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 75 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 75 of 140)
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fice typewriters would be transferred to one or more independent companies
whose power would be considerably lessened by virtue of the absence of the
integrated support of IBM's massive computer resources.

Obviously such divorcement, as well as the other divorcement provisions pro-
posed above, need not be permanent. If and when it could be demonstrated that
such markets would benefit from the entry of IBM, the decree could be modified,
at the motion of either the government or IBM. At this point in time, that pos-
siliility appears very remote.


YI. Mandatory Advance Disclosure of Technology, and Mandatory Use of
Standards Required to Achieve Compatibility.

A. The ProNem

IBM establishes most of the standards for the entire computer industi'y. par-
ticularly for interchangeable medi:;. This is recognized, for example, in an
Organization for Economic Cooperation and Development (OECD) publica-
tion (Gapfi in Technology: Computers (Paris, 1969)), which states (at pp. 66-
67) : "IBM can be said to set the standards, at least in the commercial market
by virtue of the fact that it is the largest company and the fact that a majority
of computer users have been trained by IBM and use IBM equipment ... In
the case of the computer industry, the result is that what IBM does tends to
become the standard for the whole industry by virtue of IBM's market share
nnd tbp determination of certain smaller companies to 'follow IBM' whatever

IBM's power over standnrds is further intensified by its role as the only com-
]in.ter manufacturer producing a full line of computers and peripheral equip-
ment. Many customers require compatibility among computers of varying sizes,
because they wish to use the same applications prot;rams on more than one
system or because they may interchange their peripheral equipment between
several computers. The customer's desire for compatibilty, along with IB^VT's full
line and great size, requires manufacturers to make their equipment compatible
at least in some degree with IBM products in order to serve any substantial
portion of the market.
40-927—7.5 45


Some definitions are in order to understand the iniportauce of standards and
the methods that are employed to IBM's advantage :

1. Compatibility

Compatibility is used broadly to indicate degrees of interchangeability of
various elements in a computer system. Most frequently these are :

(a) Inter Chang eaMe media are said to be compatible if the media from two
different sources can be used interchangeably on a given computer system with
no modification to either the media or the system. This requires physical, elec-
trical, environmental as well as data format equivalent through the establish-
ment of standards for all relevant characteristics. Punched cards or magnetic
tapes are examples.

(b) Module or -functional compatibility refers to the ability to interchange
functional modules between two different computer systems. Examples are
punched card readers, magnetic tape transports, memories, etc. These devices are
said to be "plug-to-plug compatible" if the plug connecting a particular module
to a system can be unplugged and a different "plug compatible" module can be
plugged into the system to perform a similar or identical function with no modi-
fication to either the module or the system. To achieve this form of compatibility
"interface standards" are required for both the points of interconnection, such
as the plug between the module and the system.

(c) Systems and software are said to be compatible if data as represented
on an interchangeable media or received from an electrical connection is in a
form and format such that it can be entered into either of two compatible sys-
tems. Similarly, two different systems ai"e said to be "software compatible" if the
programs written for one system can process data efficiently w'hen the programs
and data are entei-ed into the second system without modification. Compatibility
of this type requires a large number of standards ranging from those for the
interchangeable media or inter-connection, the codes and format for data, to
those for the internal operations to be performed upon various software or
program commands. Systems other than those of a single model of a single
manufacturer are rarely completely compatible but compatibility of varying
degrees can be achieved if sufficient standards and specifications are available.

2. Standards

Standards are accepted criteria or measures of performance, practice, design,
terminology, etc., that are established and controlled by a suitable authority.
Among the more important standards to the relief here proposed are perform-
ance standards and interface standards :

(a) Performance standards are used to define characteristics to permit a com-
parison of performance of two different entities.

(b) Interface standards are used to define interconnections and interrelation-
ship between separable modules defined by the function they perform. Most
frequently these standards take the form of combinations of physical and elec-
trical specifications and rules or principles required for interconnections.

Competitors are forced to provide functional and often compatible equivalents
to IBM products in order to be responsive to customers' requests for proposals.
Thus, when only IBM can achieve new product acceptance and standards through
wade usage, a clear advantage is established.

Two examples of standards resulting from IBM's dominance in the computer
industry are those for punched cards and magnetic tape. In the case of pimched
cards, prior to the evolution of the computer industry there were Hollerith cards
with 80 columns of two rectangular holes each and Remington Rand cards wnth
90 columns of round holes. Advantages were claimed for the rectangular holes
whfn hole sensing was electromechanical by means of electrical brushes making
contact through the rectangular holes in tabulating equipment. Computing
equipment card readers have used photoelectric hole sensing since the develop-
ment of high speed readers.. The greater number of holes in the 90-column card
clearly provided an advantage for computer use since it allows for recording
more data, and roimd holes have a clear advantage because they can be punched
to required tolerances more easily. The round-holed. 90-column card punch dies
are also more readily manufactured than rectangular-holed ones. In spite of
these clear technological advantages of the 90-column card, both industry and
government have standardized on the "IBM" SO-column rectangular hole cards
based purely on the number of users of the IBM card resulting from IBM's
dominance. Proof of technological superiority of the 90-column round hole
cards was clearly demonstrated by IBM's new card offering with 96 columns of
round holes.


