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 82 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 82 of 140)
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"price umbrella." IBM chairman Thomas J. Watson, Jr., stated in a recent inter-
view that his company "is going to compete at tchutcrer price level is necessary
to maintain our position in the indu-^try," words which were well-noted in Wash-
ington where IBM has lately finished out of the running on several larger pro-
curements, largely on the basis of price.

Some claim price cutting has already put in an appearance. "It hasn't been
too obvious." said one govenmient marketeer, "but you take a machine, change
its numerical designation and mark it down by 25%, and the effect is the same."
The offering of substantial discounts by manufacturers for volume purchases,
a boon to the government long sought by the General Accounting Office, is also
becoming more common.

Appendix 5

EDP Industry and Market Report

IBM ADJUSTS MAINTENANCE RATES, ELIMINATES PRICE REDUCTION ON BASIS OF EQUIP-
MENT AGE. IN MOVE TO CONTROL PERCENTAGE OF ITS RENTED DP EQUIPMENT BEING
PURCHASED

"The greatest difficulty in achieving forecasted goals of profitability in the
computer industry is controlling the mix of sales vs. rentals of equipment". Con-
trol Delta's President William Norris was quoted as saying at CDC's Annual
Meeting last month. No firm in the computer field is more conscious of this prob-
lem, nor more able to pioneer pricing policies to astutely control it, than IBM.

An example of IBM's exercise of this control is its announcement to its cus-
tomers on October i, 1965, outlining new arrangements under which a customer
can purchase rented IBM equipment, and also adjustments on the maintenance
charges that customers with purchased IBM computers or punched card equip-
ment are required to pay for IBM service on their equipment. To explain the.se
changes, let's contrast them with policies previou.sly in effect.

"purchase-of-rented" plan

Prior to October 1st, the purchase price of rented IBM computers and punched
card equipment to a customer with the equipment installed was based on the
length of time the equipment was installed. For computers, the purchase price
declined 5% a year for the first four years of use. and 10% thereafter until a
minimum price of 65% of list was reached at the end of 51/2 years. For punched
card equipment, the purchase price declined to a minimum of 45% of list for
equipment still in production, 35% of list for equipment out-of-production but
still available in the market, and 25% of list for equipment both out-of-produc-
tion and no longer available on a used basis from IBM.

On October 1st, IBM deelaretl by fiat that age is no longer a factor in deter-
mining the economic value of equipment to a customer. Instead, IBM pointed to



5672

economic and technological change as the primary factors in determining the
economic value of IBM equipment for its users. On that premise, IBM has frozen
the purchase price to a renting customer of all its currently installed computers
and punched card equipment at the value each achieved as of October 1, 1965.

A consequence of this action is that IBM has raised the sale price of its used
data processing equipment in inventory to 100% of the list price for similar
new equipment. Also, a punched card customer may well find, for example, that
two 407 accounting machines at his installation, both with the same date of
manufacture and both yielding the same performance, might have sale prices of
.$24,000.00 and $55,000.00 respectively . . . based on the fact that the former one
has been in use at his particular installation for eight years while the latter was
installed only a few months ago.

"option-to-purchase" plan

Prior to October 1st, customers renting IBM equipment could obtain an "Op-
tion-to-Purchase'' contract which allowed them to apply between 45% and 55%
of the first year rental payments for their equipment toward the purchase price
of the equipment. The fee for entering into this contract was the payment of 1%
of the purchase price of the equipment ninety days prior to its installation.

Starting October 1st, IBM no longer offers this contractual arrangement. In
its place, IBM now allows all customers renting its data processing equipment
the opportunity to apply 40% to 60% (depending on the equipment) of the first
year rental payments toward the purchase price of the equipment. The actual
percentage of rental applied on each type of equipment has been extensively
changed under the new plan. For example, under the previous plan. 45% of the
first year rental on central processors and 55% on peripheral equipment was
credited against the purchase price ; under the new plan, the percentages are
reversed.

