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

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committee is a director of IBM. IBM purchases several items from Fairchild and
Fairchild, in return, uses IBM and its subsidiary. Service Bureau Corporation,
for its data processing needs. Further, a design and patent cross-licensing agree-
ment between the two companies recently was announced. The question arising
from these facts is. "Would an illegal reciprocity pattern unfold in response to a
Civil Investigative Demand requesting details of these various company inter-
changes?"

4. Undue Influence of Customers' Specifications and Tests

A substantial portion of requests for computer proposals published by pros-
pective purchasers contain specifications which are oriented toward or actually
copied from IBM literature — sometimes with the assistance of IBM employees
handling these customer accounts. Many are biased in favor of IBM because cus-
tomers naturally use the monopolist in the field as a standard and because many
procurement committees are composed of one or more IBM "alumni". Competition
at NASA, for instance, has been reduced to almost a minimum because IBM has
gratuitously acted as NASA's computer evaluator and has recommended that
IBM be selected as sole source supplier, at least as to certain of the NASA sys-
tems. NASA's recent recognition of the need for additional competition is re-
flected in the letter of Mr. James Webb, dated December 7, 1965, a copy of which is
attached as Appendix 11, referring to NASA's "future plans to increase
competition."

Not all biased specifications and tests are the normal or inevitable result of
monopoly conditions. At one government computer procurement in 1965, a group
of four customer employees were, in varying degrees, instrumental in evaluating
the customer's needs. Competitive tests were set up to be run on a Control Data
computer as against an IBM computer to assist the customer in choosing between
the two competitors. Of twenty separate tests proposed, one of the four employees
selected thirteen to be run in the competition. All thirteen of these tests had for-
merly been operated successfully on the IBM computer and none of the remaining
seven tests had been so run. When the contract was nonethe'ess awarded to Con-
trol Data, all four of the employees left the customer to take employment with
IBM.

In addition to being instrumental at many customer sites in drafting specifica-
tions and influencing tests. IBM reportedly has in at least one instance prepared
and submitted to a customer, a government agency, false results in response to the
customer's request that competing suppliers perform "benchmark" tests of their
respective machines.

These situations lead us to suggest that an investigation of IBM's activities
would disclose other improprieties in this area of trade practices.



40-927 O - p'



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5. Patent Practices

IBM has taken advantage of its ownership of thousands of patents relating to
electronic data processing, the development of which in a significant sense was
substantially financed by the U.S. Government, to prevent and hinder competi-
tion from Control Data in the computer market. While repeatedly threatening
Control Data with serious patent infringement litigation, IBM has refused to
license Control Data under its patents on reasonable terms or on terms as favor-
able as it has offered to most other computer manufacturers, with whom IBM
has entered into a patent pool from which Control Data is excluded.

The U.S. Government, particularly the Department of Defense, has been the
principal financier and stimulus behind electronic digital computer development
in the U.S. Defense Department computer experts have stated that DOD has
spent on an average of $150 million per year directly supporting computer re-
search and development over the past ten to fifteen years, plus considerable indi-
rect support by way of research and development monies made available out of
profits on standard computer products purchased by DOD. These experts state
that the U.S. computer art has been largely supported and moved ahead by DOD
monies. IBM has been the primary beneficiary of this direct DOD research and
development support. IBM has probably received upwards of a billion doPars of
research and development funds from the U.S. government directly and it is
largely on this base that IBM's technology is built. In addition, IBM receives
70-80 per cent of revenues paid by the U.S. government for standard computing
systems, said revenues indirectly supporting additional large amounts of IBM's
research and development program. Under these circumstances IBM has built a
patent portfolio of approximately 3,000 U.S. patents and 8.000 foreign patents.

IBM has royalty-free cross-licenses with most of the large companies who are
its competitors in the computer field, including Sperry Rand. RCA. Honeywell,
International Compiiters & Tabulators, Ltd. (England), Burroughs. Philips
(Holland), Teleregister, Siemens (Germany) and others. By these royalty-free
cross-license agreements, IBM and its major competitors other than Control Data
have insulated themselves from patent infringement attacks, creating what is
probably one of the largest single patent pools in the world. Having created
these cross-licensing arrangements, several of the participants, including Sperry
Rand and Honeywell, have filed patent suits against Control Data, and IBM has
threatened to do so.

