|
__________________________________________ | ) | |
| | ) | |
| UNITED STATES OF AMERICA, |
) | | | Plaintiff, | ) |
| | |
) | Civil Action
| | -against- |
) | No. 72-344 (AGS)
| | | ) | |
| INTERNATIONAL BUSINESS MACHINES | ) | |
| CORPORATION, | ) |
| | Defendant. |
) | | | __________________________________________ |
) |
|
UNITED STATES' MEMORANDUM IN SUPPORT OF JOINT
MOTION TO MODIFY THE 1956 FINAL JUDGMENT
AND
RESPONSE TO
PUBLIC COMMENTS
N.
Scott Sacks (NS-6689)
Bruce Pearson (DP-8829) James J. Tierney (JT-7842)
U.S.
Department Of Justice
Antitrust Division
600
E Street, N.W.
Suite
9500
Washington, D.C. 20530
(202)
307-6200
Attorneys for the United States
David Turetsky
Deputy Assistant Attorney General
Rebecca P. Dick
Deputy Director of Operations
November 13, 1996
CONFIDENTIAL INFORMATION DELETED
PURSUANT
TO SECTION 13 OF APRIL 10, 1996, PROTECTIVE
ORDER
.
Page i
TABLE OF CONTENTS
I. INTRODUCTION................................................................................................................ 1
II. PROCEDURAL BACKGROUND
................................................................................... 3
III. PURPOSE AND HISTORICAL
CONTEXT OF THE DECREE ................................... 8
IV. THE LEGAL STANDARD
GOVERNING THE COURT'S
PUBLIC INTEREST DETERMINATION
..................................................................... 13
V. THE GOVERNMENT
CONDUCTED A THOROUGH TWO-YEAR
INVESTIGATION OF LIKELY EFFECTS OF DECREE
TERMINATION................... 16
VI. COMPETITIVE ANALYSIS OF
RELEVANT SYSTEM/390 AND
AS/400 PRODUCTS AND SERVICES
......................................................................... 17
A. The AS/400 Faces A Competitive Market
............................................................... 20
B. IBM's Market Power In The System/390
Equipment Market Is Limited And Diminishing
..................................................... 22
C. AS/400 And System/390 Aftermarkets
.................................................................... 28
1. Customer Lock-In And Switching Costs
.......................................................... 30
2. Life-Cycle Costing
............................................................................................. 32
D. IBM's Ability To Exercise Market Power Is Constrained By
A
Variety Of Factors
...................................................................................................
35
1. Lock-In Is Eroding
............................................................................................. 36
2. IBM's Concern For Its Reputation Further Limits IBM's
Ability To Exploit Its Installed Base
.................................................................. 36
3. IBM's Business Plans Are Inconsistent With A Strategy
To
Exploit Its Primary Market And Aftermarket Customers ............................. 37
E. The Proposed Sunset Periods Further Protect Customers
And
Competitors
.............................................................................................................. 39
F. The Decree May Not Effectively Restrain IBM's Exercise
Page ii
Of Market Power
......................................................................................................
41
VII. RESPONSE TO COMMENTS
...................................................................................... 42
A. Favorable Comments
...............................................................................................
42
B. Unfavorable Comments
............................................................................................ 44
1. COHR, Inc., Association of Service And Computer Dealers
International ("ASCDI"); And Anonymous
....................................................... 44
2. Independent Service Network International ("ISNI")
........................................ 47
VIII. CONCLUSION
............................................................................................................... 54
.
Page iii
TABLE OF AUTHORITIES
CASES PAGE(S)
Allen-Myland, Inc., v. International Business Machines
Corporation,
33
F.3d 194 (3d Cir.), cert. denied, 115 S. Ct 684 (1994) .................................................. 9, 23
Broadway Delivery Corp. v. United Parcel Service of America,
Inc.,
651 F.2d 122 (2nd Cir.), cert. denied,
454 U.S. 968, 102 S Ct. 512 (1981)
........................................................................................ 19
Eastman Kodak Co. v. Image Technical Services, Inc.,
504 U.S. 451, 112 S. Ct. 2072 (1992) ............................................ 28-
30, 32, 34- 35, 44, 47, 52
Hayden Pub. Co. c. Cox Broadcasting Corp.,
730 F.2d 64 (2nd Cir. 1984)
....................................................................................................
19
In re International Business Machines Corporation,
45
F.3d 641 (2nd Cir. 1995) .................................................................................................... 5
N.C.A.A. v. Board of Regents of Univ. of Oklahoma,
468 U.S. 85, 104 S Ct. 2948 (1984)
........................................................................................ 19
Rufo v. Inmates of Suffolk County Jail,
502 U.S. 367, 112 S. Ct. 748 (1992)
....................................................................................... 49
Sam Fox Publishing Co. v. United States,
366 U.S. 683, 81 S. Ct. 1309 (1961)
................................................................................. 14, 50
United States v. American Cyanamid Co.,
719 F.2d 558 (2nd Cir. 1983), cert. denied sub nom.
American Cyanamid Co., v. Melamine Chemicals, Inc.,
465 U.S. 1101, 104 S. Ct 1596 (1984)
............................................................ 13, 39, 47, 50- 52
United States v. Associated Milk Producers, Inc.,
534 F2d. 113 (8th Cir.), cert. denied sub nom.
National Farmers' Organization, Inc. v. United States,
429 U.S. 940, 97 S. Ct. 355 (1976)
......................................................................................... 15
United States v. Betchel Corp.,
648 F.2d 660 (9th Cir.), cer. denied,
454 U.S. 1083, 102 S. Ct. 638 (1981)
......................................................................... 14- 15, 50
Page iv
United States v. Eastman Kodak Co.,
63 F.3d 95 (2d Cir. 1995) 49
United States v. E.I. du Pont de Nemours & Co.,
351 U.S. 377, 76 S. Ct. 994 (1956)
......................................................................................... 19
United States v. General Electric Co.,
1977-2 Trade Cas. (CCH) 61,659 (E.D. Pa. 1977)
........................................................ 14, 49
United States v. International Business Machines
Corporation,
69
Civ. 200 (S.D.N.Y. 1969) .................................................................................................... 6
United States v. International Business Machines
Corporation,
1995-2 Trade Cas. (CCH) 71,135 (S.D.N.Y. 1995)
................................................................ 5
United States v. Loew's Inc.,
783 F.Supp 211 (S.D.N.Y. 1992)
................................................................................ 13- 15, 49
United States v. Microsoft Corporation,
56
F.3d 1448 (D.C. Cir. 1995) ........................................................................................... 14-
15
United States v. Mid-America Dairymen, Inc.,
1977-1 Trade Cas. (CCH) 61,508 (W.D.Mo. 1977)
............................................................. 15
United States v. Swift & Co.,
1975-1 Trade Cas. (CCH) 60,201 (N.D. Ill. 1975)
