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 76 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 76 of 140)
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5539

cis the illegal practice of the national seller cutting his prices in the confined
territory of the local competitor, making up for his losses by the exorbitant
profits made on sales effected where he faces no competition. Unless this pricing
power of IBM is checked the competitors will continue to face the potential of
extinction.

XI. Prohibition Against "Paper Machine" Practices.

A. The Problem

Closely related to the flighting machine practice of IBM is its practice of pre-
maturely announcing new or modified computer products for the purpose of ward-
ing ofe buyer commitments to a competitor's product. In view of the "security-
blanket" approach of so many computer users, IBM is fully aware that many
customers will delay a purchase decision if they understand that IBM intends
to market a "competing" product. This fraudulent practice has been used by IBM
with devastating results to ODC, especially when a paper machine was piiced—
futuristically — as a fighting machine.

B. The Suggested Relief

IBM should be prohibited from announcing (or disclosing in any way) plans
for a new product unless and until (1) detailed design and performance specifica-
tions have been established for the product, (2) the product plans have progressed
to the point where the commencement-of-manufacturing date is reasonably cer-
tain, and (3) a complete prototype is in existence and has passed tests validating
the design and performance specifications which have been established ; the re-
sults of such tests should be made available to the general public at the time of
the product announcement.

C. Evaluation

IBM's paper machines severely disrupted the development of large-scale com-
puters, and are capable of inflicting similar damage in other areas. The suggested
relief attacks this practice head-on, but still leaves IBM completely free to
innovate and successfully market hardware and software products — if the product
is real and not just a flgment of IBM's imagination. Besides being hurtful to
IBM's competition, the marketing of such products before they are truly operative
and perform as represented is damaging to the image of the United States as the
world's leader in computer manufacturing.

CONCLUSION-

"We are cognizant of the fact that much has been said and written to the effect
that, even assuming that IBM is guilty of the monopolization charge set forth in
the government's and CDC's pending complaints— and thus possesses the power
to exclude competition in the general-purpose computer market — nothing can be
done to remedy the situation. We do not subscribe to this defeatist attitude. The
structural and other x-elief measures suggested in this memorandum are feasible,
forward-looking and meaningful, without falling in the "drastic" category.

In our opinion, these measures are minimally essential if the United States is
to retain its leadership in computers, for any industry which has been monopo-
lized by a single company is, by hypothesis, a very vulnerable industry. The effect
of the relief proposed is to strengthen the industry by creating a competitive
environment for IBM's rivals which will permit their survival in the computer-
manufacturing market, and also allow them room to grow, unimpeded by IBM's
power and exclusionary practices, in computer-related markets. At the same time,
the relief suggested would leave IB:m fundamentally strong in its traditional role
as a manufacturer and marketer of computer systems.

The beneflts of the aggregate relief proposed to the industry, to the public and
to the national interest are far-reaching :

1. The economies of scale in manufacturing components will be shared by all
computer companies.

2. Technological progress will be accelerated by virtue of eliminating IBM's
de facto standards power and its resultant ability to structure the market which
locks in users to IBM products and thereby forecloses IBM's competitors.

3. "VN'ith IBM prohibited from extending its dominance into certain computer-
related markets, small companies including new entrants can flourish and inno-
vate, thus permitting users to purchase products and services on the merits of
the competitive offerings.



5540

4. The remaining general puriM>se computer manufacturers will be enabled to
survive, and hopefully to grow in strength and innovative capacity, without
dismantling IBM.

5. Assuming competition is restored by these measures, and the industry is
thereby strengthened, the American export position in computers and related
products will be improved, and the industry's capability to provide the necessary
tools for the Nation's defense and scientific explorations will be substantially
enhanced.