Patent licensing discussions between Control Data and IBM, instituted at the
initiative of IBM, have continued for several years. However, imlike its treat-
ment of other manufacturers. IBM proposes that Control Data pay IBM royal-
ties, claiming that it has no need for any Control Data patents. In fact, the
measure which IBM uses to establish the amount Control Data should pay for
such a license has been equated by an IBM executive to the alternate cost to
Control Data to defend itself against a lawsuit by IBM.

IBM has also demanded other provisions in any patent license to be granted
to Control Data which belie any intent to enter into a fair agreement and sug-
gest that IBM's primary purpose is to coerce and intimated Control Data. IBM
thus far has made no serious offers to grant a license under a single patent for
any appreciable amount less than the rate for two or more or all of its patents,
thereby coercing Control Data to make an umbrella license for a package com-
prising all or most of IBM's foreign and domestic electronic data processing
patents. To take such a license is to admit validity of all patents in the package.
IBM has also insisted on other unreasonable provisions, including a grant-back
by Control Data of licenses of its patents to IBM notwithstanding IBM's state-
ments that it feels no need for such Control Data patents.

IBM's discriminatory, imreasonable and coercive treatment of Control Data
in the area of patents — particularly its demand that Control Data suffer the
competitive disadvantage of paying royalties not exacted from others — con-
stitutes unlawful monopolization and attempt to monopolize.

6. Other Practices

Control Data believes that IBM has attempted to monopolize and abused its
monopoly power in the following additional areas, but as yet has insuflScient
documentation to warrant a more detailed statement.

(a) IBM has established an exclusive organization comprising certain of its
customers, known as SHARE. Only customers using IBM's larger systems are
qualified members. Developmental work on computer programs by IBM and by
members of SHARE is made available to all members with IBM acting as dis-



5567

tributor, free of charge. IBM maintains SHARE'S program library and distributes
its programs to members upon their request. The programs are normally made
available exclusively to SHARE members.

IBM and SHARE have recently jointly developed a new program language
("NPL"), later changed to "PL-l". Control Data requested an opportunity to
participate in the development of this language, but IBM refused. IBM, with
its large percentage of the market, sets de facto standards in programming
languages as well as in hardware. Control Data must insure that this new
language can be utilized on its equipment. Although the language specifications
eventually are being made available publicly, the lead time IBM gains in re-
fusing others access to the development of new languages tends to further
entrench and extend IBM's monopoly.

As an adjunct of the IBM 360 Series, IBM announced in 1964 that it would
change the codes, recording densities, signal intensities and other characteristics
of its magnetic tape. Having made this announcement, it was many months be-
fore IBM disclosed any information on what these new standards would be.
Recently, however, IBM has disclosed these new standards and once again its
competitors, including the independent suppliers of peripheral equipment, must
adapt to them. Only after all the details of the new IBM standards are made
known will competitors be able to modify their products to achieve compati-
bility. Such modification will thereafter take at least two years and cost millions
of dollars ; in the interim IBM will have a tremendous competitive advantage.

(b) IBM's written corporate policy precludes further sales efforts by its sales-
men after a customer is committed to a competitor's machine. Any such activi-
ties by IBM salesmen, contrary to this policy, might also constitute monopolizing
under the antitrust laws or the independent tort of "interference with con-
tractual relations." It is believed that IBM, in violation of this policy, has con-
tinued and intensified its sales efforts with respect to certain customers after
the award of a contract to Control Data. If further Investigation confirms this
belief, the details will be made available to the Antitrust Division, if requested.

