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 73 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 73 of 140)
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(a) Assume that the market for computers grows at 20 i)ercent annually.
This is a somewhat lower rate of growth than was experienced in the overall
computer systems market during the sixties, but a conservative projection
would allow some decline from the very fast growth rates of the sixties.

(&) Assume that other computer manufacturers grow at an annual rate of
between 23 and 27 percent. They were able to sustain such a rate of growth in
the sixties and except for financial limitations and IBM dominance could prob-
ably have exceeded it.

(c) Assume that IBM's growth is limited to 90 percent of the rate of overall
market growth in the early years (to preclude requiring a very high rate of
growth by competitors) and gradually falls to seventy percent of the annual
market growth rate.

Under these assumptions, IBM's market share would be about 45 percent
over ten years and about 30 percent after twenty years. Thus, after twenty
years, it is probably that IBM would be about twice as big as its larger com-
petitors rather than the present ten-fold difference.

These are simply illustrative assumptions. IBM's market share, for example,
could be brought down sooner by a greater reduction in its relative growth.
The following discussion, however, continues this particular illustration.

2. Implementation
A mechanism for bringing do^^^l IBM's market share can be illustrated by the
following provisions :

(flf) The market would be measured by the incremental dollar value of domestic
and foreign shipments of general purpose digital computers and the data would
be collected by an annual survey by the Department of .Justice. The survey should
also include special purpose computers and if special purpose computer sales grow
at a significantly faster rate than general purpose digital computer sales, the mar-
ket share provision would apply to both types of computers.

(ft) In any two-year .interval that IBM's growth exceeded the target, 1(c)
supra, IBM would be prohibited during the next two-year period from (a) ex-
panding its manufacturing capacity for general purpose digital computers, (b)
adding to its number of salesmen, system engineers, or any other personnel who
sell or assist customers with new installations or (c) increasing its expenditures



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in the marketing of computers. This provision would create an incentive for IBM
to maintain a steady, but more modest, growth to bring down its marliet share.

(c) The reduction in marlvet share would be facilitated by the provisions
enumerated in the next section. The market share limitation is in the nature of a
"fail safe" provision to make sure IBM's market share falls.

{(I) If at the end of twenty years IBM's market share has not fallen to 35 per-
cent, divestiture would be reciuired. This provides further incentive for IBM to
cooperate with a reduction in its market share.
B. Prohibition on practices and divestiture of related activities

Given the fact that market share limitations rely on competitive forces to bring
down IBM's market share, more extensive proscription of anti-competitive prac-
tices are required than with divestiture. As a starting point, the previous restric-
tions with respect to price discrimination, paper machines, product compatibility
and rovalty free licenses of existing IBM patents should be included in the market
share limitation. The divestiture of SBC, SRA and the World Trade Corporation
.should al.so be included and perhaps the Office Product Division as well, though
the operations of this division are less clearly related to market power in the
computer market.

In addition, all of the exclusionary practices alleged in the U.S. complaint, and
those of the private plaintiff.s, mu.st be prohibited or otherwise arrested. Such
provisions would include prohibitions against corporate interlocks, reciprocity,
tying, and other such practices. Other examples include :

1. Proscription on IBM future leasing of equipment

Leasing has long been recognized as a source of market power in such in-
dustries as shoe machinery. Eighty to ninety percent of IBM's computers are
leased. Such leases are a major source of IBM's market power since they
provide for a continuing relationship between IBM and its customer. Much of
IBM's price discriminatioii and many of its unfair practices are related
to leasing.

It would perhaps be too disruptive to require IBM to sell all its existing
leases. (In the divestiture plan, a separate leasing company was established,
but only as part of a general design for a reorganized industry). As a sub-
stitute IBM should be prohibited from engaging in the leasing of any new
computer installations although it could renew existing leases. Time pay-
ment plans or other lease "substitutes" would also be prohibited. Such an out-
right prohibition would strike at many of the unfair competitive tactics as-
sociated with leasing by a dominant firm.

To be sure, it is sometimes argued that leasing as a source of market power
can be handled in a le.ss drastic fashion. Thus, the particular practices as-
sociated with leasing may be enjoined and coupled with a requirement that
Ihe defendant maintain neutrality between sales prices and lease rents so
that outright purchasing no longer carries a penalty. But this provision has
often proved difficult to administer— just how is neutrality to be defined? More-
over, leasing can be favored in all sorts of nonprice ways. Another possibility
is a new Leasing Corporation, a wholly-owned IBM subsidiary which must,
like the Service Bureau, be operated on an arms-length basis. But the history
of the Service Bureau .shows the extreme difficulty of achieving true arms-length
arrangements with a wholly-owned subsidiary.

