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 71 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 71 of 140)
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the importance of price discrimination as a source of market power, and high
market shares in many computer lines even after divestiture, injunctive pro-
visions are required to eliminate price discrimination.

Price discrimination can be eliminated by requiring IBM to institute "auto-
sticker pricing". Such pricing would have the following features :

(a) Bach successor company and WTC would be required to publish a separate
list price, together with terms of sale such as credit, trade-in allowances, etc.,
for (i) each unit of the computer, (ii) software (.such as each operating .sys-
tem, compiler, assembler, application, and special user program), (iii) mainte-
nance services, (iv) programing services, (v) customer training, (vi) other prod-
ucts or services related to the sale and support of computers. This would extend
and make mandatory the present practice of "unbundled" prices.

(6) All sales (except competitive bids to a government agency) must be at
the list or "sticker" price and at published terms except as justified to meet
competition. Each product or ser^ice priced separately must be available for
purchase separately and profit margins on different products or services must



11 The disposition of World Trade is quicijly becoming, liowever. a particularly vexing
problem, in liglit of its large size, fantastic growth, and emerging "independence" as a
manufacturing and developing entity as well as a foreign marlceting arm of IBM. Statistics
indicate that World Trade dominates the foreign markets almost to the extent of IBM's
U.S. domination — and more so vis-a-vis its U.S. competitors. This strongly indicates that
World Trade should itself be further divided into several independent companies, perhaps
along geographical lines. The feasibility of this is clear, in light of the fact that World
Trade is organized merely as a holding company for the stocks of subsidiaries incorporated
under the laws of over 100 nations. Further facts are necessary to evaluate the manner in
which such foreign subsidiaries could be realigned into several viable companies, with
similar or at least potentially eaual manufacturing, research and marketing capabilities.
It is entirely possible that multi-nation companies with product lines not dissimilar to
those created in the new IBM-U.S. companies could be feasibly created and held by
several independent U.S. holding companies. Whatever the approach, it is becoming
Increasingly clear that the present worldwide power of World Trade should be diffused as
nart of any structural remedy in the U.S. market, or else U.S. computer comoanies —
including the "new" IBMs — may find penetration of foreign markets impossible, and
World Trade may itself turn to and dominate the U.S. market.



5509

be reasonably similar. Such provisions would restrain price discrimination
directly by requiring uniform prices to different buyers, prevent any single
item from being tied to anotlier (often hiding price discriminaton), and prevent
any item from being offered at a low profit margin. It would eliminate the so-
called educational discount.

(c) All sales offers, bids and proposals would be made in writing containing
the above prices, delivery date, and other terms and conditions, and the customer
would be allowed 30 days to accept or reject the proposal or any part of it.
Orders would be filled in the order of their receipt. This would prevent hidden
price discrimination via oral agreements, prevent the practice qf stampeding a
customer into accepting an order, as well as prevent discrimination between
customers via delivery dates.

id) To prevent subtle forms of price discrimination, grants to a customer or
participation in joint ventures or projects to induce a purchase of a computer
or related service would also be prohibited.

2. Paper machines, programs and the like

This practice can be reached by a provision prohibiting successor computer
companies and WTC from offering, advertising or otherwise disclosing to the
trade any computers, programs, or related equipment prior to an operational
demonstration of such item. These demonstrations are to be open to competitors
and the public and the operational characteristics demonstrated must conform
to the advertised specifications, which specifications must themselves contain
suflicient detail as to be meaningful. Such demonstration shall not be held prior
to the time the products or services are ready for manufacture and distribution
in production quantities, thus insuring quotation of realistic delivery schedules.

3. Product standards and compatibility

One characteristic of IBM's vast market share is that by its dominance it
creates certain standards on a de facto basis to which its competitors must con-
form, thus raising difficulties for other manufacturers in making their equip-
ment compatible with that of IBM. While dividing IBM's product line among
several companies reduces the scope of the problem, the dominance of successor
companies in particular markets still leaves a potential threat to competition
from sharp changes in product standards by the firm with the dominant market
share. Without prior notice of such changes, competitors are placed at a sub-
stantial disadvantage. Accordingly, with respect to all new or proposed products
or software which have characteristics which will affect information inter-
change or interface between a successor company's or WTC's systems and com-
petitive systems, such companies and WTC should be required to disclose confi-
dentially to every U.S. computer manufacturer complete functional specifications
of all such new products and software and of each major change in existing
products and software 24 months prior to their first delivery. The particular
standards which require disclosure relate to devices utilized for information
interchange in general and particularly those that involve interchangeable
media. Some mechanism would have to be devised to prevent the abuse of this
requirement by disclosing new standards which subsequently are not actively
marketed.