......................................................... 13, 49
United States v. Western Electric Co.,
900 F.2d 283 (D.C. Cir.), cert. denied sub nom.
MCI Communications Corp. v. United States,
498 U.S. 911, 111 S. Ct. 283 (1990)
....................................................................................... 14
United States v. Western Electric Co.,
993 F.2d 1572 (D.C. Cir.), cert. denied sub nom.
Consumer Federation of America v. United States,
510 U.S. 984, 114 S. Ct. 487 (1993)
................................................................................. 14, 50
STATUTES AND RULES
Clayton Act Section 7, 15 U.S.C. 18
....................................................................................... 51
Sherman Act Sections 1, 2, 15 U.S.C. 1,2
........................................................................ 2, 29
Page v
Tunney Act, 15 U.S.C. 16(e)
...................................................................................................
13
Fed. R. Civ. P. 24(a) and (b)
....................................................................................................
5
MISCELLANEOUS MATERIALS
1952 Case Transcript, September 23, 1955
.................................................................................. 8
1952 Case Transcript, January 25, 1956
....................................................................................... 9
Brief for the United States in its Opposition to Defendant's
Certiorari
Petition at 6, United States v.
American Cyanamid Co., 719 F.2d 558
(2d Cir. 1983) cert. denied sub.
nom. American Cyanamid Co., v.
Melamine Chemicals, Inc., 465 U.S.
1101 (1979) (No. 83-1085) .........................................
51
Decision One Holdings Corp., Securities and Exchange
Commission
Form 10-K, June 30, 1996
....................................................................................................
11
INFORMATION REDACTED
........................................................................... 38
Oster, Sharon M., Modern Competitive Analysis,
..................................................................... 37
INFORMATION REDACTED
............................................................................................. 25
INFORMATION REDACTED
................................................................. 25- 27
INFORMATION REDACTED
.......................... 23, 25
INFORMATION REDACTED
............................................................. 25- 27
.
Page 1 .
I. INTRODUCTION
This filing sets forth the basis on which the Court should grant the
parties' Joint Motion
to phase out the 1956 Final Judgment (the "decree") and responds
to public comments regarding
the Joint Motion. Termination of the decree as proposed in the
parties' Joint Motion, in stages
ending on July 2, 2001, is in the public interest because the decree
is not needed to prevent
anticompetitive conduct in the computer industry in the 21st
century and the sunset periods
provide equitable protection for customers and competitors who
have made business decisions in
reliance on the decree.
Following IBM's motion to
terminate the decree in June 1994, the Government
conducted a lengthy, thorough investigation. The Government
interviewed or met with over 130
competitors and customers of IBM, industry and economic experts,
and other third parties, took
depositions of seven IBM executives concerning the firm's
post-termination plans, and reviewed
more than 120,000 pages of documents submitted by IBM,
government agencies, and numerous
third parties. We concluded that, while IBM may still have the
capability to exercise market
power in the market for its System/390 mainframe computer
systems with respect to some
customers' applications, competition has so greatly increased in the
computer industry -- and
promises to continue to do so -- that IBM is unlikely to be able to
exercise market power against
any significant category of equipment customers in 2001, the
proposed termination date.
Termination of the decree is also unlikely to increase the possibility
that IBM could exercise
market power in hardware maintenance aftermarkets. In any event,
the decree was designed for a
Page 2 .
different era and may no longer effectively restrain IBM's ability to
exercise any market power it
may currently possess, or effectively restrain any residual market
power that IBM might retain
after 2001.
Based on the results of our investigation, and considering the
resources that would be
devoted to and the uncertainties of litigating this matter, the Joint
Motion is a reasonable
settlement that will terminate this litigation 49 years after it began.
The Government's economic
experts support our conclusion that the proposed modification is
reasonable and in the public
interest. In Professor Oster's
1 opinion,
the current sunsetting provisions proposed by the United States
Department of Justice are
reasonable when seen in the context of the evolution in the
structure of the computer
industry. In particular, I believe that the evidence suggests that
IBM's current ability to
exploit customers in the aftermarket is limited and likely to
become more so in the period
allowed by the sunset provisions of the termination proposal.
Oster Decl. at 3. Professor Carlton
2 opines that: "(a) terminating the Consent
Decree is
unlikely to significantly harm consumers; [and] (b) injury to
vendors of competing products and
services as a result of termination of the Consent Decree will be
limited by IBM's self-interest
and the termination's sunset provisions." Carlton Decl. at
4.
Page 3 .
II. PROCEDURAL BACKGROUND
The decree was entered by Judge Edelstein on January 25, 1956.
The decree arose out of
a complaint filed on January 21, 1952, alleging that IBM had
monopolized, attempted to
monopolize and restrained trade in the electronic tabulating
machine industry, in violation of
Sections 1 and 2 of the Sherman Act, 15 U.S.C. 1 & 2.
Although the Complaint did not allege
any violation in the computer industry, the parties agreed to extend
the decree's coverage to
computers (defined by the decree as "electronic data processing
machines") and tabulating
machines.
Many decree provisions were intended to be temporary and
expired long ago. Other
provisions, relating to tabulating machines, are obsolete and do not
apply to any ongoing IBM
business. The following provisions, however, were intended to
apply perpetually to IBM's
computer business and remained in force when IBM filed its
motion to terminate:
Section IV enjoined IBM's longstanding lease only
policy and requires that IBM sell as
well as lease its computers. Its stated purpose is to assure current
and prospective IBM
customers an opportunity to purchase computers on terms and
conditions that are not
substantially more advantageous to IBM than the terms and
conditions IBM obtains for leases of
the same computers. Section IV contains a variety of provisions to
aid this purpose. Section
IV(c)(2) requires IBM to sell its computers at prices that have a
commercially reasonable
relationship to the lease charges for the same computers and
Section IV(c)(3) requires IBM to
establish nondiscriminatory terms for the sale of its computers.
