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 79 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 79 of 140)
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referred to). Although no d^s-ign specifications, price or delivery dates were
announced — supposedly because the system was to be built to each customer's
individual specifications^the 360/90 was originally represented by IBM as a
computer which would directly compete with Control Data's 6600. There is hardly
any question that customers who gave IBM letters of intent for the 360/90 group
computers would have purchased Control Data's existing 6600 — the onl.v existing
extra-large computer — had it not been for IBM's "competition". The belief was
always widespread amonsr competing pi'oducers and many customers that the
360/90 group, although IB;M was marketing the system, had never, in fact, been
designed. The December 15. 1965, issue of COMPUTIXr; NEWSLINE roeently
confirmed this industry rtimor by reporting "IBM dropout of the supercomputer
market . . . No more orders will be tfiken and no ])roposals s.il-mitted for the
360/90. /91 or /92. It is expected that three firm orders on hand will be filled
while letters of intent will be cancelled . . .". To itensify the confusion, on
January iR. 1906. IBM formally annou.nced the 360/91 J. /91K and /91L. and on
January 21. 1966. the WATJv STREET JOTJENAL announced as apparent re-
TPTsnl of the COMPITTINO NEWSLINE report of December 15. 1965 Csee Anpen-
dix 3). The WALL STREET JOURNAL article did little to clarify IBM's plans.



5555

failing to indicate which of the many models announced from time to time in
the 360/90 group are in fact to be marketed. By stating that the Model 360/75
is the '"next most poweriul System 360 computer" the article implied the with-
drawal of the recently reported 360/85. Failure to mention the 360/92, which for
many months apparently was IBM's prime competition for the CONTROL DATA
6600, leaves the industry in the dark as to whether the 360/92 is still a part of
IBM's product line. By vigorously marketing non-existent and possibly never
to be produced computers, and by keeping the market in constant confusion as
to its actual intentions, IBM has been able to deter sales by Control Data and
thus seriously injure its financial strength as a competitor.

IBM's plans for blanketing the extra-large computer market following solution
of its technological problems become clear when IBM's "bait and switch" sales
technique is considered. "Bait and switch" tactics have been most prevalent
in competition for sales at the upper end of the 360 Series — where IBM's tech-
nological disadvantages vis-a-vis Control Data have most seriously threatened
IBM's market position. In using this technique, the IBM salesman secures a
contract from an extra-large computer customer by bidding a 360/-2 at a very
low price ; after a suitable interval. IBM seeks to convince the customer to pur-
chase, instead, one or more of the lower end models — models more likely to be
developed and eventually produced. In the NASA-Goddard procurement, for ex-
ample, IBM was awarded a contract for a 360/92 after tape-recorded presenta-
tions by several producers. Within six weeks, we are informed, the IBM sales-
man had begun to make rounds at NASA-Goddard trying to convince personnel
of the computer facility staff that they should accept a different system. Evidence
is available of a number of similar incidents.

We are convinced that a thorough study of IBM's files would uncover addi-
tional evidence that IBM decided in 1964 to prevent sales by its competitors
at all costs ; one method the company adopted to pursue that course was to
promote and take orders for undeveloped computer systems, some of which IBM
never intended to develop. Other methods adopted b.y IBM to accomplish these
purposes — including disparagement of competitors' products, establishing prices
which discriminated against the most competitive types of computer systems,
giving special discounts which operated to "lock-in" lessees of IBM equipment —
are explained and documented in succeeding sections of this Report.

B. IBM prices its profhicts sn as tn lock In its cxislhm cusioiners, cuts prices to
exclude competition and refuses to lease necessary equipment to its
competitiors.

IBM's unlawful pricing practices fall into two general categories, pricing to
deter customers leasing its machines from replacing such m.'ichines with those of
a competitor, and price cutting and other price manipulation to forestall com-
petition. While information on IBM's costs is not available to Control Data, it
is reasonable to infer from the known facts that in certain of the situations
described below IBM also was selling at a loss. This section will also describe
another unlawful practice by which IBM seeks to injure its competitors — refusal
by IBM to lease to competitors certain kinds of equipment not manufactured
by competitors which the competitors require for computer systems to be leased
to customers.