Therefore, under the new IBM regulations for the purchase of rented equip-
ment, the minimum purchase price of IBM rented data processing equipment in-
stalled after October 1, 1965, will be 88%-89% of the full list price (since IBM's
purchase/lease ratio on most data processing equipment is roughly 50/1, one
half of the first year's rental equals approximately 6/50th or 12% of the pur-
chase price).

MAINTENANCE PRICES

IBM has announced sharp increases in maintenance charges for customers
using certain purchased IBM equipment. For example, on January 1, 1966, main-
tenance charges on a purchased IBM 1402 card reader/punch less than three
years old will be increased from $50.25 per month to $120.00 per month, an
increase of 140% ! This effectively changes the breakeven point on a decision
to purchase versus rent this unit from just over 59 months to over 68 months . . .
a 15% longer pay-back period for users with an IBM maintenance contract on this
equipment. This increase has a stiff impact on IBM competitors offering IBM
peripherals such as the 1402 as part of their product lines. Readers will recall
that IBM now requires its competitors to purchase rather than rent such
equipment.

To reconcile IBM's declaration in its new purchase price policy that age
has no effect on the performance value of its equipment, IBM has established a
single monthly maintenance fee for each of its data processing units. Formerly
maintenance charges increased with the age of the machine in three year cycles.

IBM has also increased maintenance charges for customers receiving mainte-
nance on a time and materials basis. The hourly labor charge has been increased
20%, from $15 to $18 per hour. Overtime charges have been increased similarly.

IBM press announcement on the subject declared that "because of continuing
improvements in IBM's maintenance and reconditioning programs, it is possible
to provide equivalent performance levels in machines with different dates of
manufacture." These improvements have apparently not come easily, for since
1963 IBM's monthly maintenance charges to customers with purchased equipment
have increased 60% for punched card equipment and 100% for computers. Since
these increases in maintenance charges have not been made with a concomitant
increase in rental rates for computers and punched card equipment, IBM has
been in effect increasing the equivalent purchase price of their equipment between
10%-20% during the last three years.

The new IBM announcement appears to be put one of a series of carefully
planned moves IBM has been making during the last four years to control the per-



5573

centage of its computer and punched card equipment being purchased. The pre-
vious increases in maintenance charges to customers with purchased IBM equip-
ment, and the shortening of the period during which a percentage of ren*-al pay-
ments could be applied to the purchase price from two years to one year, are
examples of these moves. Their overall objective, of course, is to maintain IBM's
profit goals in the years ahead. Three prominent reasons motivating these
changes at this time are (1) the expected long market life of System/360, (2) the
activities of purchase-lease-back companies, and (3) the used computer market.



PiRCENTAGE OF INSTALLED SYSTEMS ON LEASE VS. YEAR OF FIRST INSTALLATION
FOR SELECTED I.B.M.SYSTE MS




I960 l«59

YEAR OF FIRST INSTALLATION



LONG MARKET LIFE OF SYSTEM/3 60

As indicated in the chart below, the percentage of currently installed IBM
computers purchased increased under the former "Option-to-Purchase" plan in
rough proportion to their length of service on the market . . . taking into
account that the rate of purchase was lower for small-scale systems and higher
for large-.scale systems. This is easily understood in light of IBM's former policy
of reducing the purchase price of equipment with each year of service.

Since the System/360 is envisioned by IBM as being a series of computer sys-
tems actively marketed and in use for ten or more years. IBM is anxious to keep
a high percentage of installed systems on rental so that they will provide highly
profitable revenues to IBM during the latter half of their decade of use. IBM ap-
parently reasons that cu.stomers likely to purchase their system in any case will
do so by the end of the first year of use — reacting to the incentive of the 11%
to 12% discount — rather than delaying for two or more years the decision to pur-
chase. Customers not being able to make a decision to purchase by the end of the
first twelve to eighteen months of use will probably continue to rent their 360
system indefinitely, since the purchase price on their aging equipment will
remain fixed.