4- Royalty-free patents
IBM and WTC now have thousands of U.S. and foreign patents and patent
rights, relating to computers which constitute one source of its market power. To
give the portfolio to any one successor manufacturer would give that company
a major edge over others and provide the basis for new positions of market
power. To divide the portfolio would necessarily require extensive patent cross
licensing between competing companies. The simplest solution would be to
establish royalty-free licensing of all IBM's present patents.

COXCLTTSION

Major structural relief in the computer industry is an absolute necessity.
The divestiture plan outlined herein promises such effective structural relief as
will enliance competition and promote the public interest in a strong computer
industry without jeopardizing the national security. It protects the ability of
IB^I successors to prosper, to innovate and to contribute to a competitive com-
puter industry. It demonstrates that effective competition can be achieved with-
out significant social costs for the economy.



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5513

A. Divestiture

FIVE COMPUTED MANUFACTURERS

A. Small Scale Computer Company

1 Product : Svstem/3, 360/20 and Card I/O devices.

2. Mfg. : Boca Raton, Fla., and Rochester, Minn.

3. Research : Rochester, Minn.

B. Process Control Computer Company

1. Product : 1800 and high speed memory device.s.

2. Mfg. : San Jose, Calif.

3. Research : San Jose, Calif.

C Small/Medium Computer Company

1. Product : 360/25 and 360/30.

2. Mfg. : Endicott, N.Y.

3. Research : Endicott, N.Y.

D. Medium and Very Large Computer Company

1. Product : 360/40, 360/44, 360/50, 360/91, 360/95, 360/195. 370/155.

2. Mfg. : Poughkeepsie, N.Y.

3. Research : Poughkeepsie, N.Y.

E. Large Scale Computer Company

1. Product: 360/65. 360/67, 360/75, 360/85, 370/165, and display units.

2. Mfg. : Kingston, N.Y.

3. Research : Kingston. N.Y.

TWO "OTHER" HARDWARE MANUFACTURERS

F. Federal Systems Company

1. Product : Present products of IBM's Federal Systems Division.

2. Mfg. : Owego, N.Y. and elsewhere.

3. Research : Owego, N.Y.

G. The Terminals Company

1. Product : Computer terminals.

2. Mfg. : Raleigh, N.C.

3. Research : Raleigh, N.C.

TWO RECIPIENTS OF "COMMON" ASSETS

H. Components Co.

1. Product : Present products of components division — sold to new companies.

2. Mfg. : Present facilities of IBM Components Division.

3. Research : Manassas, Va.

/. Service Co.

Receives all outstanding leases, marketing and maintenance personnel, leases,
and software. Successor companies acquire back such assets necessary for contem-
porary product line only.

FOUR "VERTICAL" DIVESTITURES

1. Service Bureau Corp.

2. OflSce Products Division.

3. Science Research Associates.

4. World Trade Corp.

"remainder"

Remaining research facilities and manufacturing plants divided "equitably"
among five computer companies.

AcHiE\'iNG Effective Competition in the Computer Industry

"In its effort to reduce the relative proportion of consent decrees to litigated
judgments, consideration should be given by the Department to the type of issues
involved and the economic significance of the proceeding. When novel questions
of law are presented, or, when the Government's complaint attacks the struc-



5514

ture and operations of dominant corporations that determine the standard of con-
duct for an entire industry, only in the most extreme situation should a negoti-
ated settlement be undertaken by the Government. Compromise of the Govern-
ment's position in such a case is not warranted, and a consent decree should only
be assented to bv the Government when the defendants agree to all of the relief
which the Department of Justice believes is essential to reestablish competition,
eliminate the conditions which caused the Government to institute its action,
and to dissipate the fruits of monopoly,"' Staff of House Comm. On the Judiciary,
S6th Cong., 1st Sess., Report on Consent Decree Program of the Department of
Justice (Comm. Print 1959) .

Oppenheimer. Brown, Wolff, Leach & Foster,

Attorneys for Control Data Corp.

Dated:

IBM's monopolization 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.