111 the case of magnetic tape, the first Univac was delivered with magnetic
tape transports. Instead of adopting these standards, IBM provided transports
with different characteristics and again the industry has standardized on the
IBM tape standards based oil grtater usage.

IBM has used its power as a standards-setter to create monopolies for its
own equipment When a new IBM product or modification of a product which
affects compatibility is introduced, other manufaiturers must introduce a new
product or modify their equipment to coni'orm lo the new IBM change m order
to bid competitively. Such modifications take time and the investuient of re-
.sources : in the interim IBM has the entire field to itself.

This aspect of IBM's monopoly power has lasting effects on competition. IB:\I
has a head start by initially establishing its product standards and controlling
changes and so can establish a lasting lead. IBM insures the full advantage of
its head start by carefully avoiding the release of any change in standards piior
to the introduction date of the new products.

IBM's competitors in the computer market are in an almost impossible posi-
tion. They can seldom innovate in areas impacting on interface technology
because customers regard IBM equipment as the norm— given IBM's great
relative size and full line. They lack the resources to challenge IBM's standard-
setting role. Since IBM fails to disclose these changes in advance, competitors
can never be as timely as IBM. They can only frantically try to recover their
market after each IBM shift or new standard.

The problems of IBM's product changes without forewarning also adversely
affects software houses, because, given IBM's overwhelming .share <>f the hard-
ware market, their software products are almost exclusively designed for use
on IBM equipment. Like the hardware manufacturers, software houses find thafc
the timing of IB]\I of both new developments and modifications to existing Inlttt-
ware and software products places them at a substantial competitive dis-
advantage by at least temporarily outmoding their own products.

A closely related problem to that of standardization is the compatibility of
computer programs. IBM and its customers have developed the greatest variety
of programs, particulnrly for various computer applications. Furthermore, with
IBM equipment so common, users and independent software specialists devote
most of their efforts to developing programs for IBM equipment to reach the
largest market. IMuch of this application programming is written in IBM
assembly or machine language, thus limiting their u.sefulness to IBM com-
puters. In contrast programs written in standard higher-order computer lan-
guages — such as FORTRAN and COBOL — can be run on most any computer
for which a FORTRAN or COBOL coni])iler of the same specifications have been
developed with minimal or no modification.

Competitive manufacturers are precluded from competitive procurements'
simply because they lack the specific applications programs required and cannot
use IBM machine language programs even if they are available. At the same
time, present IBM customers are locked-in by assembly language programs and
because of the conversion cost cannot afford to change to competitive systems.
Notably, CDC finds it has on the order of five times greater probability of making
a siile to a user who programs in machine independent language.

The remedy is to have applications software written in higher-order compiler
languages that are .specifically designed to be machine independent. Furthermore,
they are standard languages approved by the standards organization for the
computer industry: American National Standards Institute (ANSI) X?> Commit-
tee comprising representatives of many users and manufacturers. They also
constitute ederal Information Processing Standards (FIPS) for the Federal

The use of such standard compiler languages for applications software would
allow all users to benefit from new applications program developments and
allow users to shift between competitive equipments without making a large
re-programming investment. Compiler language programs may be less efficient
than as.sembly language programs in terms of machine time, but there are
compensating savings for compatibility in reduced programming time to write
in these languages and in greater ease in modification and correction of pro-
grams. This requirement would also permit and encourage development of more
efficient machine designs for proce.ssing compiler language programs.

When protrrnms are written in highpr-order compiler language, additional
standards are required tf> provide the greatest degree of compatibility between
systems of different manufacturers. These standards relate to input/output,
job control, and data files and data structure, as well as other affected areas.


standards are under development for many of these areas by the BEMA-
sponsored X3 Computer Standards Committee under ANSI. In addition, NBS
has recognized the necessity of these standards and, as the government organi-
zation responsible for FIPS, the future adoption of such standards can be
anticipated. The use of these standards, when developed, in combination with
the higher-order languages, will be required to achieve the degree of compati-
bility desired for relief from IBM's control and power to lock in customers.

B. The Suggested Relief

IBM should be required to disclose confidentially to other U.S. manufacturers
product specifications relating to compatibility, such as media specifications,
and machine interface specifications, 24 months prior to the sale of the new
or changed product. This pre-sale release requirement should also extend to
input/output, file and data structure, and job control languages.