Two other factors that will discourage users of 360 equipment from purchasing
are : (a) the rapid advances being promised in peripheral equipment, especially in
the areas of printers, optical character recognition units, displays, and mass mem-
ories, and (b) the program compatibility between models of 360 make upgrading of
the central processor to achieve greater processing capacity a relatively simple
technical step . . . making customers wary of getting locked in at too low a level



5574

by purchasing a processor which might be found to be underpowered for the
application load required.

It is likely that under IBM's new plan between 80%-85% of System/360 users
will rent their equipment for the long haul. Those that do purchase will put forth
their purchase price within their first six to sixteen months of use of their sys-
tem, suggesting that IBM will be receiving a generous share of income from pur-
chased systems during '66 and '67, the two years of heaviest installation activity
with its associated heavy marketing, training, and installation expenses.

PURCHASE-LEASE-BACK COMPANIES

Probably the single most compelling reason for the timing of IBM's price
changes has been the "purchase-lease-back" activities of companies such as Man-
agement Assistance, Inc., Boothe Leasing Corp., D.P.A., Inc., Cyber-Tronics, Iiic,
etc. During the past year these firms have been generating an impressive volume
of business by arranging for computers and punched card equipment users (par-
ticularly the latter) renting equipment from IBM to purchase their equipment at
the reduced prices allowed by IBM's former price policy. The "purchase-lease-
back" firm would then, as their name implies, purchase the equipment from the
user for the same price and lease it back to the user usually at substantial savings
in rental costs. It is believed that the volume of IBM equipment purchased during
the last twelve months by these companies is in excess of $40 million.

The effect on "purchase-lease-back' companies of IBM's new policy is likely
to be a strong acceleration in their activities during the next year or so, since
the purchase-lease-back arrangement for IBM equipment will never be more
attractive than it is at the current time. In the next three to five years, however,
if the IBM policy stands, a restriction in the growth of these firms is clearly
indicated.

It is highly likely that because IBM's new policy has a direct adverse economic
impact on "purchase-lease-back" companies, the policy will be challenged in the
courts as an artificial measure designed to restrain the trade of independent
companies purchasing and maintaining IBM equipment. Certainly, the elimina-
tion of IBM's former "Purchase-of- Rented" plan seems in strong contrast to the
spirit behind the wording of the so-called IBM Consent Decree, the agreement
drafted by the United States Justice Department and signed by IBM on Janu-
ary 25, 1956. This judgement, the requirements of which ofiicially expire next
January, required IBM to offer to sell to any customer renting an IBM tabulating
or electronic data processing machine that equipment at a sale price "which
should not be greater than the sale price for a new machine of the same type and
model less 10% for each full year of age, computed from the date of first installa-
tion after original assembly or rebuilding, except that for machines of more than
eight years the price may be more than 25% of such sales price." This agreement
was binding only during the period of eighteen months from the signing of the
judgement. However, since the judgement did direct IBM to be non-discriminatory
in offering customers the opportunity to purchase as well as rent its equipment,
its spirit is likely to be invoked in challenging IBM's new purchase policy.

Logically, IBM should be anxious to curtail the activities of "purchase-lea.se
back" firms for two reasons. First, IBM loses profitable rental income on its data
processing equipment, particularly punched card equipment, that is usually fully
depreciated on its books. Second, since many of the "purchase-lease-back" firms
pro\ide their own maintenance sen^ice, or arrange for maintenance service
through outside sources, IBM loses its close sen-ice relationship with its custo-
mers, thereby gieatly lessening IBM's opportunity to upgrade the customer's
equipment to a more elaborate punchetl card installation or to a computer. In
fact, one "purchase-lease-back" firm reports that in over half of the punched
card installations purchased by it which have subsequently upgraded to a com-
puter, the computer was of non-IBM manufacture.