Exhibit 5. — Joint position statement of Control Data Corp., Honeywell, National
Cash Register, Sperry Rand re United States v. IBM

Joint Position of Control Data Corporation, Honeywell, the National Cash
Register Company, Sperky Rand Corporation, Re Relief Matters in U.S.
V. IBM

The following positions, each of which will be briefly elaborated on in the
following pages, are held in common by these four companies :

1. Early relief is indispensable to insure a possibility of the restoration of com-
petition. This requires the immediate formulation of a comprehensive plan for
interim relief. Although emphasis should be on post-trial interim relief, i.e., relief
to take effect soon after violation has been found and to terminate upon the effec-
tive date of the ultimate relief, a pre-trial injunction might be warranted under
certain circumstances, provided that the preparation for and the hearing on a
motion for such relief would not impede the forward progress of trial preparation
and delay the commencement of trial.

2. The post-trial interim relief plan should include "structural", as well as be-
havioral, provisions designed to safeguard the industry during the extensive
period of appeals and during the process of formulating the ultimate relief.

3. To the end that interim relief should take effect as soon as possible, the
Antitrust Division should make an effort to obtain a court order separating the
issue of violation from the issue of ultimate relief.

4. The Antitrust Division's position as regards the complex question of ulti-
mate relief should not be finally resolved until the point in time when the imposi-
tion of such relief is fairly close and the industry and other relevant facts which
then exist are known. We collectively reiterate the positions already individually
recited by each of our four companies that, under the present circumstances, it
is our judgment that the divestiture proposed in the October, 1972 relief memo-
randum filed with the Court by the Antitrust Division would not restore com-
petition to the industry and achieve the objectives of the Sherman Act. However,
we do believe that consideration must necessarily be given to divestiture of a type
which is appropriate under the circumstances at the time and to divestiture, and
other relief, on a world-wide basis,

I, AN effective interim RELIEF PLAN IS NECESSARY AND FEASIBLE

The need for early, interim relief can be understood only in light of the
probable time of commencement of the ultimate relief measures and the likeli-
hood of significant changes in the industry before ultimate relief becomes
effective. For present purposes, we assume that the trial will start sometime
in 1974 and last for approximately one year. Because of the complexities in-
volved in the litigation and the obvious volume of the trial record, the appellate
process will probably take years, and the possibility of more than one appeal
cannot be discounted.* The ultimate relief-formulation process will also be
extremely time-consuming, because of the likelihood tliat relief will be proposed
and presented by numerous interested groups and individuals, inside and out-
side government. In view of the importance of the issue, the District Court will
be inclined to seriously consider the pros and cons of all such proposals l)efore
entering its final judgment incorporating the ultimate relief plan.

All of this means that ultimate relief probably cannot become fully effective
in this decade. But if IBM's dominance remains unchecked until the 1980"s, the
computer industry may suffer an irretrievable setback. Without delving into



*This process may be even lengthier in the Expediting Act is amended so as to provide
for appeals in government injunction cases to the Courts of Appeal.



5541

the cause and effect relationship between IBM's dominance and the departures,
including those of GE and RCA, from the computer industry, the fact remains
that the number of IBM mainframe competitors is now down to only a handful.
Their continued viability through the critical years comprising the second half
of this decade must not be impaired.

An effective interim relief plan could provide assurance in this respect. The
underlying assumption of this Memorandum is that the government will establish
a monopolization violation at the trial, and a monopolization finding neces-
sarily means that the District Court will have found that IBM has the power to
exclude competitors from the market. In light of such an adjudication, and in
light of the obvious difficulty and time-consuming nature of resolving the ulti-
mate relief pi-oblem, the undersigned companies feel that the Antitrust Division
might well persuade the District Court, without the need for extensive hearings,
to enter an order calling for effective interim relief. The necessity for such interim
relief measures was recognized by the Supreme Court in one of the earliest
Sherman Act cases :

"(The relief) subject necessarily takes a two-fold aspect, — the character of
the permanent relief required, and the nature of the temporary relief essential
to be applied pending the working out of permanent relief in the event that it
be found that it is impossible, under the situation as it now exists, to at once
rectify such existing wrongful condition . . . Pending the bringing about of
the result just stated, each and all of the defendants, individuals as well as
coniorations, should be restrained from doing any act which might further
extend or enlarge the power of the combination, bv any means or device what-
soever." U.S. V. American ToMcco Co., 221 U.S. 106, 31 S. Ct. 632, 650, 651 (1911).