(c) Paragraph VIII of the 19.56 Consent Decree proscribes IBM's activities
with respect to its service bureau. Shortly after entry of the decree, IBM estab-
lished its data centers division and, more recently, its test centers. Through
manipulation of these two centers, which IBM currently operates in a number
of cities, and by controlling the activities of Service Bureau Corporation, its
wholly-owned subsidiary, it is believed that IBM is using its position in the data
processing industry to monopolize the computer industry.

ni. SUGGESTED RELIEF

(A) The major underpinnings of IBM's monopoly power have been its tre-
mendous assets and its ability to spread its development costs over the many
units of equipment sold. The most effective means of neutralizing this monopoly
power would be to divest IBM of those assets which have given it much of its
financial strength, but the absence of which will not impair its ability to compete
as a computer manufacturer. Divestitute of IBM's typewriters, dictating equip-
ment, tabulating equipment, data processing, and computer peripheral equip-
ment (printers, memory units, and tapes, discs, and drums) division would reduce
IBM's financial muscle and impair its ability to engage in those predatory
activities in the computer market which we have described. Tlie deletion of the
peripheral equipment division would also deprive IBM of the sales tool of offer-
ing a full line of computer equipment and would place it in the same posture
in the market place as its competitors. The availability of said peripheral equip-
ment to IBM's competitors and to IBM at uniform specifications, terms and
prices would assure competitive compatibility in the industry. Finally, such
divestiture would have the additional collateral advantage of restoring com-
petition to the peripheral equipment market, which at the present time is
strangling under IBM's monopoly hold.

(B) An alternative to divestiture, designed to achieve the same result, would
be a provision, similar to that found in the 1956 Consent Decree, requiring IBM
over a period of time to reduce its market share with respect to all markets and
all relevant products in the electronic data proces.sing field to no more than 50%.

(C) To avoid in the future IBM's u.se of "paper machines" as a means of
forestalling sales by its competitors, IBM should be prohibited from selling,
advertising or taking orders for computer systems not yet operational in its
laboratories and from specifying delivery dates which it cannot reasonably
meet. Special computers specified by customers would be excepted from this
prohibition.



5568

(D) Because IBM has installed over 70% of the computers now in operation,
and because computer customers require that machines be compatible, IBM
constructively sets the hardware and software standards for the industry. Any
changes in such standards by IBM requires immediate copying by its competitors
if they are to survive. In the past, IBM has kept these technical changes secret
until they are to be marketed, thus gaining valuable lead time over its competi-
tors. So long as IBM retains its monopoly position, it must be required to reveal
these hardware and software changes far enough in advance of its marketing so
that its competitors can adapt and continue to compete in equal time. IBM must
not be able to drive its competitors from the market place for a period of time
simply by making technical changes in its equipment. Also, IBM must be required
to separate itself from its customer software group, SHARE, or to open member-
ship in that group to all its competitors so long as that organization is used as a
means of making technical changes, such as the development of a new program-
ming language, which will retard IBM's competitors.

(E) With respect to pricing, IBM should be

il. Prohibited from selling or leasing below cost.

2. Prohibited from discriminatorily pricing in any market so as to preclude
the special discounts IBM has given in the past to those customers to whom
sales would be the most promotive of further sales to others.

3. Required, in order to prevent avoidance of the provisions of any decree,
to make all offers to sell in writing and to price separately, and non-
discriminatorily ;

(a) All hardware, including systems and units ;

(b) All progi-ams and programming;

(c) All customer services, including maintenance;

(d) All other goods and services, including services of Service Bureau
iCorporation, data centers and test centers.

4. Required, in order to prevent avoidance of the provisions of any decree,
to contract separately and in writing for the purchase from any customer or
employee of any customer of :

(a) Computers;

(b) Computer time ;

(c) Programming services; or

(d) Other property or services.

o. Prohibited from offering discriminatory discounts based on computer
size.

6. Prohibited from reducing its rental prices on installed IBM equipment
in order to induce any customer to purchase or lease new equipment from
IBM for future delivery.

7. Prohibited from allowing rental payments on an installed IBM com-
puter to be applied against the purchase price of an IBM computer ordered
for future deliver.v.