With respect to machine language, IBM should be required to write all its
future applications programs in higher-order compiler languages for which
ANST or FIPS standards have been approved and released. In addition, IBM's
input/output, job control, data file and data structure methodology shall con-
form to ANSI or FIPS standards when standards for these areas have been es-

'C Evaluation

The 24 month prior notice requirement would reduce IBM's head start and
give competing manufacturers a chance to make product iutroductious within
a time frame competitive with that of IBM. The greater use of common languages
and other software standards increases the customer's freedom of choice by
permitting the selection of data processing equipment on its relative merits
and prices, unimpeded by the costs of re-programming.

Additionally, prior release of product specifications and the software stand-
ards requirement would dilute IBM's power in several specific ways :

(1) As discussed in CDC's preliminary Pre-Trial Memorandum, IBM's pre-
dominant market share is not only a reflectioi: of its market power, but it is
also a source of that power in that its predominant market share is self-per-
petuating. It is self-perpetuating because the fact that the great majority of
installed computers are IBM computers is, in and of itself, a strong inducement
to a prospective customer to acquire an IBM machine. This is so because the
vast number of IBM installations necessarily means that (a) there is a much
greater amount of software and trained personnel available to the user, (b)
there is a large amount of "back-up" computing time (on IBM machines) avail-
able, or conversely, a large number of users who might purchase unused time
from the customer on its computer, and (c) there is a large number of buyers
for the computer as a "used" computer if and when the customer wishes to dis-
pose of it. This self-perpetuating effect of IBM's predominant market share
would be minimized if the above compatibility measures were required.

(2) The self-perpetuating effect is equally applicable to a current IBIM cus-
tomer. In addition, the current IBM user is locked in to IBM for additional or
replacement computers because of the high cost of converting to non-IBM equip-
ment. If non-IBM equipment and device deiiendent software were compatible,
this lock-in effect (a "physical" rather than contractual bundling) would be
eliminated, and computer could be acquired on its merits.

(3) For software, the shift to higher-order compiler languages would encourage
computers to be designed to operate more eflicieutly on programs written in these
languages. The use of such software standards, including compiler languages
in developing applications programs, would allow all users to benefit from new
IBM developments in applications programs and allow users to shift to com-
petitive equipment without making a large re-programming investment. The
general importance of compatibility of software not only for competition but for
economic eflSciency is reflected in the OECD report :

"For a long time the problem of compatibility has been one of the most
important ones of the industry, and this for many reasons. Lack of compati-
bility has for instance deterred many users from going to other manufacturers,
owing to the high cost of rewriting their programs ; moreover, manufacturers
tliemselves have found the lack of compatibility between their own computers
was creating tremendous wastages."

(4) To achieve hardware, interface and media compatibility, advance dis-
closure by IBM of new prodiict performance, standards and changes to current
products is important not only for computer manufacturers, but for independent
manufacturers of peripheral and terminal equipment, and for users.


In short, the compatihility measures suggested here would enhance competi-
tion in several markets.


In contrast to the more expansive treatment accorded to the foregoing relief
measures, we will discuss only briefly the following interrelated items of spe-
cific injunctive relief.* This cursory treatment does not reflect their lack of im-
portance. Rather, the practices are so obviously anti-competitive, and their
prohibition so obviously warranted, that brevity seems appropriate.

All of the proposed injunctions should apply equally to World Trade Corpora-
tion where there is growing evidence of extremely predatory behavior.

VII. Prohibition Against Bundling.

A. The Problem

For many years, IBM sold its computer systems, software and support services
for a single (bundled) price, and refused to sell any one of those "products"
alone. Because IBM has overwhelming market power in all three of those areas,
it was able to use its power in any one area as a tying device to the other areas.
This in effect requires customers to pay for services and products that they may
not desire or be able to use. The current government complaint alleges that
bundling has been one of the principal exclusionary practices whereby IBM
maintained its monopoly power over the industry.

B. The Suggested Relief

In June of 1969, IBM "voluntarily" unbundled many of its support services
and software from its computer systems, but there have been rumors that a
partial "rebundling" is being contemplated. IBM should be required to unbundle
all of its services and software with the possible exception of operating sys-

C. Evaluation

Untying this exclusionary knot will eliminate an obstacle that stands in the
way of other systems manufacturers in their efforts to market their products
on their merits. This relief would be particularly efiicacious when conil)ined
with the compatibility relief suggested above. Additionally, the benf^f.cial
results of unbundling extend to the computer related markets by removing
an impediment to the selling of maintenance, software, etc. by the independent
companies in those markets.