Although most of the examples of pricing practices set forth below occurred
in the United States, it is believed that substantially the same practices by IBM
are prevalent throughout the world and are seriously hindering competition with
IBM for foreign customers as well as domestic.

1. Deterrence of Replacement of Leased IBM Machines ivith Competitors'
Machines

IBM recently has adopted two policies applicable to customers renting its
machines which have the effect of "locking in" such customers by making it
substantially more expensive for them to renlace those machines witli com-
petitors' machines than w^ith IBM machines. The impact of these policies in the
market place can only be fully appreciated when it is realized that through
IBM's conscious effort approximately 80% of the total IBM equipment acquired
by customers is leased rather than purchased.

(a> Conversion Fental Plan. The conversion rental plan, adopted by IBM in
about May of 1965. is available to any customer leasing IBM equipment who
determines to replace it with IBM 360 Series equipment. The plan is not avail-
able if the customer elects to replace IBM equipment with that of another manu-



5556

facturer. Under the plan, upon delivery of the new IBM equipment, the customer
is allowed to retain the old IBM equipment for a four-month period, during
which it pays only 10% of the normal rental on the old equipment. Payments
by the customer on the new equipment begin when it has been installed and is
operational, except in the case of the federal government which is permitted a
thirty-day acceptance period before payments begin. Prior to institution of the
conversion rental plan, customers ordinarily paid full rental for old equipment
so long as it remained installed.

IBM's competitiors are unable to counter this discount, which practically
forces many IBM customers to reinstall IBM equipment regardless for their desire
to acquire other equipment. Since its competitors lack IBM's massive capital
and surplus, they simply cannot afford to pay 90% of the customer's rent to
IBM so that the customer can have a familiar system in operation while comput-
ing load is being converted to the new system. In addition, a customer may be
loath to change to a competitive system because of the fear that IBM, as it
has on at least one occasion, may refuse to allow the customer to retain the old
computer, even at full rental, until the new computer has been installed. Adoption
of thifa plan by IBM at a time when, as discussed elsewhere in this Report. IBM
had become very concerned that its monopoly position was being threatened
evidences that the purpose of the plan, as well as its effect, was to prevent its
customers from installing competitive systems.

While not a part of the conversion rental plan and offered selectively by IBM
in only certain competitive situations, it is appropriate to mention here three
analogous devices by which IBM has hindered competition. There are indications
that IBM has permitted some customers to retain leased IBM equipment com-
pletely free— without even payment of 10% of normal rental — during conversion
to new IBM equipment. Moreover, old equipment has, on occasion, been retained
by IBM's customers without payment for various periods of time after conver-
sion to new IBM equipment is completed. Finally, in recent months, coincidental
with IBM slipping deliveries on its 360 Series computers, it is believed that some
■customers have been permitted to pay 10% of the normnl rental (or possibly
even less) beginning with the date the new equipment should have been installed
by IBM. even though installation was delayed.

(b) TrunsferaUe 860 Scries Purchase Credit. IBM also is offering to at least
some customers renting 360 Series computers an arrangement whereby a portion
of the rentals paid by a particular customer for its rented 360 computer can be
applied against the purchase of any other IBM computer in the 360 Series. For
example, at the Stanford University computer center. IBM offered that a portion
of rentals paid for lease of a 360/67 computer could be applied on a purchase of a
360/75 computer at such time as the customer should desire to upgrade to the
more powerful machine. Records based on preliminary investigation list several
other customers to whom such offers apparently have been made, including
Boeing Company and Lawrence Radiation Laboratories at Livermore, California.
a facility operated by the University of California for the Atomic Energy
Commission. Subsequent to these offers, on October 1, 1965, IBM announced
a new marketing plan which in substance appears to embody the transferable
purchase credit program. A copy of the announcement is attached in Appendix
9. We understand that IBM's U.S. Government General Services Administration
price list has for several years contained provisions also offering such a program.