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 foregone efficiency. There is
the related concern that the only feasible structural relief will still be inadequate
to restore effective competition as for instance, by transferring the market power
of one monopolist to two duopolists who together control the market.

The 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.

The general proposition is demonstrated here by examining two alternative ap-
proaches : (1) Horizontal divestiture and (2) limitations on the growth of IBM
to reduce its market share. Each alternative is set forth in an illustrative plan.
Each plan also contains divestitures of IBM activities in related markets and
limitations on IBM's anticompetitive practices. These ancillary measures are
designed to complement and strengthen the pro-competitive effect of measures
in the general purpose digital computer market.

Neither plan should necessarily be regarded as definitive. Rather the two
plans are 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 the economy. Accordingly, a decree contain-
ing 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.

I. A divestiture alternative

The central feature of the divestiture alternative is the creation of five inde-
pendent general purpose digital computer manufacturers from existing IBM
product lines and facilities. Accompanying 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. Computer manufacturing

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

1. The divestiture plan
(a) Main Frame Manufacture and Computer System Integration and As-
sembly is the starting point for horizontal divestiture.^ IBM operations at this
stage are at several plants, each concerned with only one segment of the IBM
product line. This organization of operations and facilities provides the basis
for the creation of the following seven independent computer manufacturers,
presumably by stock distribution to present IBM shareholders :



^Part (b) considers IBM's peripheral products. "Main frames" are used as the initial
buildinK block since thev tend to "define" the s.vstem and since the required assembly and
pre-installatlon testing "of systems tends to occur at the site of main frame manufacture.



5515

(1) The System Three Corporation would be allocated the smallest comput-
ers — IBM's System 3. This corporation would also be assigned IBM's tabulat-
ing equipment operation. The central facility of this new company would be
IBM's Rochester, Minnesota plant which makes tabulating equipment and plants
in Georgia and Florida which have been involved in the development and manu-
facture of System 3.

(2) The Small Scale and Process Control Computer Manufacturing Company
would be allocated the manufacture of the 360/20, the 1130 and the 1800. Its
major facilities would be IBM's Boca Ratan, Florida, and San Jose, California,
plants, which now manufacture these three computers.

(3) The Smaller Scale/ Medium Size Computing Company would have the
360/25 and the 360/30. It would receive IBM's Endicott, N.Y.. plant which is
the main frame manufacturing and systems assembly facility for these two
systems.

(4) The Medium Size Computing Company would be allocated the 360/40,
360/44, and the 360/50. Main frame manufacturing and assembly of these
systems would occur at IBM's Poughkeepsie, N.Y., plant, which is now engaged
in these activties.

(5) The Large Scale Computing Company would have the 360/65, 360/67,
360/75, 360/85, and the 360/195 (still under development), whose system assem-
bly and main frame manufacturing facilities are at Kingston, N.Y. The company
would, accordingly, receive these IBM facilities.

(6) The Federal Systetns Company would be IBM's present division of the
same name. The division makes special purpose computers, largely for govern-
ment use, at Owego, New York, and other locations.

(7) The Terminals Company would make IBM computer and operator com-
munication terminals, such as the 1050 and 1060. Although these are arguably
"peripheral products", a separate company is advi.sable here because terminals
are expected to represent a large portion of the dollar value of systems and are
the fastest growing portion of the computer market. IBM presently assembles
its principal terminals at Raleigh, North Carolina, and this IBM plant would be
assigned to this 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 Shoe case, many additional divestiture alternative 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 manu-
facturing center for its main frame and an assembly point for its systems.
The obvious economies of scale of manufacture — those at the plant level —
are thus preserved.

Computers are, of course, more than main frames. Indicated below are the
complementary proposals for peripherals, components, marketing and service,
software, and development.

(ft) Peripherals are used across IBM's existing computer line and their manu-
facture is sometimes co-located with the assembly of certain computer systems.
Siich co-located units would go to the computer main frame manufacturer which
is assigned the plant. Other peripheral plants would be distributed among the
computer manufacturers in such a way as to equalize the potential revenues
of the successor computer companies. Of course, some caution would have to be
exercised in assigning peripheral capabilities because there is a large difference
in the dollar value and market among various particular peripheral devices.

Since no single successor computer manfacturer would have a full peripheral
line, 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 the present non-IBM companies.