Prospective prohibition of leasing by IBM would be a simple and effective
way of taking them out of the leasing business. The users would not suffer
.since leasing corporations stand ready to fill the gap. And users that prefer
to lease from a manufacturer could do so from other manufacturers. Over the
long-run, breaking the tie between IBM and its lease customers would help the
growth of IBM's rivals.

2. The prohihition of IBM operation of data processing centers

Tlie advantages of divesting SBC were indicated earlier. Similar arguments
support the prohibition of IBM's operation of data processing centers which
use IBM equipment, although the 1956 Consent Decree provisions could be
"satisfied" in this respect. A firm selling both to itself and others has extensive
opportunities for price discrimination in favor of its own operations, when
it has a predominant market share. Vertical integration into data processing
would reserve part of the computer market for IBM when the critical require-
ment is for bringing down IBM's market share.



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3. The operation of Federal System Division as a separate corporation
The divestiture plan (Part I) provides that the Federal Systems Division be

established as a separate company. If pursuant to market share limitation, it
were decided that this division remain a part of IBM, other measures would be
necessary to insure that competition is not jeopardized.

While most of the division's activities are not a central factor in the general
purpose digital computer market, they help IBM to maintain market power in
that "know-how" resulting from this division's research and development,
financed by the government, assists and complements IBM's commercial research
and development efforts. In addition, hardware compatibilities, customer con-
tracts and other knowledge concerning the government's broader requirements
all of which are developed pursuant to such special projects, can be, and often
are, used to assist and justify additional sales of general purposes equipment to
government agencies.

To minimize these problems, IBM should be required to establish the Federal
Systems Division as a separate corporate subsidiary, operated at arm's length
and required to report profits separately. The new corporation would be pro-
hibited from any marketing activities intended to promote the sale of IBM com-
mercial equipment. Moreover, to the extent national security will allow, both the
plans and results of its research and development activities would be made avail-
able to other domestic computer manufacturers at the same time it becomes avail-
able to IBM divisions engaged in commercial activities.

4. The licensing of IBM patents at rrasonaile royalties

As indicated above, IBM would be required to license its existing patents on a
royalty-free basis. While IBM is by no means the technological leader in data
processing, its massive research effort can be expected to generate at least occa-
sional key patents, which might preclude the growth of competitors. Accordingly,
IBM should be required to make available to domestic competitors any future
U.S. and foreign patents on a reasonable royalty basis.

Finally, as above noted, other provisions designed to arrest other of IBM's
activities as alleged in the various complaints against it would also be necessary
to insure the success of market share limitation.

C. The evaluation of market limitation

As with divestiture, this kind of structural relief can be evaluated both in
terms of its contribution to effective competition and its effect on IBM stock-
holders, executives and employees. Since this form of relief does not entail sig-
nificant changes in the present size of IBM, the questions about economies oi
scale are not critical.

1. The impact of market share limitation on competition

An advantage of market share limitation is that it encourages the growth of
IBM's present rivals. It thus recognizes that the crucial problem of the computer
industry is not necessarily too few competitors but IBM's market share — ten-fold
greater than its largest competitor.

The disadvantage is that the structural change in the industry is postponed
for many years so that there may be delay in the arrival of effective competition.
In the interim the court must retain jurisdiction in order to police the injunction.
The major drawback, however, could be the possibility that IBM's competitive
drive might be handicapped by a market share limitation. The word possibility
is stressed because the market share limitation may, in fact, not be operative.
With IBM's present anticompetitive practices prohibited, IBM. in the new com-
petitive market, may be forced to compete vigorously, simply to prevent a greater
fall or decline in its market share than the market share limitation requires.
Hence the market share limitation provision is only a contingent provision opera-
tive only if the new more pro-competitive rules for IBM fail to generate a decline
in market share.

2. The effect of market share limitations on IBM stockholders, executives,
and employees

Although IBM stock values reflect anticipated future growth (as well as monop-
oly profits), market share limitation by no means drastically jeopardize IBM's
growth prospects. With respect to the computer industry, in light of the history
of rapid growth, even during the plans most restrictive years it is likely that
IBM could still grow over twice the rate of the Gross National Product which by
definition is the average growth of all economic activity. The restriction thus



5525

does not preclude IBM from growing, and growing faster than most corporations.
Moreover, more modest growth in the computer industry would mean a lesser
drain on IBM's cash flows for expansion so that IBM could pay higher dividends
or channel its growth into other industries — like copiers. As a result, the effect
of a growth restriction in the computer market upon IBM stockholders and execu-
tives would be mitigated — while competition in other industries would be encour-
aged.