USED COMPUTER MARKET

The freezing of the purchase price of IBM computer systems raises the ceiling
at which used IBM computers of the first or second generation will be able to
enter the used computer market during the next two to three years. However,
since even under the "Purcbase-of-Rented" plan, IBM's purchase prices were well
above that of the free market, little effect on the quantity or price of used com-
puters is foreseen. The new IBM plan does, however, firmly squelch suggestions
made by some EDP consultants that IBM might be planning a drastic reduction



5575

in the purchase price of its second generation equipment in order to make a final
"cash-in" on the 1400/7000 series prior to quantity deliveries of the System/360.
The naivete of such assumptions in terms of IBM's market and profit goals is now
clearly seen.

IBM has several further moves it can make if the percentage of its data process-
ing equipment rented by its customers is not brought on target by the new policy.
One step is to shift the purchase to rent ratio of its equipment upward, thereby
increasing the purchase price of its data processing equipment without changing
its monthly rental. IBM has made several purchase price changes on data process-
ing equipment in the past, but is quite proud of the fact that only once in the
recent past (in 1956, after signing the Consent Decree) did it ever change the
rental price of some of its equipment. The second measure that IBM can take is
to withdraw its "Option-to-Purchase" plan entirely, thereby allowing no applica-
tion of paid-in-rental toward the purchase price of its rented equipment. Since
the new "Option-to-Purchase" plan does not involve a contractual arrangement
as did the previous one, IBM is free to make this change in the future with a
minimum of thirty days notice to its customers.

Both these moves, of course, would offer some additional competitive price
advantage to IBM competitors in the computer industry. However, this effect
might well be outweighed by the additional profits to be realized by the rental
income coming from a generous share of the 65% to 75% of the computer market
IBM is expected to maintain command of in the 1970's.

MONTHLY COMPUTER CENSUS AS OF AUGUST 10, 19t5



Manufacturer and name of computer '



Solid
state ?



Average

monthly Date of 1st
rentals Installation



Number of Number of

installa- unfilled

tions orders



Advanced scientific instruments:

ASI 210 Yes

ASI 2100 Yes.

ASI 6020 Yes

ASI 6040 Yes

ASI 6050 Yes

ASI 6070 Yes

ASI 6080 Yes

Autonetics:

RECOMP ll.._. Yes

RECOMP III Yes

Bunker-Ramo Corp.:

BR-13C Yes

BR-230 Yes

BR-300 Yes...

BR-330 Yes

BR-340 Yes

BR-530 Yes

Burroughs:

205 No

220 No

ElOl-103 No...

BlOO Yes

B250 Yes

B260 Yes

B270 Yes

B280 Yes.

B300.. Yes

B5000'B5503.. Yes. .

Clary: DE-60/OE-60M Yes

Computer Control Co.:

DDP-19 Yes.

DDP-24. Yes

DDP-116 Yes

DDP-224... Yes

Control Data Corp.:

G-15 No

G-20 Yes

160/160A/160G Yes 1

924/924A Yes

1604/1604A.... Yes

3100.... Yes

3200 Yes

3300.. Yes

3400 Yes

3600 Yes

3800 Yes

6400 Yes

6600 Yes

6800.... . Yes



2,850 April 1962

3,000 December 1963

2,200 April 1965.

2,800 July 1965...

3,000 October 1965

3,500 October 1965

4,000 January 1966.

2,495 November 1958

1,495 Junel961-.

2,000 October 1961

2,680 August 1963

3,000 March 1959

4,000 December 1960.

7,000 December 1963

6,000 August 1961..

4,600 January 1954

14,000 October 1958

875 January 1956..

2,800 August 1964..

4,200 November 1961

3,750 November 1962

7,000 July 1962

6,500 July 1962

8,400 July 1965

20.000 March 1963....

535 July 1960

2,800 June 1961

2,500 May 1963.

900 April 1965...

3,300 March 1965..

1,000 July 1955...

15,500 April 1961

750,3,400, May 1960, July 1961,

12,000 March 1964.

11,000 August 1961

38,000 January 1960

7,350 December 1964

12,000 May 1964

15,000 August 1965....