Further, Section IV(c)(7)
requires IBM to fill lease and sale orders, to the extent
administratively practicable, in the order
of their receipt.
Page 4
Section V restricts IBM's ability to re-acquire
previously sold IBM computers. Section
V(a) enjoins IBM from acquiring IBM computers except as a
trade-in or as a credit. IBM,
however, is allowed to re-acquire computers that it has leased to a
customer. Section V(b) and
(c) require IBM to offer to sell at specified prices and for a
specified period used IBM computers
acquired as trade-ins or for credit.
Section VI prohibits IBM from discriminating against
owners of computers in favor of
lessees. Section VI(a) requires IBM to provide, without separate
charge, the same type of
services, except repair and maintenance, that it provides to lessees
without separate charge.
Section VI(b) requires IBM to offer to computer owners, at
reasonable and nondiscriminatory
prices, repair and maintenance service for as long as IBM provides
such service, provided that
the computer has not been altered or connected to another computer
in such a manner that its
maintenance and repair is impractical for IBM. Section VI(c)
requires IBM to offer to computer
owners and to persons engaged in the business of providing repair
and maintenance services, at
reasonable and nondiscriminatory prices, repair and replacement
parts for as long as IBM has
such parts available for use in its leased computers.
Section VII restrains IBM from requiring that lessees or
purchasers of IBM computers
disclose to IBM the uses of their computers, from requiring that
purchasers have their computers
maintained by IBM, and generally, from prohibiting
experimentation with, alterations in or
attachments to IBM computers.
Section VIII specifies conditions under which IBM
could operate its "service bureau
business" and required that IBM operate its service bureau business
through a subsidiary.
Page 5 . . .
Section IX requires IBM to furnish to owners of IBM
computers manuals, books of
instructions, and other documents that IBM furnishes to its own
repair and maintenance
organization, and requires IBM to furnish to purchasers and lessees
of IBM computers manuals,
books of instruction, and other documents that pertain to the
operation and application of such
computers.
Section XV enjoins IBM from entering into certain
agreements to allocate markets or
restrain imports into the United States or exports out of the United
States and from conditioning
the sale or lease of certain computers upon the purchase or lease of
any other computers.
IBM filed its Motion to Terminate the 1956 Consent Decree on
June 13, 1994. 3
Several
IBM competitors and trade associations, including the Independent
Service Network
International ("ISNI"), the Computer & Communications Industry
Association ("CCIA") and the
Computer Dealers and Lessors Association ("CDLA"), moved to
intervene as of right, or in the
alternative, for permissive intervention under Fed. R. Civ. P. 24(a)
and (b). The Court found that
none of the proposed intervenors satisfied the eligibility
requirements for mandatory or
permissive intervention and denied the motions. United States
v. International Business
Machines Corp., 1995-2 Trade Cas. (CCH) 71,135 (S.D.N.Y.
1995).
In its Preliminary Statement of Issues (filed on July 19, 1995), the
Government
announced it would not oppose partial termination of the decree.
The Government tentatively
consented to terminate Sections V(b) and (c) (requiring IBM to
offer used equipment for sale
pursuant to certain conditions), Section VIII (service bureaus), and
all other provisions of the
Page 6 .
decree as they applied to IBM's personal computer ("PC") and
workstation products and services.
United States' Preliminary Statement of Issues at 1-2. As to
these products and services, the Government concluded that the
decree was no longer needed to serve the public interest in
competition in any relevant computer service, personal computer or
workstation market. After
public notice and a period for comments, the Court found that
partial termination was in the
public interest, and on January 17, 1996, entered an Order
terminating these portions of the
decree.
The decree continued to apply to IBM's mainframe computers (the
System/390 line of
products and services) and IBM's mid-range computers (the
AS/400 line of products and
services). 4 Before commencement of full reciprocal discovery, the
Government requested, and
was permitted, time to investigate the likely impact of decree
termination on IBM's System/390
and AS/400 customers and competitors. The Government
ultimately concluded that it could not
consent to immediate termination, but that it would be in the public
interest to phase out the
decree gradually.
On July 2, 1996, the United States and IBM stipulated to sunset
periods for all remaining
decree provisions as they apply to the System/390 and AS/400
families of products and services.
The parties agreed to terminate Sections IV(b)(3) and (c)(7) and
Section VII(d)(1) immediately
Page 7
upon entry of an Order by the Court. With respect to the AS/400,
the parties agreed to terminate:
(1) Section V(a) immediately upon entry of an Order by the Court;
(2) Section IV (except Section
IV(c)(3) as it may apply to the provision of operating systems) and
Section VI(a) six months after
entry of an Order by the Court; and (3) all other provisions of the
decree as they apply to the
AS/400, including Section IV(c)(3) as it may apply to operating
systems, on July 2, 2000. With
respect to the System/390 and the remainder of the decree, the
parties agreed to terminate all
remaining provisions on July 2, 2001. Thus, after July 2, 2001, no
portion of the decree will
remain in effect. 5
On July 11, 1996, the Government filed a memorandum
explaining why, subject to
having an opportunity to evaluate public comments, it had agreed
to phase out the decree. Also
on July 11, 1996, the Court entered an Order Directing
Publication Of Notice Of Judgment
Modification, implementing procedures to give non-parties
notice of, and an opportunity to
comment upon, the proposed modification. The Order provided for
a 60-day public comment
period and an additional 30 days in which the parties could file
responses to any public
comments received. The 60-day public comment period expired on
October 15, 1996, and the
parties' responses are now due.
Seven comments were filed, three supporting the Joint Motion and
four opposing. The
only customer to file a comment supports the Joint Motion.
Amdahl Corporation, the leading
manufacturer of System/390 plug-compatible mainframes in
competition with IBM, and the
CCIA also support the Joint Motion as long as the decree is
enforced during the sunset periods.