II. THE INTERIM RELIEF PLAN SHOULD INCLUDE STRUCTURAL PROVISIONS

The need for post-trial interim relief has been expressly recognized by the
Antitrust Division in its October, 1972 preliminary memorandum on relief. But
the undersigned companies entertain serious doubts as to whether the combina-
tion of the "anti-scrambling" provisions of section II of that memorandum, and
the behavioral injunctions of section III. are sufficient in scope to accomplish
the objective of not permitting the situation in the industry to worsen during
the immediate post-trial years. It must be recognized that, if and when IBM has
been adjudicated to be a monopolist — at which point IBM would be confronted
with the possibility of dismemberment, as outlined in the Department's Octo-
ber. 1072 memorandum — IBM's management would have every incentive, as well
as the capability, to substantially increase its market share, so as to be able
to "bequeath" such additional business to the IBM successor companies. Any
such increased pre-divestiture dominance would of course benefit the IBM
"Xewcos", but the corresponding loss of market share by current IBM competi-
tors might prove disastrous for one or more of them.

We see no effective way to preclude that eventuality, short of the "controlled
growth" approach suggested here. In essence, the proposed controlled growth
remedy would prevent IBM from increasing its market share. This prohibition
against excessive groAvth would apply to identifiable segments of the com-
puter market, and also to the computer-related markets which likewise would be
vulnerable to an IBM take-over during the post-adjudication period. Some of
the details of the controlled growth remedy, together with an outline of the
other features of the proposed interim relief plan (i.e., behavioral injunctions
and provisions assuring access to IBM products and technology), are set forth
in Appendix A to this Memorandum.*

We have characterized the controlled growth remedy as "structural" because
it directly addresses the central issue of preservation of competition and is un-
related to behavioral practices. But the proposal is designed to preserve the
current market structure, not to alter it, and thus is consonant with the interim
relief concept of maintenance of status quo. We are aware of the fact that reme-
dies imposed on an interim relief basis must be reversible because of the possi-
bility that the adjudication of the trial court might not be affirmed. Neither the
controlled growth remedy nor the other suggested measures fall into the irreversi-
ble category. Rather, they are designed to preserve the current market structure
and thus obviate the possibility that the entire objective of the government's'



♦Similar behavioral injunctions against IBM may be in effect at the time of adjudica-
tion. In Telex v. TBM, the District Court in September, 1973 cranted injunctions embracing
some portions of Interim Relief Measures Nos. 1, 2 and 6 of Appendix A.



5542

case — tlie infusion of competition into tlie computer industry — \Yill be frustrated
before final relief is entered.

III. THE VIOLATION ISSUE SHOULD BE SEP^VKATED FROM THE ULTIMATE BELIEF ISSUE

The Department should take whatever steps are necessary to obtain an
adjudication against IBM as soon as feasible, which adjudication will permit
the imposition of effective, and early, interim relief. A separation of the two
principal trial issues will assist in meeti!!i;- that objective in two v»'ays. First, if
the parties are freed at this time from the burden of preparing the evidence
and arguments in support of their respective positions on ultimate relief, the
trial-commencement date can be accelerated ; and second, tlie duration of an
initial trial limited to the violation issue would be substantially shorter than a
single trial of the combined issues, thus allowing the entry of the trial court's
findings as to the monopolization issue at a much earlier date than otherwise.

We realize that to accomplisli such a separation is not within the govern-
menfs discretion but rather that of the District Court. And we assume that
IBM, desiring to delay the day of adjudication as long as possible, would resist
a government motion for a separate trial. Still, an issue-separation approach of
this kind is not uncommon in government antitrust cases, and we would urge
the Antitrust Division to seek such a separation in view of the following re-
sultant advantages that are in addition to the interim relief objective mentioned
above :

1. If the violation issue is dispositive in favor of IBM, many months of the
Court's time and one of the Division's efforts will be sa\ ed.