(F) Because of its established tendency to utilize reciprocal buying power as
a sales inducement, IBM should be prohibited from procuring goods or services
from customers or potential customers with the intent to affect their buying
practices.

i(G) IBM should be required to sell and lease its products to its competitors
on as favorable terms and conditions as it sells and leases such equipment to its
other customers.

(H) IBM should be required to license all of its patents to Control Data on
as favorable terms and conditions as it licenses those patents to other major
computer manufacturers.

i(I) IBM should be prohibited from making any disparaging statements about
its competitors or their products and services.

(J) IBM should be prohibited from directly or indirectly drafting or assisting
in the drafting of computer specifications published by potential customers. IBM
should also be prohibited from directly or indirectly designating the tests required
of potential sellers' computers l)y any potential purchaser.

(K) All the requirements and prohibitions cited above should be equally ap-
plied with respect to IBM World Trade Corporation and all other subsidiaries
of IBM.

IV. CONCLUSION

This Report describes International Business Machines Corporation's monopo-
lization of and attempt to monopolize the automatic data processing industry.



5569

It requests that the Antitrust Division investigate and talce action against these
antitrust violations which, if not eliminated, will result in substantial permanent
impairment of comi>etition in one of the nation's most vital industries, an industry
which is certain to assume even greater importance in succeeding years. The
sales reports and other documents upon which the above charges are based are
in the possession of the undersigned. They are available for inspection at the
request of the Division. Control Data officers and employees with more detailed
knowledge of the facts also stand ready to meet with Division representatives
upon request to expand or explain the contents of the Report.

Respectfully submitted,

Oppenheimer, Hodgson, Brown, Wolff & Leach,

Attorneys for Control Data Corporation.
Appendixes : ( 11 ) .

Appendix 1

Washington Post— July 8, 1965

Two More Companies Leave Thorny Computer Market

(By Dennis Duggan)

In the past few weeks, the departure of two companies from the fiercely com-
petitive computer market has underscored a point : The gate to the computer busi-
ness is clearly double-hinged.

Companies come and companies go. In recent months. General Precision Equip-
ment Corp. and Union Carbide Corp. decided they were not meant for the com-
puter industry.

Carbide's quick exit from an industry in which it spent only 13 months recalls
some other outstanding industry shipwrecks on the shoals of this big but tough-
to-conquer industry.

Bendix Corp. played a waiting game between 1955 and 1963 which industry
experts say cost the company something like $30 million. Bendix called it quits in
March, 1963, when it sold out to Control Data Corp.

Royal McBee also sat in on the game. Royal threw in its cards early in 1963
after" suffering losses of $1.7 million in 1962 and $1.1 million the year before.

It sold its half interest to General Precision for $5 million that wheel came
full (circle) early this year when General decided it had suffered enough.

A surprise exit

Control Data Corp., of Minneapolis, a specialist in big, scientific computers, is
acquiring General Precision's commercial computer assets in a transaction ex-
pected to be completed soon.

Carbide's decision to quit the computer market comes as something of a sur-
prise. It has both the money, (sales last year ran to $1.87 billion) and the market-
ing muscle to make a serious run at the market.

But on June 30, it joined the long list of computer has-beens. The company's
official explanation for quitting is that "the projected rate of growth in digital
computer equipment has not been realized."

Homer Morrison, sales promotion manager of Carbide's Linde division, to which
Data Systems reported, explains that the parent bought Data in 1964 to tie in
with their acquisitions in the electronic field.

"We also thought the company would give us a corner in the basic digital com-
puter market." He adds : "We discovered plenty of competition."

"just lost interest"

According to industry estimates. Union blew slightly more than $1 million in an
attempt to expand the marketing of Data Systems' computers — a small systems
unit selling for about $12,000.

Data Systems unveiled a new $20,000 computer at a recent computer show in
New York. Morrison says of the new machine — ^the DSI 2000 — "We just lost in-
terest in it."

But while Union Carbide lost interest in Data Systems, that firm's president
and co-founder, Samuel Erwin, disagrees with Carbide's contention that the
company wasn't growing fast enough.