25,000 November 1964

58,000 June 1963

60,000 November 1965

40,000 January 1966

110,000 August 1964...

140,000 April 1967



23
6
3
1




55
14

170
14
40
35
19
15

56

44
163

60
104
205
148

85
2

39
325

2

66

6



328

26

426

28
60
24
76

12
42





2

4
4
1



2X

X

10

1

29
2X

2

2X

2X
2X
2X

35
7
65
25
25
45
11
3

!X

4
45
22

2X
2X

4
1

2X

35
3053

20
11
20

3
10

1



5576

MONTHLY COMPUTER CENSUS AS OF AUGUST 10, 1965— Continued



Manufacturer and name of computer '



Solid
state?



Average

monthly Date of 1st
rentals Installation



Number of
installa-
tions



Number of
unfilled
orders



Digital Equipment Corp.

PDP-1 _ Yes

PDP-4 Yes

PDP-5 Yes

PDP-6 Yes

PDP-7._ Yes

PDP-8 .___ Yes

El-tronics, Inc., ALWAC IIIE No

Electronics Associates, Inc.: 8400 Yes

Friden6010 Yes

General Electric:

115.... Yes

205 Yes

210 Yes

215 Yes

225 Yes

235 Yes

415 Yes

425 Yes

435 Yes

625 Yes

635 - Yes

General Precision:

LGP-21 Yes

LGP-30 Semi

RPC-4000 - Yes

Honeywell Electronic Data Processing:

H-120 - Yes

H-200 Yes

H-400 Yes

H-800. Yes

H-1200.. _ Yes

N-1400 Yes

H-1800 Yes

H-2200.. Yes

H-4200 - Yes

H-8200 - Yes

DATAMATICIOOO No

IBM:

305 _ No

360/20 Yes

360/30 Yes

360/40 ___ Yes

360/50 Yes

360/60 Yes

360/62 Yes

360/65 Yes

360/67_._ Yes

360/75 __ Yes

650 No

1130. Yes

1401 Yes

1401-G Yes

1410 Yes

1440 Yes

1460 Yes

1620 I, II Yes

1800.. Yes

701 No

7010 Yes

702 No

7030... Yes

704 No

7040 Yes

7044 _ _ Yes

705 No

7070,2,4... Yes

7080 Yes

709 No

7090 _. Yes

7094 Yes

7094 II Yes

ITT: 7300 ADX ._ Yes



3,400 November 1960.

1,700 August 1962....

900 September 1963.

10,000 October 1964....

1,300 November 1964.

525 April 1965

1,820 February 1954..

7,000 June 1965

600 June 1963

1,375 December 1965..

2.900 June 1964

16,000 July 1959

6,000 September 1963.

8,000 April 1961

10,900 April 1964

7,300 May 1964

9,600 June 1964

14,000 October 1964...

41,000 December 1964..

45,000 December 1964..

725 December 1962..

1,300 September 1956.

1,875 January 1961...

2,600 December 1965..

5,700 March 1964

8,500 December 1961..

22,000 December I960..

6,500 February 1966...

14,000 January 1964...

30,000 January 1964....

11,000 October 1965...

16,800 February 1966..

35,000 Marcn 1967

40,000 December 1957..

3.600 December 1957.,

1,800 December 1965..

7,500 May 1965

16,000 April 1965

30,000 August 1965... .

48,000 August 1965....

55,000 September 1965.

49,000 January 1966...

49,000 September 1966.

78,000 November 1965.

4,800 November 1954.

850 November 1965.

4, 500 September 1960.

2,000 May 1964

14,200 November 1961.

3,500 April 1963

9,000 October 1963...

2, 500 September 1960.

3,500 December 1965..

5,000 April 1953

22,600 October 1963...

6,900 February 1955..

160,000 May 1961

32,000 December 1955..

18,000 June 1963

35,200 June 1963

30,000 November 1955.