2. If violation is found (and that is the assumption underlying this Memoran-
dum), the District Court can then address the ultimate relief problem in light of
the understanding of the complex industry which will have been gained in the
process of hearing the evidence on the violation issue and formulating its findings.

3. Against the background of such an understanding of the industry, the relief
issue can be addressed in light of the then current facts and trends in the indus-
try, national and international economic considerations, etc.

4. No duplication of evidence would be involved. Certain key witnesses would
have to appear a second time, but their testimony would be more meaningful if
given after the Court's findings on the monopolization issue. For example, in an
undivided trial context, testimony on the cpural issue of what is needed to dis-
sipate IBM's market power has to be given on the basis of assumptions as to the
nature and scope of that power, while in a separated trial context, such testimony
would be given in light of the District Court's extensive findings on the market
definition and market power issues.

5. The suggested separation of issues does not necessarily affect the question
of whether one or two appeals will be taken. Depending on the definition of the
issues to be separated, the Court can infuse in or withhold from, its initial find-
ings the requisite "finality" determinative of IBM's right to appeal at that point.
But in either event, interim relii^f m^'asures could tako ef^'<H^t sli'irtly afrer (if not
before) such initial findings and remain in effect at least until the entry of the
final judgment setting forth all of the deails of the ultimate relief package.

IV. THE RESOLUTION OF THE ULTIMATE RELIEF QUESTION SHOULD BE DEFERRED

The government's tentative proposal for ultimate relief, as we understand it,
contemplates the division of IBM into "several" (presumably 5 to 8) balanced
mainframe manufacturers which offer a relatively full line of computer systems.
In our view, that plan is fraught with substantial risks and difficulties. Assum-
ing that the feasibility problems involving plant-splitting and the use of foreign-
located assets can be overcome, the risk of economic waste by way of transitional
costs and the risk of creating a shared monopoly remain.

Substantial transitional costs are necessarily involved. Among the more ob-
vious are the economic wastes inherent in dividing basic research and develop-
mental work in progress, transferring production, and allocating successor re-
sponsibilities regarding support of IBM equipment in the field.

Another aspect of the transitional costs of the dismemberment plan proposed in
the Antitrust Division's October, 1972 relief memorandum would be the slow-up
in the market as users hold up their procurement decisions until there is less
uncertainty as to the new structure of the industry. Such a slow-up, aggravated
by the continuing IBM de facto standards, would probably involve a freeze on
technological progress to the detriment of computer users, and hence the public.



5543

It is likely to adversely affect all of the firms in the industry, and especially the
non-IBM companies because they lack the cash flow from an extensive lease base
to sustain them during the transitional years.

More importantly, the final outcome of the dismemberment plan in the Anti-
trust Division's October, 1972 relief memorandum is likely to leave the IBM suc-
cessor companies as dominant firms. Depending in part on the efficacy of interim
relief, the successor companies will be substantially larger than the non-IBM
mainframe companies and will have the further advantage, which could prove
decisive, of a very sizeable lease base coupled with a compatible product line
among themselves. With a head start from size and lease base, and sheltered by
systems/data base compatibility barriers and the other aspects of the "technologi-
cal lock-in",* the successor IBM companies might well succeed not only to the
assets of IBM but also to its predominance in the industry. This would not only
fail to return true differentiated competition to the market place, but rather \vould
set apart one group of competitors with significant advantages over other
competitors.

Converting single-firm dominance to shared monopoly power is not, in our
view, of suflicieut public benefit to offset the substantial transitional costs of dis-
memberment and the risk that users will lose the innovative product differentia-
tion and other competititive benefits now being provided by the non-IBM main-
frame companies.