Three of the opposing comments are from IBM competitors or
trade associations representing
Page 8 . .
IBM competitors in the aftermarket for service and maintenance of
System/390 and AS/400
computers. We also received an anonymous opposing
comment.
III. PURPOSE AND HISTORICAL CONTEXT
OF THE DECREE 6
In 1952, IBM was apparently the sole domestic manufacturer of
electrical tabulating
machines and had about 90 percent of sales of electrical and
mechanical tabulating machines.
The complaint alleged that IBM had pursued a lease-only strategy
that protected its new
equipment from competition from used equipment. 7 The Complaint sought to
limit IBM's
monopoly power in the tabulating industry by requiring IBM to sell
as well as lease its tabulating
machines.
By 1956, computers were replacing tabulating machines and IBM
had begun to adopt the
same lease-only policy and to pursue the same or similar tactics for
computers as it had for
tabulating machines. Although the Complaint did not allege
violations in the computer industry,
the parties agreed to extend the decree to computers. The
Government was concerned that
computers would supplant tabulating machines and the failure to
include computers would make
"the decree obsolete before it is operative." (September 23, 1955,
Tr. at 4 (U.S. Selected Docs.
Tab 9).) At the January 25, 1956, hearing for entry of the decree,
Government counsel explained
that, while the Complaint related to tabulating machines, it
involved a "dynamic industry" so that
Page 9 . .
the parties had agreed the judgment should extend to computers.
(January 25, 1956, Tr. at 58-59
(U.S. Selected Docs. Tab 11).)
The primary purpose of the decree was "to establish in the United
States a used machine
market" to compete against IBM's new computers. (Id. at
69.) Section IV implements this
purpose by requiring that IBM sell as well as lease its computers.
The other decree provisions
generally were intended to reinforce the sale requirement. For
example, the decree encouraged
the development of an independent repair and maintenance service
industry to support the used
equipment market. (Id. at 69-70.)
8 An unanticipated consequence of the decree
was the
development of computer lessors that competed with IBM in
financing.
The Government has never charged IBM with violating the decree,
although we have
investigated a number of complaints. Five investigations are
noteworthy here. In 1987, IBM
announced plans to close 64 of 87 domestic parts centers open to
independent service
organizations ("ISOs"). Our investigation of the closings was
terminated the following year
when IBM negotiated a settlement with the complainants. Second,
in 1989-90, the Division
investigated whether IBM's refusal to license microcode to "split"
machines constituted a
violation. The Division concluded it did not, but the court later
disagreed in Allen-Myland, Inc.
v. International Business Machines Corp., 33 F.3d 194 (3d
Cir.), cert. denied, 115 S. Ct. 684
(1994). Third, the Division closed its 1993-94 investigation of
IBM's service bureau business
after concluding that IBM's conduct did not violate Section VIII.
Fourth, in 1995, we opened an
Page 10
investigation to determine whether IBM's Entry Server
Offering/Technology Upgrade Option
("ESO/TUO"), a lease/upgrade option, was matched by an
equivalent purchase/upgrade option.
The investigation is pending.
********************* INFORMATION
REDACTED ************************
********************* INFORMATION
REDACTED ************************
Competition and IBM's role in the computer industry have
dramatically changed over the
past four decades. The computer industry has experienced
explosive growth. In the early 1950s,
computers were at an early and primitive stage and had few
commercial applications. There
were only a handful of competitors and U.S. industry revenues
were less than $200 million.
Remington Rand entered the 1950s as the market leader with its
Univac machine, but by 1955,
IBM led in computer installations. Today, there are more than
50,000 firms selling computer
hardware, software, and services and industry revenues exceed
$300 billion annually. Although
IBM is still the leading manufacturer of mainframe computers, the
industry has fragmented. In
addition to alternative mainframe platforms, there are a wide
variety of small and mid-sized
systems. Increasingly, networks of smaller systems compete with
IBM.
The most significant trend in the industry has been the rapid
decrease in computer costs,
coupled with the rapid increase in computer performance and
functionality. The processing
capacity of IBM mainframes is generally measured in "millions of
instructions per second
("MIPS"). Over the past two decades, the maximum capacity of
mainframe computers has risen
Page 11 .
from fewer than 10 MIPS to nearly 800 MIPS. At the same time,
the price/performance (or
price/MIPS) level has improved substantially. Since 1972, the cost
per MIP has dropped from
$1.3 million to under $50,000. Moreover, IBM's recent
introduction of new generation
complementary metal-oxide semiconductor ("CMOS") processors
has further lowered product
and operating costs. Price/performance has been improving at even
a more rapid rate among
smaller and mid-range computers as a result of developments in
microprocessor technology.
Small and mid-range computers can now more economically
perform many of the functions that
formerly required a mainframe.
The hardware maintenance market has also changed dramatically.
Historically,
customers purchased mainframes or mid-range computers from one
manufacturer and obtained
maintenance and support from that same manufacturer. Today,
most, if not all, large customers
purchase both IBM and non-IBM equipment and have installed a
wide range of platforms, from
networked PCs to large data centers. These customers are
increasingly seeking a single-point-of-
contact and a single price from one of many possible services that
can maintain the full range of
their multi-vendor, multi-platform environments. 9 In this multi-vendor
environment, only IBM is
required to provide its competitors with replacement parts and
proprietary technical information
and diagnostic tools.
While, IBM was once the predominant player in the computer
industry, today many firms
influence the course and direction of the computer industry. IBM's
industry position has
Page 12
diminished as the result of effective competition from alternative
mainframes, mid-range
products and services, the vast improvement in price/performance,
and other factors. In fact, five
years ago, many industry observers viewing IBM's declining sales,
revenues, profits, and
employment, declared the mainframe dead and questioned IBM's
ability to survive. IBM's
competitive response to alternative platforms and client-server
computing appears to have
reversed many of these trends and earlier reports of IBM's demise
appear to have been
overstated. But IBM is no longer the dominant player it once was.
