented and falsely disparaged Plaintiff's com-
puters, sofeware, maintenance policies, personnel, financial position and overall
capabilities ;

Exclusionary contract practices

(cc) It has employed very informal, and frequently oral, negotiating and con-
tracting techniques for the purposes or with the effects, among others, of en-
couraging premature customers preparation for receipt of its computers and of
camouflaging and facilitating the unfair practices alleged herein. Said techniques
have included :

(i) The urging of customers to give to it informal orders or "letters of intent"
to acquire an IB:m computer, containing no terms or specifications and ostensibly
designed to merely reserve for the customer a place on its delivery schedule
without legally committing the customer, except that thereafter it pressures the
I'ustomer to confirm its order or supposedly be eliminated from the delivery
sequence :

(ii) The use of master contracts for many customers, originating with the first

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 68 of 140)