Through this device. IBM initially is able to forestall sales by competitors
who in fact have more powerful machines developed and ready for delivery,
by pointing out that the customer would be receiving an interim 360 machine
which could later lie replaced by a more powerful IBM machine at, in effect.
a substantially reduced price. Then, when tlie customer has signed such a con-
tract, it is wedded to IBM. because the customer cannot aft'ord to throw away
the substantial price benefit of applying its rentals toward a purchase of an
upgraded machine. INIoreover, the longer IBM slips its deliveries and the greater
IBM's delay in developing a more powerful 360, the tighter the knot is drawn,
since the customer's credit rentals presumably are mounting. Thus IBM gains
valuable development time, yet retains its monoply position at the expense of
more advanced competitors. That the pui'pose of the device, as well as its effect,
is to prevent sales by competitors is marie clear by the fact that it is offered
at a time when IBM is unable to deliver the more powerful types of com])uters
at as early a date as can some other manufacturers and is unable to meet its
announced delivery schedules.



5557

2. Price Cutting and Manipulation

(a) Educational Discounts.

IBM has cut prices in the educational market with the purpose and effect of
excluding and hindering competition. Recently IBM has intensified this price
cutting by increasing the dollar amount of the price cuts. IBM's price cutting in
the educational market constitutes singling out for special price concessions a
particularly important category of customers for whom IBM is experiencing
unusually severe competition and upon whom one of its major competitors,
Control Data, is much more dependent than IBM or other manufacturers. IBM's
price cutting in this market has extended so far as to involve outright gifts
" of computers and computer time to exclude competition.

The educational market is an extremely vital one to any computer manufac-
turer. It is at educational institutions that persons are being trained who will,
in the futiire, be in the position of deciding for government and industry what
manufacturer's computers to acquire. If these persons have been trained on
IBM computers, they will have a natural inclination to later recommend them.
Further, any individual sale to an educational institution is also likely to have
greater importance in immediately stimulating sales to other customers than is
true of sales to commercial or governmental users. Much of the most advanced
work in application of computers is being carried on at educational institutions
and selection by an institution of a computer of a particular manufacturer is
likely to give that manufacturer considerable prestige which will be helpful
in making other sales. Moreover, tliere is considerable national and international
exchange of computer programs and computer processed data among educational
institutions and such exchange is facilitated if the institutions engaging in it
have computers which are compatible with each other.

Most important, the intellectual capabilities of the teaching and research
staff people found at leading universities are unique. Over the years, these
people have insisted on surrounding themselves with the most-advanced com-
puters available to execute the complex arithmetic of their theoretical formulas,
which are applied in almost every conceivable advanced field of research. The
practical results of their unique work will profoundly influence computer usage
in all of these fields in future years. The government has designated a few
leading universities, including Carnegie Institute of Technology. Stanford Uni-
versity and Massachust^ts Institute of Technology to receive special advanced
projects and support to expand their research work to develop new teclmologies.
The U.S. Government support includes heavy funding for the purchase of com-
puters for these projects. IBM has made a particular effort to obtain orders at
these few universities so that the services of their leading scientists, otherwise
unobtainable, will be devoted to developing computer technology and programs
for iise on IBiM computers. Thus, this technology becomes available to IBM
instead of to its competitors.

IBM has through the years offered discounts from its standard or list prices
for sale or lease of its computers and related equipment to educational insti-
tutions. Prior to about April 1, 1963, a twenty per cent discount was available
to any accredited college or university for its business and administrative data
processing and a sixty per cent dhscount was available to such institutions on
equipment to be used for research or teaching. Effective about April 1, 1963, the
sixty per cent discount was withdrawn. However, customers which, prior to
April 1, 1963, had been offered sixty per cent discounts orally or in writing
foi- IBM equipment to be delivered after that date were permitted to retain
the discounts if firm orders were given within a stated time period.