Of the many major events in the evolution of the computer
industry since the decree was
entered, four developments are worth noting here. First, the
tabulating machine industry has
disappeared. Second, in 1964, IBM introduced the
forward-compatible family of mainframe
computers beginning with the System/360. Over the years, IBM
introduced successive
generations to this system. The most recent iteration of IBM's
mainframe family is the
Enterprise Systems Architecture/390 ("ESA/390") introduced in
1990. 10
Third, in 1969, the Department initiated a monopolization case
against IBM. In opposing
consolidation of the 1969 and 1952 cases before Judge Edelstein,
the Government in essence
acknowledged that the conduct alleged in the 1969 case did not
violate the 1956 Decree. The
case was dismissed by the Government in 1982, as the Government
conceded that it could not
prove that IBM's dominance of the computer market was the
consequence of illegal
monopolization.
Page 13 . . . . .
Finally, in 1984, IBM resolved an investigation by the European
Economic Commission
("EEC") by agreeing to an Undertaking that specified conditions
under which IBM would
disclose System/390 interface information. 11 In 1995, IBM withdrew
from the Undertaking.
IBM continues to release interface information, but its future
intentions with respect to interface
disclosures are unknown.
IV. THE LEGAL STANDARD GOVERNING
THE COURT'S PUBLIC INTEREST
DETERMINATION
The Government in this action represents the public interest in
competition. But while
we do not represent third parties who may have benefited from the
decree, we recognize that
customers and competitors may have made significant investments
in reliance on the decree and
that important equitable considerations warrant the negotiated
sunset periods. See United States
v. American Cyanamid Co., 719 F.2d 558 (2d Cir. 1983),
cert. denied sub nom. American
Cyanamid Co. v. Melamine Chemicals, Inc., 465 U.S. 1101
(1984).
Where the Government has consented to a modification of an
antitrust judgment, the
court must determine whether it "is in the public interest."
Id. at 565; United States v. Loew's
Inc., 783 F. Supp. 211, 213 (S.D.N.Y. 1992). Although a
judgment modification or termination
is not subject to the Tunney Act, 15 U.S.C. 16(e), its
reasonableness is judged under the same
"public interest" standard that governs a proposed consent decree.
Loew's, 783 F. Supp. at 213-
14; United States v. Swift & Co., 1975-1 Trade Cas. (CCH)
60,201 at 65,702 (N.D. Ill. 1975);
Page 14 . . . . . .
United States v. General Electric Co., 1977-2 Trade Cas.
(CCH) 61,659 at 72,717 n.1 (E.D. Pa.
1977). Applying this test, a court should not reject a judgment
modification unless "it has
exceptional confidence that adverse antitrust consequences will
result -- perhaps akin to the
confidence that would justify a court in overturning the predictive
judgments of an administrative
agency." United States v. Western Electric Co., 993 F.2d
1572, 1577 (D.C. Cir.), cert. denied
sub nom. Consumer Federation of America v. United States,
114 S. Ct. 487 (1993). Under this
standard, "the court's function is not to determine whether the
resulting array of rights and
liabilities is the one that will best serve society, but only to
confirm that the resulting settlement
is within the reaches of the public interest." United
States v. Microsoft Corp., 56 F.3d 1448,
1460 (D.C. Cir. 1995) (emphasis in original) (internal quotations
omitted). 12
The Government has broad discretion in controlling and settling
antitrust litigation on
terms that will best serve the public interest in competition.
Sam Fox Publishing Co. v. United
States, 366 U.S. 683, 689 (1961). Thus, the court's review
should remain narrowly focused,
limited to whether the Government has offered a reasoned and
reasonable explanation for its
consent. United States v. Bechtel Corp., 648 F.2d 660, 666
(9th Cir.), cert. denied, 454 U.S.
1083 (1981). Approval should be granted "so long as the resulting
array of rights and obligations
is within the zone of settlements consonant with the public
interest today." United States v.
Western Elec. Co., 900 F.2d 283, 307 (D.C. Cir.), cert.
denied sub nom. MCI Communications
Page 15 . . . . .
Corp. v. United States, 498 U.S. 911 (1990) (emphasis in
original); see Loew's, 783 F. Supp. at
214; United States v. Mid-America Dairymen, Inc., 1977-1
Trade Cas. (CCH) 61,508 at 71,980
(W.D.Mo. 1977). Specifically, the Court's inquiry here is simply
whether the Government's
consent to the five-year phase-out of the decree is a reasoned and
reasonable exercise of the
Government's prosecutorial discretion in view of the changes in the
computer industry in the past
40 years and further changes that are likely to occur by 2001.
No third party has a right to demand that the proposed
modification be rejected or
amended simply because a different modification would better
serve its private interests. The
United States -- not a third party -- represents the public interest in
Government antitrust cases.
See, e.g., Bechtel Corp., 648 F.2d at 660, 666;
United States v. Associated Milk Producers, Inc.,
534 F.2d 113, 117 (8th Cir.), cert. denied sub nom. National
Farmers' Organization, Inc. v.
United States, 429 U.S. 940 (1976).
The settlement of this litigation enables "the Department of Justice
to reallocate
necessarily limited [enforcement] resources," Microsoft, 56
F.3d at 1459, and brings the public,
and interested third parties, the certain benefit of some measure of
relief when no such certainty
could exist if the litigation were to continue. Id. at 1461.
Had this matter proceeded to a hearing,
tremendous Government, judicial and private resources would have
been expended and the
result, we believe, would have likely been similar to that negotiated
by the parties.
The Government made a thorough investigation of the computer
industry, analyzed the
competitive benefits of continuing the decree, and assessed the
costs and risks of litigating. The
Joint Motion reflects the Antitrust Division's considered, predictive
judgment that the decree
should not continue indefinitely into the next century.
Page 16 .
V. THE GOVERNMENT CONDUCTED A
THOROUGH TWO-YEAR
INVESTIGATION OF LIKELY EFFECTS OF DECREE
TERMINATION
To develop a factual record to assess the likely effects of
decree termination, the
Government obtained from IBM more than 100,000 pages of
documents, including its strategic
business plans and high-level documents analyzing System/390 and
AS/400 markets and IBM's
competitors. 13 See Tierney Declaration. at 5. 14 IBM also made available
for deposition seven
corporate witnesses who testified regarding IBM's plans in the
event of decree termination and
inefficiencies imposed upon IBM by the decree. These depositions
also covered IBM's current
plans and various background issues to provide context to the
deponents' testimony. Id. at 7.