5570

Appendix 2

Shaping new links in man/computer communications . . .

Only the Power of a Control Data ® 6600 Computer System Could
Satisfy the Needs of CERN, the 13-Nation Nuclear Research Center

6600 power

132,072 words of one microsecond core memory witli a 32-way interlace per-
mitting successive accesses at 100-billionths of a second.

Capable of processing more than three million instructions per second. Handles
up to 11 programs simultaneously through central processor and 10 peripheral
processors.

Multi-processing capability ideal for time-sharing requirements of large scien-
tific computing organizations.

Provides memory protection and dynamic relocation of partly executed pro-
grams essential to operating without restriction in multi-programming mode.

The European Organization for Nuclear Research (CERN) on the French-
Swish border required a new and unique computer system — the CONTROL
DATA 6600. Only this computer could provide the power and accessibility neces-
sary to make it an integral part of CERN. The 6600"s unique organization allows
the hundreds of theoretical and experimental physicists, engineers and techni-
cians at CERN to share in its operation simultaneously. On-line experiments,
on-line film measuring devices and many remote consoles, typewriters and plot-
ters—in addition to 400 FORTRAN programs daily — will tap the 6600 on a time-
sharing basis.

Concurrent parallel operations on the 6600 are achieved through the simulta-
neous processing of input and output information by the 12 data channels and
the 10 peripheral processors on one hand and the central arithmetic processor
on the other. The speed and efficiency of processing data is further enhanced by
putting the entire 6600 system under the control of a single overall monitor known
as SIPROS— the CONTROL DATA Simultaneous Process System. For more in-
formation on this and other Control Data computer systems, contact your nearest
representative or write direct to our Minneapolis address, Dept. G-95.

Api)endix 3

The Wall Street Journal. Friday. January 21, 1966

IBM Plans To Deliver Six "Super Computers" Next Year and 12 in '68

two model 9 machines will go to NASA UNITS, ONE TO PRINCETON, ONE TO

LOCKHEED DIVISION IN '67

(By a Wall Street Journal Staff Reporter)

New York. — ^International Busine.e»s Machines Corp. announced plans to
deliver six "super computers" to customers in 1967 and to increase the pace of
deliveries to one a month l)eginning in January 1968.

The installations next year will be the first of IBM's Model 90 series, the upper
end of the System 360 family of computers. The first delivery of one of the big
machines wall be made in the first half of 1967. the company said.

Each of the model 90 series is valued at .$6 million. Including peripheral equip-
ment. Thus, the combined value of the six machines to be delivered next year is
about $36 million and the combined value of the 12 slated for deliverv in 1968
is $72 million.

There have been published rumors in the trade that IBM would drop out of
the super-computer market, but the company's announcement of delivery
schedules for Model 90 machines has the effect of scotching this talk.

One each of the giant computers will be installed next year at the National
Aeronautics & Space Administration's Goddard Space Flight Center in Green-
belt. Md.. and its Goddard Institute for Space Studies in New York City. Both
machines have )ieen purchased outright.

Deliveries next year of one machine each will also be made to Princeton
University and Lockheed-California Co., Burbank, Calif., a division of Lock-
heed Aircraft Corp.



5571

IBM said Princeton and Lockheed have an option to buy the machines outright
or rent them. The other two customers slated to get machines in 1967 weren't
identified.

IBM said all future orders for Model 90 series machines will be for outright
purchase only, not rental.

The computers are designed for solving problems in such highly sophisticated
areas as space exploration, subatomic physics, theoretical astronomy and global
weather forecasting.

The machines have internal processing speeds up to 12 times faster than the
next most powerful System 360 computer, the model 75. which sells for about $3
million. The Model 9o" series processes data up to 100 times faster than the older
IBM 7090, one of the most widely used of the large-scale computers.

Appendix 4

Datamation December 1964

Washington Report

price-cutting stirs market

Of immediate concern to most Washington area computer sales reps is recur-
rent talk of price cutting, and pnssiblt/ a partial u-ithdraual of the so-called IBM



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 81 of 140)