While the undersigned companies have these very real concerns over the effcacy
and feasibility of the dismemberment plan in the Antitrust Division's October,
1972 relief memorandum, the position of these four companies is that the merits
of any ultimate relief plan, be it the Antitrust Division's or those of any of the
four companies, cannot now be adequately evaluated.** Under the best of cir-
cumstances, the effective date of the measures imposed by way of ultimate relief
is many years away, and during the intervening years the facts and circum-
stances which should dictate the type of ultimate relief that is both feasible and
eflicacious, i.e., the industry structure and composition, the state of the tech-
nology, user needs, the position of the United States relative to other countries
(including balance of payments and balance of trade considerations), and other
domestic and international economic factors, may drastically change. It is for
these reasons that we feel that the government should not attempt at this time
to fix on a definite plan for ultimate relief, but rather defer tlie formulation of its
final relief plan to a point in time when the controlling considerations are known
or at least can be evaluated with much less uncertainty.

In spite of such difficulties in predicting future events, these four companies
expect that consideration will have to be given to divestiture of some type and
to divestiture and other relief being implemented on a world-wide bnsis.

V. CONCLUSION

It is the considered request of the parties to this Memorandum that the Depart-
ment of Justice give due consideration to the collective positions expressed
herein. We believe that the views of these companies deserve substantial weight
because they represent computer-dedicated assets producing annual revenues of
over $2,500,000,000. These four companies employ over .800,000 people, almost
half of them directly involved in computer efforts; these companies are owned
by over one quarter of a million shareholders. These companies are significant
suppliers to the U.S. government and are major exporters. These companies are
also the source of significant innovation in all facets of computer techjiology.
With so much at stake, these companies are vitally interested in the eflBcacy and
consequences of the relief to be sought against IBM.

It is obviously in the self-interest of these companies to remain viable and to
grow in strength, but inasmuch as these four corporations represent a significant



•* "Technological lock-in" arises from the close inter-relationships of hardware and
software in a complex computer system and the close integration of the computer system
witli most users' o|ierations. By making a change in suppliers uneconomical, this distinc-
tiTo phenomenon of the computer industy ties customo'-s to suppliers and lends itsplf to
manipulation to maintain monopoly power hv a dominant firm. The importance of the
concept lies in the doubt that it casts on the efficacy of the plan in the Anti-trust Division's
Octoher. 1072 relief memorandum as a means to dissipate monopoly power. In most in-
dustries, such dismemherment would "automaticallv" accomplish a dissipation of power,
but the peculiarities of the computer industry present a special set of problems.

**The Antitrust Division stated a somewhat similar position in Its October, 1972 relief
memorandum when it suggested (pp. 2-3) that the principal effort should be directed
to . . . achieving a fully developed record upon which to evaluate the future efficacv of
this or other forms of relief."



5544 •

share of what remains of the non-IBM segment of the computer-manufacturingf
industry, the increased vitality of these companies is also of paramount import-
ance to the public interest.

Representatives of each of the companies stand ready to elaborate on the
positions stated in this Memorandum and to work with the Antitrust Division
staff in an effort to solve the complexities inherent in the ultimate relief ques-
tion and to effectively address the issues involved in the interim relief concept
proposed in this Memorandum.

Respectfully submitted.

Appendix A to October, 1973 Relief Position Paper of CDC, Honeywell, NCR

AND Sperry Rand

proposed interim RELIH3' IN U.S. V. IBM

The following eight relief measures (including the three injunctions proposed
by the xlntitrust Division) are expressed only as general concepts. They are
intended to be applicable world-wide.

I. The Government's Suggested Injunctions

The Antitrust Division's October, 1972 relief memorandum set forth interim
relief recommendations to which we subscribe. In addition to the standard anti-
scrambling provisions of section II of that memorandum, the government sug-
gested the following injunctive provisions :

Interim Relief Measure No. 1: IBM shall not use bundled pricing.

Interim. Belief Measure No. 2: IBM shall not engage in predatory or discrimina-



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 76 of 140)