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 69 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 69 of 140)
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eqiiipment the customer ever acquired from Defendant IBM— frequently tabu-
lating equipment — and accordingly lacking written particulars concerning the
terms, specifications, prices or manpower commitments made by Defendant IBM
for the customer's subsequent computer procurements ;



5498

Discrimination ayairist other computer manufacturers and their cnsto)ncrs
(dd) It has taken advantage of Plaintiffs and other of its competitors' de-
pendence upon it as a source of certain peripheral equipment and supplies by
refusing to deal with such companies, or by insisting upon restrictive terms and
conditions, for the purpose or with the effect of financially injuring Plaintiff and
other manufacturers and preventing them from competing ;

(ee) It has established production and delivery schedules for replacement parts
and components produced by it which are designed to give preference to users
of its computers and discriminate against the users of Plaintiff's nr other
competitors' computers who, as part of their computer systems, must have
access to replacement parts and components produced by Defendant IBM. to
the detriment of its competitors and their customers ;

Bait \and switch
(ff) It has deceived customers and deprived Plaintiff of sales by securing con-
tracts, commitments, or letters of intent from customers for computers, particu-
larly large size computers, and have eliminated its competitors, sought to can-
cel the contract, commitment, or letter of intent and in lieu thereof, eitlier market
a computer more likely to be developed or delivered by it, or a more expensive com-
puter more likely to fulfill the promises made to the customer ;

Nonsequential deliveries
(gg) It has rearranged and manipulated its delivery schedules for computers
in the light of competitive considerations by offering discriminatory delivery pref-
erences to some customers at the expense of others ;

Joint marketing
(hh) It has engaged in joint marketing efforts with The Service Bureau Cor-
poration, its wholly owned subsidiary, and has used said subsidiary as well as
its data centers and test centers as vehicles through which to lock-in customers
and through which to grant discriminatory price concessions including free usage
of computer time, free manpower for software support, and buybacks of computer
time or programs ;

Consent decree
(ii) It has, contrary to the terms, conditions and intent of its 1956 Consent
Decree, directly entered into the time-sharing service business, thereby ex-
ploiting its position as the dominant computer manufacturer as well as locking in
potential computer customers ;

Patents
(jj) It has acquired several thousand United States and foreign patents, patent
rights and options to obtain patent rights pertaining to computers and has
used its patent position to entrench its monopoly power ; and

Acquisition
(kk) It acquired in 1964 the assets and business of Science Research Associates,
Inc., a firm engaged in the development and publication of instructional materials
in basic subjects for elementary schools, high schools, and universities, and the
development and production of a variety of intelligence, aptitude and achieve-
ment tests, thereby entrenching its position in the developing market of com-
puterized education.

VI. DAMAGE TO PLAIXTIFF

24. The aforesaid violations by Defendant IBM have been the cause of sul)-
stantial and irreparable damage to the business and property of Plaintiff in
that, among other things. Plaintiff has been temporarily and often permanently
deprived of innumerable sales and leases of computers. As a result. Plaintiff has
lost significant revenues and profits from such sales and leases of computers and
peripheral equipment and from the providing of related software and maintenance
services. Additionally, Plaintiff has been deprived of profits which, but for the
aforesaid violations, would have been realized in connection with sales or leases of
computers in fact made by Plaintiff. In turn, the direct loss or delay of revenues
and profits has, among other things, greatly impaired Plaintiff's growth and
development, including technological development, with the consequent further
loss of additional sales and leases. In some instances. Defendant IBM's illegal
conduct has barred Plaintiff from marketing computers in an entire computer



5499

submarket. The actual damage to the business aud proijeity of Plaintiff from tlie
illegal couduct of Defendant IBM is thus extensive, tJie exact amount of which
remains to be determined.

•'5 The illegal conduct of the Defendant IBM herein comijlained of is of a con-
tinuing nature. Unless enjoined, Defendant IBM will not refrain from doing
the things complained of and the unlawful activities will continue to the further
irreparable loss and damage of Plaintiff. In addition, customers and the public
will continue to suffer considerable financial damage, to be discriminated against,
to be confused and have their operations disrupted, and generally to be deprived
of the benefits of free and unrestrained competition in the computer markets and
Siubmarkets. The Plaintiff has no complete and adequate remedy at law.