The successor companies would be required to offer their peripherals to other
computer manufacturers on equivalent terms. This provision would help the
growtli of the non-IBM computer companies, who now cannot obtain IB^f
equipment for integraticm into their systems at other than a "retail" price. Over
time, one would expect that the seven companies would buy peripheral equip-
ment from other than IBM successors.

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.



5516

(c) Components are the even more elemental parts of a computer, including
the individual circuits, wire contact relays, switches and the like. The IBM
computers use many components in common and the manufacture of these items
is now grouped in a separate division. It is proposed that IBM's component
division become a separate company, selling to the seven IBM successor com-
puter companies. As with peripherals, the new components company would also
sell to the general market and other components vendors, such as Texas Instru-
ments, would be free to sell to the successor computer manufacturers. One
would expect then, a three-fold gain for competition. Components manufacture
would have a major new competitor. Other computer manufacturers would have
access to IBM components. Other component vendors would have available a
new source of demand in the successor computer companies.

(d) Marketing, Service, Software, Maintenance and Leasing divides into two
parts : that associated directly with the products of the successor computer
companies and that less clearly identified with these companies. A new entity
would be created to take over all these operations which entity would promptly
turn over all outstanding leases of equipment still in production to the successor
computer companies manufacturing such equipment. This would assure a flow
of cash to each company from the outset. Each new computer company would
thenceforth assume responsibility for maintenance, the basic associated soft-
ware, and future marketing of their respective machines by hiring away from
the new entity the staff formerly engaged in these operations.

The new entity would then be left with office buildings, perhaps a residual
marketing staff, some pre-existing applications software, and responsibility for
the continued leasing and maintenance of IBM computers no longer in produc-
tion. It would have substantial revenues from out of production IBM computers.
It could continue as a leasing, maintenance and software company, but to ensure
that it did not dominate a new service or market, the new entity would be pre-
cluded from acquiring and leasing new computers. As the old machines were
retired or sold, the assets could be liquidated and the cash distributed to stock-
holders.

(e) Development covers the design of new computers and is, of course, im-
portant to survival in the computer industry. There is a tendency, promoted by
IBM publications, to think of IBM as one massive development entity. In fact,
however, such key efforts as the design of the System 360 line was done by several
teams at different locations and IBM has its present R&D activity located at
at least 24 separate laboratories. One' — Manassas, Va. — serves the components
division and would be allocated to the new components company. At each of the
principal plant locations for the seven computing companies there are major
development groups, as follows :

( 1 ) Mini-computers — Rochester, Minn. ;

(2) Small computers — San Jose, Calif. ;

(3) Smaller scale/medium scale computers — Endicott, N.Y., two labs ;

(4) Medium scale computers — Poughkeepsie, N.Y., three labs ;

(5) Larger scale companies — Kingston, N.Y. ;

(6) Federal Systems — Oswego, N.Y. ; and

(7) Terminals — Raleigh, N.C.

The development groups are concerned primarily with the products of the
plants near them, so that there would be a natural fit in these assignments. There
would remain a few other laboratories that serve a broader corporate function —
such as the Thomas J. Watson Laboratory concerned with basic research. These
might either be allocated to those companies so as to equalize as.sets and tech-
nical manpower of successor companies or, preferably, transfer of such labora-
tories to some sort of independent research foundation could be encouraged.

2. The divestiture plan results in economically strong companies
The survey above, operation by operation, indicates that each successor com-
pany retains a feasible set of activities appropriate for an independent company.
Focusing on these eight companies as a whole, each would still be absolutely
large. Their annual revenue is hard to predict from published IBM data, but
the average would be well in excess of 500 million dollars. Another measure of
size is the relative market share in the general purpose digital computer market,
which Avould average for these companies about 14 percent. (IBM's present
share of 70 percent would thus be divided approximately five ways — Federal
Systems and Components are not in that market). While this would be a sharp
drop, the 14 percent would still be twice the market share of the largest non-IBM
company.



5517

Furthermore, the companies would atart with substantial financial assets in
their share of a multi-billion dollar lease base. (Any sharp inequality in the
division of the lease base could be equalized by the differential division of IBM's
working capital. )

The resulting companies would, of course, be much less vertically integrated
than the present IBM. But, as indicated above, the degree of vertical integration
would remain comparable to that of other computer manufacturers. There might
be particular facilities imbalances and the management of particular successor
companies might regard some greater degree of vertical integration as desirable.



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 71 of 140)