YIII. Prohibition Against Granting Hidden Discounts.

A. The ProMem

IBM has historically provided cusotmers with economic incentives, beyond
direct price reductions, in order to maintain standard lease prices, and thus not
affect their lease base, and still be able to offer what amounts to reduced prices
to selected customers. These hidden and indirect discounts and concessions
take various forms, including agreements to provide services such as analysts
or other manpower at no charge ("manpower give-aways"), promises to develop
software at no charge ("software give-aways"), agreements for joint software
development with customers (an activity apparently to be expanded, as an-
nounced early this year by President Cary of IBM), purchasing software or
buying back machine time from the customer ("buy-backs"), grants for research
or computer centers, etc., etc. These indirect, hidden concessions and discounts
make it extremely diflicult for competitors to engage in direct price competition
on the merits of their products.

B. The Suggested Relief

IBM should be required to publish a separate price list, which would include
terms of sale such as credit, trade-in allowances, etc., for (1) each unit of
hardware. (2) applications software. (3) maintenance servic<^'-". (4) any other
products or services provided by IBM as a part of the sale and .support of (-(im-
puters. (If the suggested remedy of divorcement of IBM from the computer
related services bu.siness is not adopted, then such services, i.e.. education or
training, programming, and consulting should also be subject to this injunction.)

*IBM should be enjoined from all 37 exclusionary practices alleged in Control Data's
complaint, the practices discussed briefly iiere being among those where immediate relief
is most necessary.


A-ll sales and leases should be made at this published price except where de-
viations are justified to meet competition. Where deviations are made, IBM
should be required to disclose pviblicly the aggregate "nef price for each sale or
lease it consummates. It should also make known its complete terms of sale
during each competitive procurement, so that the other bidders have an oppor-
tunity to engage in open price competition.

C. Evaluation

The relief suggested here should be considered in light of our proposals re-
.^arding unbundling and the divorcement of IBM from the computer services
markets, because the historical "packaging" of various hardware products, soft-
ware products and "support" services permitted IBM to hide discounts and
conceal the net price it was charging. "Auto sticker" pricing will permit other
:main frame companies to engage in more effetcive price competition. This open-
pricing relief must also be considered in conjunction with the proposed injunc-
tion against exhorliitant discounts — even on a published I»asis — discussed next.

IX. Prohibition Against Extensive Discriminatory Pricing.

A. The ProUem

Historically, IBM has confined the practice of massive price-cutting to its
so-called educational discount, which has varied from 60% to 20%. As alleged
in the pending government complaint. IBM used this educational discount prac-
tice as a means to arrogate to itself the major share of university business, not
only for the immediate hardware sales that it fostered, but also for the long-
term entrenchment benefit stemming from the built-in bias toward IBM which
resulted from the exposure to and familiarity with IBM equipment on the part
of faculty, students and advisors. While IBM "voluntarily" has reduced this
discount, there is nothing to prevent IBM from re-instituting it or from instituting
a similar discount for other types of customers, thereby effectively locking out

B. The Suggested Relief

IBM should be prohibited from publishing (or charging) any extensive
discount schedule for any type of customer for the purpose of injuring competition.

C. Evaluation

CDC's Preliminary Pre-Trial Memorandum demonstrates that IBM's educa-
tional discount policy was not altruistically motivated. It was designed as a
device to perpetuate its predominant share of the computer markets and, as
such, should be enjoined. Reasonable discounts for non-profit and similar in-
stitutions would still be permissible.

X. Prohibition Against Predatory ("Fighting Machine") Pricing. ;

A. The Problem

IBM is the only main frame manufacturer with a complete line of products
both hardware and software. This fact, combined with the fact that its market
share is more than ten times its nearest rival, necessarily means that IBM
faces little or no competition with respect to many of its computers and other
products. Such products, both hardware and software, can be and are priced
at monopoly profit levels, while those products which face present or imminent
competition are priced at levels resulting in abnormally low profits — or priced
below cost. IBM has employed this power of selective pricing — the favorite tool
of a monopolist — to subjugate its competitors.

B. The Suggested Relief

IBM should be enjoined from (1) entering into the production of computer
hardware or software which is not likely to result in returns reasonably related
to the returns from other computer products marketed by IBM, and (2) pricing
any product at a low-profit or non-profit level with the intent to injure a com-

C. Evaluation

The three relief measures previously discussed would require IBM to price
each of its products separately and on its own merits, to disclose such price
openly, and to refrain from discounting in favor of a particular group of cus-
tomers for the purpose of injuring competition. This complementary fourth
measure is necessary to insure a fair and non-monopolistic pricing approach
bv IBM. The well-kno^Ti "fighting machine" practice is just as anti-competitive

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 75 of 140)