VII. PRAYER FOR RELIEF

Wherefore Plaintiff prays :

(1) That the Court adjudge and decree that Defendant IBM. directly aud
through combination and conspiracy with its subsidiaries, has attempted to
monopolize, has combined and conspired to monopolize, and has monopolized
the interstate and foreign computer markets and submarkets in violation of
Section 2 of the Sherman Act.

(2) That the Court i.ssue an injunction restraining Defendant IBM, its officers,
directors, employees, agents, representatives, and successors, from engaging in
the aforesaid violations of law, and from engaging in the specific exclusionary
practices alleged in paragraph 23 (a) through (kk) and any other practices
found to be exclusionary.

(3) That the Court decree such affirmative injunctive relief, including dis-
solution of the business or divestiture of properties of Defendant IBM, or enter
such orders as may be necessary to dissipate the effects of the violations alleged
lierein and to insure competitive conditions in the computer markets and sub-
markets.

(4) That a judgment be entered in favor of the Plaintiff for treble the amount
of its actual damages, as provided by law.

(5) That the Court allow, and that Defendant be required to pay, the full
costs of this suit, including as a part thereof a reasonable fee for the services
of Plaintiff's attorneys.

(G) That the Plaintiff be granted such other, further and different relief as
the nature of the ca.se may require and as may .seem just and appropriate to
this Court both to promote competition and protect computer customers and

the public.

Oppemieimer. Hodgson, Brown,
Wolff & Leach,
By John G. Robertson,

Attoi-ncys for Plaintiff.

St. Paul, Minn.

JURY DEMAND

The Plaintiff, pur.suant to Rule 48 of the Federal Rules of Civil Procedure,
does hereby demand a jury trial of all the issues of fact rai.sed by its Complaint
herein except as to the equitable relief demanded.



Exhibit 3. — Control Data Divestiture Plan

Achieving Effective Competition in the Computer Industry

A Plan for Divestiture

INTRODT'CTION

IBM's monoix)lization of the manufacture and sale of general purpose digital
computers is founded upon its dominant share of the market. Effective relief
requires reducing significantly IBM's market share: no half-way measures will
suffice to achieve effective competition. Xon-structural remedies were tried in
the United Shoe case with a demonstrable lack of success (divestiture l)eing
initially rejected by the district court because of United's single-plant operation —
a reason not obtaining here), and the Department of .lustice emphasized in its



5oOO

brief to the Supreme Court (on page 24) that the elimination of a defendant's
'•monopoly share" of the releAant market went to the heart of relief in a
monopolization case :

"^lonoixdy jwwer is obviously inconsistent with workable competition. The
latter term, wlien iised in the context of relief in a monoimlization case, can
onl.v be read to describe a market where no competitor has a monopoly
share * * *"

All this is well established anti-trust policy and good anti-trust economics.
But there remains concern that structural relief in this industry is not economi-
cally feasible ; that the massive size of IBM can only be reduced by imposing
substantial social costs on the economy in terms of foi-egone eflSciency. Tliere
is the related concern that the only feasible structural relief will still be inade-
quate to restore effective competition as for instance, by transferring the market
power of one monopolist to two duopolists who together control the market.

Tlie purpose of this memorandum is to show that a closer analysis supports a
quite different view — that structural relief can be both adequate for achieving
competition and accomplished without significant social costs for the economy.

Tlie general proposition is demonstrated here by examining an exemplaiy plan
for horizontal divestitui'e.^ The plan also contains divestitures of IBM activities
in related markets and limitations on IBM's anti-competitive practices. These an-
cillary measures are designed to complement and strengthen the pro-comiietitive
effect of divestitures in the general purpose digital computer market.