The Antitrust Division also solicited the views of IBM's customers
and competitors and
the opinions of industry and economic experts. Division staff
interviewed 93 customers from the
following industry segments:
Airlines 7
Banks/Financial Institutions 14
Communications 20
Federal Government 8
Health Care 5
Insurance 6
Manufacturing 28
Other 5
Page 17 .
Id. at 2. In most cases, the Division interviewed the
company's head computer procurement
official and information system manager. The Division
interviewed approximately 30 of IBM's
competitors, as follows:
Original Equipment Manufacturers
9
Independent Service Organizations
4
Leasing/Financing Companies 14
Outsourcing Companies 2
Other 1
Id. at 3. Twenty-one IBM competitors and customers
voluntarily submitted documents and 10
federal agencies produced over 20,000 pages of documents and
tapes. Id. at 5.
In addition, we held extensive meetings or interviews with
third-party industry experts
and economic experts. Id. at 4. We also received and
reviewed about a dozen written
submissions from IBM customers and other third parties.
Id. at 6.
VI. COMPETITIVE ANALYSIS OF RELEVANT
SYSTEM/390 AND AS/400
PRODUCTS AND SERVICES
The System/390 and AS/400 are "platforms" or "systems." Each
platform is an integrated
combination of various types of hardware, software and services.
The System/390 and AS/400
have three main components. The first component is a central
electronic complex ("CEC"). The
CEC is made up of one or more central processing units ("CPUs"),
main memory and channels.
Channels link the CEC to the second component of a system, the
peripheral products. Peripheral
products include tape drives, disk drives, printers, communications,
controllers and display
terminals. The final major component of a platform is the
operating system. Operating system
software contains instructions for both the associated hardware (the
CEC and the peripheral
products) and applications software.
Page 18
Three operating systems -- MVS, VSE and VM -- run on the
System/390 and are sold in
product suites referred to as OS/390. The AS/400 operating system
is known as OS/400. IBM is
the sole supplier of the operating systems for both the System/390
and AS/400. The operating
system is typically leased to the customer and IBM retains the right
to adjust monthly licensing
fees on short notice. The operating system is the key to the
platform. Products and services that
can be used with IBM operating systems are, for purposes of
competitive analysis, within the
platform. Thus, a mainframe computer manufactured by Amdahl
that runs OS/390 software
competes within the System/390 platform.
In general, the System/390 and AS/400 differ in terms of
processing power and
functionality and legacy heritage.
15 The System/390 and its operating system are
the latest
successor to a long line of upwardly-compatible systems first
introduced in the mid-1960s. IBM
estimates that more than a trillion lines of specialized code have
been custom-written for the
System/390 platform. In contrast, the AS/400 was introduced in
1988 and is not a direct
descendent of any other IBM product. The AS/400 lacks the
volume and range of legacy
applications found in the System/390. Many AS/400 applications
are packaged off-the-shelf
products.
In terms of functionality, the System/390 is distinguished from the
AS/400 and other non-
mainframe platforms by its high processing capacity (MIPS),
security, memory capacity, data
storage and handling, 24 hour-a-day, 365 days-a-year reliability,
and scalability (the ability to
serve hundreds or thousands of simultaneous users). The
System/390 is generally used to meet
Page 19 . . . .
very large-scale business requirements for data processing, data
storage, and communications and
for applications of every description, e.g., transaction
processing and reservations systems.
With this general background, we turn to the task of defining
relevant markets in which
IBM competes. A relevant market is comprised of those
"commodities reasonably
interchangeable by consumers for the same product." United
States v. E.I. du Pont de Nemours
& Co., 351 U.S. 377, 395 (1956). Relevant to our market
analysis is whether a product is unique
or has close substitutes, as to which there are substantial
cross-elasticities of demand. See
Hayden Pub. Co. v. Cox Broadcasting Corp., 730 F.2d 64,
70-71 (2nd Cir. 1984).
Once relevant markets have been defined, the next step is to
determine whether decree
termination would enable IBM to exercise or augment power in any
relevant market. Market
power is defined as the ability to raise prices above those that
would be charged in a competitive
market or to reduce output below competitive levels. Broadway
Delivery Corp. v. United Parcel
Service of America, Inc., 651 F.2d 122, 127 (2nd Cir.),
cert. denied, 454 U.S. 968 (1981);
N.C.A.A. v. Board of Regents of Univ. of Oklahoma, 468 U.S.
85, 109 n.38 (1984). This Circuit
considers a number of factors in determining whether market
power exists, including "the
strength of competition, the probable development of the industry,
and consumer demand."
Hayden, 730 F.2d at 68-69.
Guided by these principles, we analyzed the AS/400 and
System/390 equipment markets
(the equipment markets or primary markets) as well as markets for
replacement parts and
maintenance of these computers (the hardware maintenance
aftermarkets). 16
Page 20 .
We conclude that the AS/400 is sold in the competitive mid-range
market and, therefore,
decree termination is unlikely to permit IBM to wield or acquire
market power. With respect to
mainframes, the evidence suggests that the System/390 platform by
itself is a relevant product
market and that IBM may have some degree of market power with
respect to a significant
number of System/390 customers. Our investigation, however,
found that IBM faces significant
intra-platform competition from plug-compatible mainframes in
addition to significantly
increasing competition from alternative platforms. We anticipate
that IBM's ability to exercise
market power will steadily diminish during the sunset period. In
the System/390 and AS/400
maintenance aftermarkets, we conclude that IBM may possess
some degree of market power, but
that several factors lessen IBM's ability to exercise that power,
including competition in primary
equipment markets and a variety of factors affecting the
aftermarkets.
A. The AS/400 Faces A Competitive Market
An assessment of competition in the computer industry begins
with a traditional structural
analysis. International Data Corporation ("IDC") maintains widely
cited and relied upon data
based on quantity of units shipped annually for all computer
models ranging from low-end PCs
to high-end mainframes, by manufacturer and by platform. IDC
categorizes the mainframe, mid-
range and server platforms as "large," "medium" and "small" based
on functionality and price.