Despite IBM's substantial discounts, in the mid-19r;0"s Control Data began
to experience some success in the educational market. While IBM was able to
retain about the same percentage of that market as it had of the entire com-
puter market, 70%-80%, Control Data offered stronger competition for that
market than IBM experienced from any competitor for the market as a whole.
Control Data became second to IBM in the educational market, ca])turing about
12% of it. In the market as a whole the nearest comi)etitor to IBM had only
7% of the market. Concomitantly, Control Data became more dependent ui>on
the educational market for business than was any other manufacturer, including
IBM. 12% to 13% of Control Data's business came from the educational market,
compared with 4% for IBM. IBM subsidized price cuts in this market by its sales
in other markets, particularly injuring its primary competitor in the educational
market, which, unlike IBM, was dependent on that market.



5558

As Control Data continnecl to prosper in the educational market IBM became
more concerned. In the Spring of 1964 a new man was put in charge of IBM's
educational and scientific sales division with orders from above to "stop Con-
trol Data." Finally, Mr. Thomas J. Watson, Jr., in a speech delivered at a sales-
men's convention in x\pril, 1965, stated, in substance. "We have been living with
the lawyers breathing down our necks trying to live the letter of the law of
the Consent Decree. Gentlemen, we are not going to lose any more educational
or scientific business." High executives, as well as salesmen, were quoted as
saying that IBM intended to lose no more educational accounts, at any cost.

These words were soon borne out by actions. In May of 196.5, IBM revised its
educational grant policy in a manner which would greatly hinder further pene-
tration of this crucial market by Control Data and other manufacturers. In
light (»f the above described statements by IBM olBcers and employees it is
clear that this was the intent of the revised educational discount policy, as
well as of educational discounts or price cuts granted by IBM under earlier
policies.

Under the new policy educational accounts are again being offered discounts
substantially in excess of 20%. Moreover, such customers are offered increasingly
larger percentage discounts as the power of the computer being considered by
the customer increases. Thus, the highest educational discount is available on
the most powerful computers, the 360/75 and 360/92, and this is precisely where
IBM's product line is the weakest and where IBM receives the greatest com-
petition from Control Data.

The following chart sets forth the discount scale.

Percent of
IBINI computer : discount

360/20 20

360/30 20

360/40 30

360/44 30

.360/.50 35

360/65 40

360/67 40

360/75 45

360/92 45

2360, 2362 (core memory) 40

2361 (bulk core) 45

All other peripheral equipment 20

Note. — Attached as a pp. 10 is a schedule of educational discounts granted
within the last several years by IBM. It is only a partial listing, based on infor-
mation made available to Control Data from its salesmen's reports. It is sub-
mitted in response to a request of the Antitrust Division that we document such
of these discounts as are within our knowledge or belief.

It is unlikely that the greater discounts are available on the larger machines
because IBM has a greater profit margin on these machines. IBM reportedly
follows a uniform ratio of cost to price throughout its product line.

In revising its discount policy. IBM not only increased the dollar amoimt of
its price cutting in the educational market, it expanded the category of customers
eligible for price cuts exceeding 20%, in an effort to further inhibit competition
in that market.

Discount in excess of 20% are no longer available only to institutions using
the computer for teaching or research. Apparently the present discount schedule
is available to any accredited college or university for any computer usage.
This interpretation is supported by recent indications that IBM will offer an
educational discount to Stanford University for a computer to be immediately
transferred by the University to the AEC for installation at the Stanford Linear
Accelerator Center (SLAC), which will be operated by the University for the
AEC. And at a recently established "research triangle computing center," jointly
operated by three Southern universities, IBM has apparently offered discounts
to the Triangle although substantial amounts of computer time will be sold by
the Triangle to industrial firms in the area. Many other educational institutions
to whom IBM sells computers sell their excess time to non-educational institutions.