This plan should not necessarily be regarded as definitive. Rather the plan
is intended to document a simple but important conclusion : structural relief is
not only necessary if competition is ever to be achieved, but clearly feasible
without substantial cost to tUe economy. Accordingly, a decree containing only
prohibitory injunctive provisions, whether such be consented to by IBM or entered
by the court after trial, would be inadequate and contrary to the public
interest.^

A DIVESTITURE PLAX

The central feature of the divestiture plan is the creation f)f five independent
computer manufacturers from existing IBM product lines and facilities. Accom-
panying such a horizontal divestiture are interrelated proposals and divestitures
regarding IBM's activities in other than the computer markets and measures
proscribing IBM's anti-competitive practices.^

A. Divestiture of comjuiter mauufacturing capahility

This section first describes the plan for computer manufacturing and then
evaluates its feasibility, its effect on competition, the possible costs to the
economy in terms of economies of scale and its fairness to stockholders, execu-
tives and employees.



1 As an alternative to rtivestiture, measures designed to foster (and ultimately require)
a gradual reduction in IBM's market share could ultimately provide the necessary struc-
tural relief, althoujrh the arrival of effective competition would be delayed. Thus, if IBM's
i-ate of growth was, for a number of years, something less than that of the overall
market — ^although it would still grow faster than most large corporations — the competitive
disparity between IBM and its competitors would gradually narrow. Generall.v, since
IBM would be left basically intact, such an approach woud require a number of stringent
prohibitions directed against IBM anti-competitive behavior, the divestiture of certain
activities outside of the computer market, and a mechanism in the nature of a "failsafe"
provision whereby the market would be frequentl.v examined to verify a decline in IBM's
market share. In the event that it was not declining, contingent provisions would come into
pay which would virtually compel such reduction. If of interest to the Department, further
detail concerning this apiiroach can be made available. At this time, however, while clearly
feasibkle — and ultimately effective — immediate horizontal divestiture appears preferable
to such an alternative.

- The following excerpt, from the staff of House Committee on the Judiciar.v, S6th Cong..
1st scss.. Report on Consent Decree Program of the Department of Justice (committee
print 19.">9), p. 27. is particularly applicable to the computer industry : "In its effort to
reduce the relative proportion of consent decrees to litigated judgments, consideration
should be given by tlu» Departnuuit to tlio type of issues involved and the economic sig-
nificance of the proceeding. When novel questions of law are presented, or, when the
Government's complaint attacks the structure and operations of dominant corporations
that determine the standard of conduct for an entire industry, only in the most extreme
situation should a negotiated settlement be undertaken by the Government. Compromise of
tlie Government's position in such a case is not warranted, and a consent decree should
only be assented to by the Government when the defendants agree to all of the relief which
the Department of .Tustice believes is essential to reestablish competition, eliminate the
conditions which caused the Government to institute its action, and to dissipate the
fruits of monopol.v."

•''A "chart" summarizing the following divestiture plan is attached as "attachment 1."



5501

1. The plan

(0) Central processing unit (CPU) manufacture is the initial consideration
for horizontal divestiture.' "Attachment 2" to this paper is an excerpt from
an IBM sales manual, and indicates its principal domestic plants engaged in
manufacturing computer equipment. Thus, it appears that IBM manufactures
CPU's at several U.S. plants, each concerned principally with one "segment"
of the IBM product line. For example, the principal manufacturing locations
for IBM's current line CPU's include :

(1) Boca Ratan, Fla.— System/3, 1130, and 2020 (360/20) :

(2) San Jose, Calif.— 1800 ;

(3) Endicott, N.Y.— 2025 (360/25) and 2030 (360/30) ;

(4) Poughkeepsie, X.Y.— 2040 (360/40), 2044 (360/44), 2050 (360/50),
2091/95 (360/91-95), and 2195 (360/195) ;' and

(5) Kingston, New York— 2065 (360/65), 2067 (360/67), 2075 (360/75), and
2085 (360/85)."

In addition, attachment 2 indicates that there are five principal domestic
manufacturing locations for certain of its peripheral devices. Although there are
exceptions and a certain degree of overlap, the nature of the devices producetl
at these U.S. locations generally fits the following pattern :

(1) Kingston, N.Y.— Display units (Prefix "22__") ;

(2) San Jose, Calif.— External "high speed" storage devices, such as disk,
drum, and core (Prefix : "23_-") ;

(3) Boulder, Colo. — External "slower speed" storage devices, such as mag-
netic tape units (Prefix : "24__") :

(4) Rochester, Minn.— External card I/O devices (Prefix: "25 - ") ; and

(5) Raleigh, N.C. — Communications equipment (Prefix: "27—" and "77—").
This organization of principal domestic manufacturing operations and facilities

provides the basis for the creation of the following five independent computer
equipment manufacturers, presumably by stock distributions to present IBM
shareholders :

(1) IBM-A ("Small Scale Computer Company") would receive IBM's Boca
Ratan manufacturing facilities and thus responsibility for marketing, integra-
tion, and assembly of System 3 and the 1130 and 360/20 computer systems.