Large systems cost in excess of $1 million, medium systems from
$100,000-$1 million; and
Page 21
small systems below $100,000.
17
Various models and configurations of the AS/400 fall into either
the small or medium
category. Using IDC 1994 data, presented below are market shares
based on dollar value of
shipments for small and medium platforms: 18
SMALL |
Company | % |
IBM (AS/400) | 23 |
IBM (RS/6000) | 18 |
HP | 18 |
Sun | 10 |
DEC | 9 |
Compaq | 8 |
AT&T | 2 |
Motorola | 2 |
Others | 10 |
|
MEDIUM |
Company | % |
IBM (AS/400) | 35 |
IBM (S/390) | 23 |
HP | 9 |
AT&T | 4 |
DEC | 4 |
Unisys | 4 |
DG | 4 |
Tandem | 3 |
Others | 14 |
|
These data illustrate that the AS/400 faces real competition. IBM
competes against
traditional mid-range vendors, such as Hewlett-Packard ("HP") and
Digital Equipment
Corporation ("DEC") and PC-based local area networks (LANs")
and UNIX 19
based servers,
including Sun Microsystems ("Sun"), Tandem, Compaq, and
others. The AS/400 also faces
Page 22 .
competition from used AS/400 equipment.
Customer and competitor interviews confirm that there are
competitive alternatives to the
AS/400. Most customers considering the purchase of a mid-range
platform view the AS/400 and
platforms offered by HP, Sun and other computer manufactures as
substitutes for one another.
No competitors complained that decree termination would permit
IBM to exercise market power
in the equipment market in which the AS/400 competes. Professor
Oster has also analyzed the
structure of the AS/400 market and concludes that IBM faces
substantial competition from a
number of alternative systems. Oster Decl. at 8.
B. IBM's Market Power In The System/390 Equipment Market Is
Limited And
Diminishing
The IBM System/390 falls into IDC's medium and large
categories. Below are the
market shares based on 1994 IDC segments by price range:
MEDIUM |
Company | % |
IBM (AS/400) | 35 |
IBM (S/390) | 23 |
HP | 9 |
AT&T | 4 |
DEC | 4 |
Unisys | 4 |
DG | 4 |
Tandem | 3 |
Others | 14 |
|
LARGE |
Company | % |
IBM (S/390) | 65 |
Amdahl | 16 |
Hitachi | 9 |
Unisys | 2 |
Cray | 2 |
Other | 6 |
|
Many existing IBM customers interviewed did not view
alternative mainframe platforms
or mid-range platforms as direct substitutes in the near term for the
System/390. These
Page 23 . .
customers indicated that they are, to varying degrees, "locked-in" to
the System/390 platform in
the sense that it would be prohibitively expensive to stop using the
System/390 and switch all
their applications to an alternative system in a brief time period.
See Allen-Myland, 33 F.3d 194.
A smaller group of System/390 customers indicated that they are
locked-in to the System/390
platform because it is the only platform that can offer the
functionality they require.
Clearly, the closest substitutes, and the only complete substitutes,
for new System/390
purchases are the plug-compatible mainframes sold by Amdahl and
Hitachi Data Systems that
operate with IBM's System/390 operating system and used IBM
System/390 equipment.
Through its operating system, IBM controls about 80 percent of the
System/390 mainframe
platform, including the plug-compatible manufacturers ("PCMs").
PCMs, dependent on the IBM
operating system, are structurally positioned to lag behind IBM's
developments and, therefore,
are not well-positioned to increase their market share substantially.
Nonetheless, IBM clearly
recognizes the competitive impact of PCMs.
********************* INFORMATION
REDACTED ************************
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REDACTED ************************
If the System/390 platform is the relevant market for analysis,
IBM clearly has significant
market power. However, a forward-looking analysis should not
narrowly focus only on the
System/390 platform, but also must take into account existing and
increasing competition from
Page 24
alternative platforms for many customer applications. Although for
many customers it is not
economical to switch all System/390 applications to an
alternative platform, alternative
mainframe platforms that run on non-IBM operating systems
(e.g., Unisys and Cray) and, most
importantly, alternative mid-range platforms that run on either
proprietary or UNIX operating
systems (e.g., HP, Tandem, Data General, Silicon Graphics,
DEC and AT&T) compete with IBM
for new applications and older existing applications that can be
economically migrated off the
mainframe. See Carlton Decl. at 11.
Professor Oster's review of IBM's
marketing documents indicates that "IBM is quite
sensitive to the competitive pressure imposed by [alternative
platforms] on its behavior." Oster
Decl. at 8. Our review of IBM's documents also confirms
that the System/390 faces
increasingly vigorous competition from alternative mainframe and
mid-range platforms.
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20
Although a significant number of IBM customers do not view the
System/390 and
alternative platforms as direct and complete substitutes, alternative
platforms increasingly
compete vigorously to displace System/390 computing capacity
and capture particular
applications. The cost of switching away from the System/390 has
not deterred a growing group
of customers from moving to alternative platforms.
************************************
************************ INFORMATION
REDACTED ************************
******************************************* More
importantly, System/390 customer
interviews and IBM planning documents establish that most
System/390 customers are switching
an increasing number of applications off the System/390 and from
the outset are installing new
applications that once would have been run on the System/390 on
alternative platforms. The
widely anticipated continuation of these trends toward full and
partial migration off the
System/390 through the sunset period should dissipate any market
power IBM may now have
with respect to these System/390 customers. See Oster
Decl. 8-9; Carlton Decl. 11, 20.
Page 28 . .
C. AS/400 And System/390 Aftermarkets
Also relevant to the competitive analysis are the aftermarkets for
AS/400 and System/390
replacement parts and hardware maintenance. Original equipment
manufacturers ("OEMs") and
ISOs are IBM's primary competitors in the AS/400 hardware
maintenance market. IBM faces
substantial competition on the AS/400 platform from OEMs such
as DEC, and from numerous
national, regional and local ISOs. In the System/390 equipment
maintenance market, Decision
One is the largest full-service System/390 ISO and IBM's only
significant competitor. Decision
One maintains only IBM mainframe equipment; Amdahl and
Hitachi face no competition from
ISOs for the maintenance of their plug-compatible CPUs. IBM
maintains a substantial amount of
all System/390 computers that are not under warranty. As to parts,
there is a substantial supply
of used replacement parts, particularly for older equipment;
however, IBM can control the
availability of new replacement parts and the availability of certain
critical refurbished parts that
can cost several hundred thousand dollars. Also relevant to this
analysis is competition posed by
multi-vendor service providers and a customer's ability to consider
the life-cycle cost of a system
at the time of purchase.