In addition to its use of educational discounts to defeat competition in the
educational market, IBM has on numerous occasions used outright gifts to
achieve tlie same end and thereby retain or extend its monopoly. These give-
aways frequently are in the form of buildings to house computer facilities or



5559

luoue.v grants to sponsor research projects or endow professional chairs. Often
the gift offered is free usage of computers. A gift by IBM of money or a com-
puter or the right to use a computer not only forestalls competition between IBM
and other manufacturers for an installation which might otherwise be purchased
or leased, but it also frequently influences future computer installations by
the customer. The customer may either feel indebted to IBM for the prior gift
or may fear that if it later patronizes another manufacturer the gift will be
withdrawn.

The University of California at Los Angeles exemplifies this situation. Some-
time in the lOoO's, IBM established the Western Data Processing Center on the
U.C.L.A. campus. The IBM computers in this facility are available for use by
the U.C.L.A. faculty and faculties of a number of other universities, free of charge.
It is understood that the faculties use one daily shift of time at the center, and
that IBM uses the other two shifts. The building in which the center is installed
apparently is owned by the university and made available to IBM rent-free.
Presently, the facility furnishes the universities free use of an IBM 7094 com-
puter and other equipment, the total rental value of which is approximately
$1U0.000 per month.

Presence of the Western Data Processing Center on the U.C.L.A. campus acts
■ subtly to influence decisions of the university as to which manufacturer's com-
putes will be acquired by the university. For example, in the spring of 1965,
Control Data and IBM were in competition for sale or lease of a computer sys-
tem for use on an ARPA (Department of Defense Advanced Research Projects
Agency) funded project involving research into communications between com-
puter systems. Ctuitrol Data offered three 3200 computers and IBM offered three
360/40 computers. It became known unofficially that Control Data had been
tentatively selected as the supplier. At this point, IBM announced that it had
decided to install a 360/40 computer at the Western Data Processing Center,
which would be available for this project. Thus, the customer needed to purchase
or lease (inly two computers. The customer selected two IBM 360/40s. This same
subtle influence applies throughout the University of California complex.

Preliminary investigation discloses a number of other offers of free computer
usage by IBM to educational institutions. In March of 1964, IBM offered to
the University of California at San Diego a free 7090 computer ordinarily priced
at .$3,048,000 (or a 7094-11 at a price discounted from $3,420,000 to $800,000).
In January of 1965, IBM offered a free STRETCH computer to Carnegie Insti-
tute of Technology. Sometime in 1965, IBM oft'ered to give the University of
Illinois a free 360 Series computer for an 18-month project. Such offers by IBM
have not been limited to the United States. We have received reports of offers
by IBM of free 7090 computers to at least eight foreign educational institution,
mi. St of whom have accepted and installed the computers.

IBM's practices in the educational market constitute a violation of the anti-
trust laws. Initially aware of the great importance of this market and particu-
larly of certain key institutions wtiliin the market and thereafter findinj Con-
trol Data threatening its position in the market, IBM cut prices, subsidizing
tlie price cuts by sales at list or standard prices to other categories of customers.
The intent and effect of this price cutting was to prevent competition in the
educational market. Since the market accounts for but a small percent of IBM's
tiptal computer sales, whereas it is a much more significant market for Control
Daia, it is an ideal battleground for IBM, which unlike Control Data, need not
be concerned whether it realizes a profit on sales in that market.

(h) Buytacks; Extranrclinary Programming and, Maintenance

IBM has engaged in indirect price cutting and price manipulation to prevent
competition by offering certain customers for whom competition is particularly
serious, or who would be particularly prestigious customers, buybacks and pro-
gramming or maintenance services not generally offered to other customers.

Buybacks may take several forms but, in general, constitute reduction of the
purchase price or rental to be charged the customer on the understanding (i)
that IBM can use a portion of time on the computer the customer will acquire
or (ii) that the customer will perform certain work on the computer, such as
programming, for the account of IBM. While the details of such arrangements
usually are not available to Control Data, it is believed that in instances the



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 79 of 140)