(2) IBM-B ("Process Control Computer Company") would be allocated the
San Jose manufacturing facilities, and responsibility for marketing, integration
and assembly of the special purpose 1800 computer system.

(3) IBM-C ("Small/Medium Computer Company") would receive resiwnsi-
bility for the 360/25 and 360/30 computer systems, and thus IBM's Endicott,
X.Y.. plant.

(4) IBM-D "Medium and Verv Large Computer Company") would be allocated
the 360/40, 360/44, 360/50, 360/91. 360/95, 360/195, and 370/155. Accordingly,
this companv would receive IBM's Poughkeepsie, N.Y., manufacturing facilities.

(5) IBM-E ("Large Scale Computer Company") would receive IBM's Kings-
ton, N.Y., manufacturing facilities and thus be responsible for marketing, integra-
tion and assembly of the 360/65, 360/67, 360/75, 360/85 and 370/165 computer
systems.

In addition to the foregoing, the principal domestic locations of IBM peripheral
manufacture would also be distributed among these five companies, ideally in
such a manner as to equalize the potential revenues of the successor companies.
Although it is evident that any final determination of which peripheral facility
to assign to which company (1) must be considered in the light of IBM's product
line and facilities at the time of such divestiture and (2) will depend upon deter-
mination, presumably from IBM records, of the dollar value of and market
value for various peripheral devices at such time, given today's market and rea-
sonable estimates concerning the future, the following would appear to be a logical
rlistribution of IBM's major peripheral facilities at this time :



* "Central procpsslnfr Units" are used as the initial bnildinfr block since they tendto
"define" the ronipntpr svsteni and since thev are far and away the slnple most expensive
element in a comptiter' "system". IBM's EDP peripheral products are. however, also
jrenerallv considered in this section and part (b) below discusses considerations in com-
puter svstem intecration and assembly. . . .iota

s Although not included in attachment 2, IBM's press release announcing its new .:!7i)
Series" on .Tune ?,0. 1970, stated that the .S70/1.5.5 would also be produced at Pough-

8 The press release referenced in the preceding footnote identified Kingston. N.Y.. as
the site of production for the new 370/16.5.



40-927 O - pt. 7-43



5502

(1) IBM-A would receive the Rochester, Minn., facilities for two reasons. First,
this location was heavily involved in the development of System/3, and its prod-
ucts are generally associated with the "mini"' or ".sub" computer area. Second,
while substantial, the revenues and market position of IBM-A are such that to
equalize its potential with that of other "new IBMs", a major peripheral facility
is justified.

(2) IBM-B would receive the San Jose peripheral device facilities. The fact
that the 1800 is produced in San Jose supports the allocation of such a geographi-
cally co-located facility. More importantly, however, since the 1800 is a special
purpose computer with a more limited market and revenue potential, it is impor-
tant that a major source of peripheral reveaiue be allocated to IBM-B. High speed
memory devices are a major source of IBM revenue, and would fill this role
nicely.

(3) IBM-C, due to the dominant market position of the 360/25 and 360/30,
would not receive any major peripheral facility.

(4) IBM-D would also not receive a major peripheral facility, since it would be
a tremendously powerful company in its market area.

(5) IBM-E, while dominating the large computer market, would be allocated
the Kingstoin, N.Y., peripheral facilities since the relative market importance of
this peripheral facility is not such as to outweigh the fact of its co-location with
IBM-E.