III. CONCLUSION

Each plan promises effective structural relief which would enhance competi-
tion and thereby promote the public interest in a strong computer industry with-
out jeopardizing the national security. Each protects the ability of IBM to
prosper, to innovate and to contribute to a competition computer industry. Deter-
mination of which of the two is better public policy turns in large part on the
importance given to achieving immediate structural change, without continued
supervision. In any event, each plan demonstrates that effective competition can
be achieved without significant social costs of the economy.



Exhibit 4. — Memorandum re restoring competition in the industry

Memorandum of Control Data Corporation Re Measures To Restore Competi-
tion IN the Computer Industry and Foster Competition in the Computer
Related Industries

September 22, 1972.
Since the filing of Control Data's suit against IBM in December of 1968, and
the filing of the government's case against IBM four weeks later. Control Data
devoted considerable thought to the question of what kinds of relief against IBM
are necessary to restore competition and are at the same time feasible. Dismem-
berment of IBM along product and divisional lines has been seriously considered.*
However, an alternative to extensive divestiture may be deemed desirable to
minimize the risk of adversely affecting the U.S. position of dominance in the
computer market.'' and to minimize the possibility of turmoil that some may
think would result from the dismemberment of IBM into sufliciently small en-
titles to dissipate IBM's market power.

The following relief measures would lessen IBM's monopoly power in the
general purpose computer market, by a combination of structural relief and
injunctions prohibiting IBM's monopolistic practices in that market. Addition-
ally, the suggested measures would inmiediately insulate, and thereby avoid IBM
potential dominance of. the related markets of data services, profes.sional serv-
ices, and remote terminals.

THE pressing NEED FOR RELIEF

The record of the antitrust litigation demonstrates the pervasive character
of IBM's monopoly power and the necessity for early and substantial relief. On
November 1, 1971, Control Data submitted its Preliminary Pre-Trial Memoran-
dum to the District Court in St. Paul and furnished a copy (minus documents
asserted by IBM to be privileged) to the Department of Justice. The principal
evidentiary source for this four-volume memorandum is IBM documents. Con-
trol Data's memorandum contains convincing proof of IBM's possession and
direct use of monopoly power, as well as proof of the nature and deleterious
effect of IBM's anti-competitive practices.

Control Data's case is being aggressively prosecuted toward trial. However, an
"early" and successfully concluded trial in Control Data's case may not provide
adequate relief, because the courts are understandably reluctant to grant struc-
tural relief in private cases. While the courts have the power to grant such
relief to private parties, this reluctance would probably be even stronger in

*0n September 1, 1970, Control Data submitted to the Antitrust Division of the
Department of .Justice a paper entitled "Achieving Effective Competition in the Computer
Industry '. In that paper, we discussed our views as to the relief measures required to
end the monopolization by IBM of the general purpose computer market. The emphasis in
that submission was on the feasibility of a 1.3-part dismemberment of IBM. as well as
injunctions to prohibit certain anti-competitive marlcet practices. That paper also
mentioned the possibility of a relief measure which would require IBM to reduce Its
market share over time.



5526

cases where, as here, a government suit against the same defendant — for basi-
cally the same offense — is pending. So the active prosecution of Control Data's
action in no way detracts from the need, felt by both Control Data and the
industry (and, indeed, the country), for timely structural relief in the govern-
ment's case.

The importance of early and stringent relief dissipating IBM's monopoly
power is no longer debatable. The withdrawal from the general purpose com-
puter market of GE and RCA. two of America's largest companies, is dramatic
evidence in and of itself. The "psychological" effect of those departures is still
a factor. Not only has user confidence been shaken, but also many industry
observers continue to question the viability of other main frame companies.
The government's intention to curtail IBM's power — and thereby to strengthen
competition — must be make known in specific and unmistakable terms.

We also recognize that critical problems of economic survival are being faced
by the smaller firms in the peripheral equipment, software and services mar-
kets. Again, only early and meaningful relief can contribute to solving these
problems.

THE RELIEF MEASURES PROPOSED

The measures proposed include a combination of structural relief, mandatory
compatibility, and injunctive relief against specific exclusionary practices.*
They are intended to recognize the distinct and yet interrelated character of the
many markets or sub-industries that comprise the electronic data processing
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 :

Relief Aimed at Restructuring the Computer and Computer Related Markets

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

Divorcement of IB^NI from the business of manufacturing and marketing re-
mote terminals and communications-oriented equipment, including data prep-
aration 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 directly with
its computer sales), and divestiture of Science Re.search Associates (SKA).

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

Mandatory Injunction To Achieire Compatibility

Mandatory use by IBM of higher order languages, and mandatory disclosure
of product specifications and design technology leading to hardware and soft-
ware compatibility.