27,000 March 1960

55,000 August 1961

40,000 August 1958

63,500 November 1959.

72,500 September 1962.

78.500 April 1964

18, 000 September 1961.



60


2


55


2


112


4


10


11


14


55


45


160


24


2X


1


6


200


188





100


28


15


56


2X


50


5


145


3


51


6


62


75


35


55


11


20


5


22


5


26


130


'X


400


2X


80


2X





160


555


310


122


8


83


8





33


12


2


11


9


C


42





6





1


4


2X


180


:X





2,700


55


2,350


70


650





300





16





5





85





7





85


270


^X





1,050


7,100


300


1,000


100


760


50


2,000


450


2,000


350


1,750


30





75


1


2X


140


60


8


2X


7


= X


43


2X


108


22


55


8


61


3X


352


8


73


1


11


-•X


56


4


135


15


77


30


9


6



5577



MON



THLY COMPUTER CENSUS AS OF AUGUST 10, 1965-Continued



Manufacturer and name of computer '



Solid
state?



Average
monttily
rentals



Date of 1st
installation



Number of Number of

Installa- unfilled

tions orders



Monroe Calculating Machine Co. ;

MonrobotlX . - - "°

MonrobotXI - - ^"

National Cash Register Co.:

NCR-304 - :"



NCR-310.



Yes



NCR-315 - Ill

NCR-315-RMC - - l^l

NCR-390 l^^

NCR-500 ''"

Philco: „„^

1000 - - III

2000-210211 Yes

2000-212 Yes

2000-213 Yes

Radio Corp. of America:

Bismac - - ^°

RCA301-. - Yes

RCA 3301 - Yes

RCA 501. - J®5

RCA 601 Yes

Spectra 70/15 Yes

Spectra 70/25 Yes

Spectra 70/45 Yes

Spectra 70/55 - - Yes

Raytheon: „„^

250 - Yes

^^" " Yes



440.
520.



;;;;;;;; Yes

Scientific Data Systems, Inc.:

SDS-92 - Yes

SDS-910.. - - Yes

SDS-920 - Yes

SDS-925. - - Yes

SDS-930 Yes

SDS-9300 - Yes

Systems Engineering Labs:

SEL-810.. Yes

SEL-840 Yes

UNIVAC:

I and II -



No



III.



File Computers .-. - Vo:'"'

Solid-state 80 I, II, 90 I, II, and Step.

418

490 Series

1004 -.

1050 - - M

1100 Series (except 1107) l^o

1107 Yes

1108 Yes

LARC - - Yes



Yes
No
Yes
Yes
Yes
Yes
Yes



Total.



3 5,800 March 1958

750 December I960..

14,000 January 1960

2,000 May 1961

8,500 May 1962

12 000 September 1965.

1,850 May 1961..

1 500 September 1965..



7,010 June 1963....

40,000 October 1958.

52 COO January 1963.

68,000 June 1965...



100,000 1956..

6000 February 1961..

11,500 July 1964

14,000 June 1959

November 1962.
November 1965.
November 1965.

March 1966

May 1966



35, 000
2.600
5.000
9,000

14,000



1,200 December 1960.
3,500 March 1964...
3,200 October 1965...



900 April 1965

2,000 August 1962

2,700 September 1962.

2,500 December 1964..

4,000 June 1964

7,000 November 1964.



750 August 1965..
4,000 October 1955.



25, 000

20, 000
15,000
8,000
11,000

26, 000
1,900
8,000

35,000
45,000
50, 000
135, 000



March 1951; Novem-
ber 1957.

August 1962

August 1956

August 1958

June 1953....

December 1961

February 1963

September 1933

December 1950

October 1962

July 1965....

May 1960



155


2X


560


130


26


2X


46


1


330


35





75


960


60





200


16


2


21


2


T


2





1


3


2X


600


12


33


22


98


2


5


2X





60





50





60





13


170


10


12


5





8


15


40


140


25


88


15


4


22


54


25


11


8





8



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 82 of 140)