It will be noted that the foregoing allocation of perhipheral facilities among
the new companies leaves open the issue concerning which would receive IBM's
present facilities at Boulder, Colo., and Raleigh, N.C., as well as additional plants
established prior to divestiture. This is, in part, to afford fiexibility — one or more
of these "remaining" facilities could be assigned to such companies as appeared
"weak" relative to their "sisters" (given the facts available at the time of divesti-
ture), such facilities could be "substituted' to some degree for those discussed
above, or separate companies producing such peripheral devices could be created.
With respect to IMB's Raleigh, N.C., plant, creation of a separate company is
recommended im light of the fact that communication terminals are expected to
represent a large portion of the dollar value of systems and are the fastest grow-
ing portion of the computer market. Finally, it is recommended that IBM's pres-
ent Federal Systems Division also be spun-off as a separate company. This division
makes special purpose computers, largely for government use, at Owego. N.Y., and
other locations. Thus, IBM-F would become "The Terminals Company" and
IBM-G would become the "Federal Systems Company".

The divestiture plan meets the obvious criteria of practicality ; no existing
product or plant is divided among firms. Of course, by breaking up one or more
existing plants, as advocated by the Justice Department in its brief concerning
relief in the United SJioe case, many additional divestiture alternatives emerge.'
Under the foregoing plan, however, each company would be allocated at least one
large former IBM plant (over 5000 employees) which is now the manufacturing
center for a CPU and an assembly point for its systems. The obvious economies of
scale of manufacture — those at the plant level — are thus preserved.

(ft) Compute?- system integration and assembly is, to some degree, accom-
plished at the site of CPU manufacture. As attachment 2 makes obvious, however,
certain IBM peripheral devices are ordered dii'ectly from their point of manu-
facture and then "field merged" into the computer system at the customer
location. The proposed divestiture plan would not prevent continuance of this
procedure, albeit in a Slightly different manner. Since no single successor com-
puter manufacturer would have a full peripheral line — at least initially — they
would necessarily engage in selling to one another and each would be partially
dependent on purchased peripherals. In this respect, they would not differ from



■^ In its effort to minimize relocation of IBM activities, this divestiture plan does not
necessaril.v create tlie optimum "matcli" of product lines. For example. IBM-B would be
particularly "small" as a computer "system" company -vyhile yery stronjr in the peripheral
area, IBM-C vfOuUX be "weak" relatiye to IBM-D and IBM-E. and IBM-D ^yould not
only be tremendously large and powerful in the "systems" market but rather illojricaily
"brackets" IBM-E with "medium" and "yery large" systems. It is entirely possible that
with a yery modest relocation of present facilities, an alternatiye diyestiture plan would
emerge which would equalize the revenues and potentials of each company in the
"systems" markets with entirel.v harmonious product mixes. The Poughkeepsie plant
(IBM-D). for example, may comprise several plants, each principally concerned with a
distinct product line. Moreover, introduction of additional "370's" may alter the picture
and, in this industry, it is generally conceded that plants can readily be adapted to dif-
ferent products. This only emphasizes the many feasible alternatives available for
divestiture based on other premutations ayailable under attachment 2 and resulting from
IBM's massive size and market coverage.



5503

the present non-IBM companies. Whether delivery for integration, assembly
and testing was requested to be made to the site of CPU manufacture, customer
installation location, or elsewhere, would be discretionary with the successor
company purchasing the device in light of its complexity.

The successor companies would be required to offer their peripherals to other
computer manufacturers on equivalent terms. This provision would help the
growth of the non-IBM computer companies, who now cannot otain IBM equip-
ment for integration into their systems at other than a "retail" price. Over time,
one would expect that the seven companies would buy peripheral equipment
from other than IBM successors as well as develop additional devices to com-
plement their individual product lines.

The effect of these steps would be to open up IBM's closed preserve on its
peripherals. IBM peripherals would become more freely available for the systems
of other manufacturers and conversely the demand of IBM successor computer
companies for peripherals would become open to independent peripheral
manufacturers.

The computer business, of course, is more than the manufacture and assembly
of hardware. Considered below are the complementary proposals for components,
marketing and service, software, and development.

(c) Components are the even more elemental parts of a computer, including
the individual circuits, wire contact relays, switches and the like. The IBM CPU's
and peripheral devices lase many components in common and the manufacture of
components is now groui>ed in a separate division. It is proposed that this divi-
sion become a separate company (IBM-H — "The Components Company"), selling
to the seven IBM successor computer equipment companies, at least until they



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 69 of 140)