Injunctive Relief Against Specific Exclusionary Practices

Prohibitions again unfair and predatory pricing practices, including (a)
bundling, (b) hidden discounts, (c) discriminatory pricing, and (d) "fighting
machines".

Prohibition against marketing "paper machines".

These measures of structural and injunctive relief must be coupled with a
suitable means of policing. 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 charac-
teristics of the computer business that particularly entrench and magnify a
dominant market share, and IBM's exploitation of certain unfair market prac-
tices. 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 services, professional services, education and



♦The relief measures are described in this memorandum in terms of preneral concepts.
The details of such measures would require a draft decree of considerable length.



5527

remote terminals— all markets suited to effective competition among smaller
companies.

THE PROPRIETY OF DIVORCEMENT RELIEF APPLICABLE TO RELATED MARKETS

Unless IBM's market power is checked, IBM will extend its domination of
the computer hardware markets to these related markets. IBM's predominant
share of the general purpose computer market provides a natural "springboard"
which IBM can use to dominate the remote terminal market and data, profes-
sional and education services. IBM's familiarity with and ability to take advan-
tage of such springboards is well documented :

1. In 1932, IBM (according to the government's complaint) had 85% of the
tabulating equipment market and used its monopoly position in that market,
as adjudicated by the court (298 U.S. 131), to restrain trade in (and, in effect,
to monopolize) the related tabulating card market.

2. In 1952. the government again sued IBM for antitrust violations, this time
directly attacking IBM's monopolization of the tabulating equipment market.
The 1952 complaint, which expressly referred to the 1932 case, was settled by
a consent decree in 1955. Although this 1952 complaint made no mention of com-
puters, the prohibitions contained in the 1956 decree extended beyond tabulating
equipment to the then related (and embroyonic) business consisting of the
manufacturing and marketing of computers.

3. The third phase in this history of the government's attempt to prevent a
sequential domination by IBM of these related markets was commenced with
the institution in 1969 of the government's current Section 2 case against IBM.
The 1^)69 complaint expressly refers to the 1952 case and. notwithstanding the
fact that the 1956 consent" decree purported to restrict IBM's activities in
marketing computers, expressly alleges that IBM used its monopoly position
in the tabulating equipment market as a springboard to monopolize the business
of manufacturing and marketing general purpose computers.

What now must be obviated is the continuation of the current market environ-
ment which will lead to the filing— perhaps in the late '70's— of still another De-
partment of Justice complaint against IBM, one which will charge IBM with
monopolizing these hardware and service markets which are so closely related to
the general purpose computer market alleged in the pending government case.
This prospective complaint would be formidable, alluding as it would to IBM's
dominance in tabulating equipment which was used as a springboard to IBM's
monopolizing of the computer-marketing business, which monopoly, in turn, pro-
vided the springboard for IBM's monopolizing of these growing computer-related
markets. But if the objective of Section 2 litigation is to obtain relief which is
structural in nature and therefore lasting— thus avoiding the need for future
complaints and litigation— then we submit that the time is now to divorce IBM
from these related markets. "The very purpose of prophylactic structural relief
is to obviate the need for new antitrust suits by foreclosing threatened violations
before they can occur." (January, 1970 brief of the Department of Justice to the
Supreme Court in the Armonr-Getieral Ho^t case: p. 32)

This type of divorcement relief against a monopolist is clearly appropriate. Re-
lief addressed to markets directly related to the markets which are the focus of
the litigation— as was done in 1956 in the case of IBM itself— was one of the
principal objectives obtained in the Meat Packers case {U.S. v. Swift d- Co., 276
U.S. 311). There, the complaint alleged dominance in meat-packing and threat-
ened dominance in the non-meat food business. While divestiture of the defend-
ant's meat-packing assets was not ordered, the decree divorced the defendants
from the business of food distribution, the net effect of which relief was that the
meat companies' ". . . economic power was thus not destroyed but rather hem-
med in." {U.S. V. Sioift d Co., 189 F.Supp. 885 at 892, the 1960 modification pro-
ceeding). ,. ,

The propriety — and necessitv — of utilizing such divorcement remedies was doc-
umented by the government in its brief (pp. 30-32) to the Supreme Court in
the related Armonr-General Host case :

"Structural relief which restricts or eliminates a defendant's activities or fi-
nancial interests in certain lines of commerce is an important instrument among
the varied and flexible forms of remedy which have been decreed to prevent par-
ticular threats to competition. Such relief has been utilized in court orders in a
varietv of monopolization, merger and restraint of trade cases, most commonly
to prohibit entrv into certain lines of commerce by acquisition and sometimes—



5528

as here — to exclude companies from any kind of involvement in the prohibited



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 73 of 140)