As discussed above, IBM does not have market power in the
AS/400 market, and its
market power in the System/390 market -- already substantially
diminishing -- will diminish
further over the sunset period. Even without market power in the
AS/400 and System/390
primary equipment markets, however, IBM theoretically could
exercise market power in the
maintenance aftermarkets.
The complexities of aftermarket competition were discussed in
Eastman Kodak Co. v.
Page 29 .
Image Technical Services. Inc., 504 U.S. 451 (1992). Kodak
sold photocopiers and micrographic
equipment in what may have been a competitive equipment market.
According to alleged facts
assumed for the purpose of Kodak's summary judgment motion,
after ISOs entered the market,
Kodak adopted policies limiting their access to replacement parts.
Because of Kodak's
restrictive policies, ISOs were unable to obtain suitable parts and
many were forced out of
business. The ISOs brought an antitrust action alleging that Kodak
violated Section 1 by tying
the sale of service to the sale of replacement parts and violated
Section 2 by unlawfully
monopolizing the market for the sale of service for the Kodak
machines.
As to the Section 1 claim, the Court rejected, as a legal
presumption, the economic theory
that competition in the equipment foremarket precludes any finding
of monopoly power in parts
and service aftermarkets. The plaintiff had alleged that Kodak was
able to charge higher prices
and provide poorer service by eliminating ISOs who serviced
Kodak copiers. The Court held
that this factual assertion could not be defeated on summary
judgment by a purely theoretical
argument. Consequently, the Court rejected as a matter of law the
contention that the
defendants' lack of market power in the primary equipment market
automatically precluded the
possibility of market power in aftermarkets and found that there
was a "question of fact whether
information costs and switching costs foil the simple assumption
that the equipment and service
markets act as pure complements to one another." Id. at
477.
Consistent with Kodak, the Government in this matter
looked to the evidence in assessing
whether IBM can exercise power in aftermarkets for parts and
service. The evidence establishes
that IBM's ability to exploit its aftermarket customers is limited by
a number of factors,
including competition in the equipment market and the fact that
life-cycle costing information is
Page 30 . .
readily available and widely used by purchasers.
1. Customer Lock-In And Switching Costs
Customer lock-in -- the customer's ability to switch to
alternative platforms -- is a
relevant factor to assessing IBM's ability to exercise power in
maintenance aftermarkets.
Customers can be effectively locked-in as a result of investments
they have made in a platform,
including expenditures on hardware, software and training.
If the cost of switching is high, consumers who already have
purchased the equipment,
and are thus "locked-in," will tolerate some level of service-price
increases before
changing equipment brands. Under this scenario, a seller
profitably could maintain
supracompetitve prices in the aftermarkets if the switching costs
were high relative to the
increase in service prices, and the number of locked-in customers
were high relative to
the number of new purchasers.
Id. at 476.
AS/400 and System/390 customers are, to varying degrees,
locked-in to their respective
platforms by their investments in hardware, applications software
and training. Switching off the
AS/400 is easier and less costly than switching off the System/390,
because more applications
are off-the-shelf products that can more easily be migrated to other
platforms.
For aftermarket analysis, System/390 customers can be
categorized into two groups. The
first group is composed of customers with "unlocked applications."
This group includes new
customers ( e.g., new companies or companies just
establishing an in-house computer capability)
who are unlocked in the sense that they have no existing IBM
equipment. This group also
includes existing System/390 customers seeking new applications
or who have legacy
applications that can be economically and functionally migrated off
the System/390 to alternative
platforms. This group may also have a number of applications that
cannot be performed except
Page 31
on a System/390. Customers with unlocked applications represent
a large and increasing share of
the demand for System/390 capacity. The second group consists of
customers with only "locked-
in" applications that can not be easily migrated to alternative
platforms and customers who have
no plans to purchase new applications that could run on an
alternative platform. These customers
are locked-in to the System/390 platform. Customers comprising
this second group account for a
small and declining share of IBM's sales. Carlton Decl. at
12.
According to Professor Carlton, increasing competition in the
primary equipment market
will protect customers in the first group -- new customers and
existing customers purchasing new
applications or migrating old applications -- from any attempt by
IBM to exercise market power
in the maintenance aftermarket. Id. at 4, 20. Professor
Carlton notes that there is vigorous
and growing competition between the System/390 and alternative
platforms for new applications
and old applications for which the customer has a choice either to
retain on the System/390 or
migrate to an alternative platform. Based on competition from
alternative platforms, Professor
Carlton concludes:
Any attempt by IBM to raise significantly the price of repair parts
and maintenance
service, all else equal, would result in these [unlocked] users
choosing computer systems
offered by other vendors. As I have explained, IBM competes
currently and intends to
make sales to these unlocked users. Therefore, IBM is
constrained in its aftermarket
pricing.
Id. at 20. Professor Oster agrees that competition from
alternative platforms constrains IBM's
behavior. She concludes that IBM's market power in the
aftermarkets is constrained by its
interest in limiting the migration of unlocked applications to other
platforms, and she anticipates
that this constraint is likely to increase during the sunset periods.
Oster Decl. at 9, 16-17.
Page 32 . .
Interviews with customers support Professor Carlton's and Oster's
conclusions. Most
System/390 customers plan to move at least some applications off
the mainframe or are
considering mainframe and alternative platforms when purchasing
new applications.
2. Life-Cycle Costing
The Court in Kodak observed that for competition in an
equipment market to effectively
constrain aftermarket pricing, customers at the time of purchase
must be able to perform accurate
life-cycle pricing to inform themselves of the total cost of the
package of equipment, service, and
parts. Kodak, 504 U.S. at 473. The Court found that many
of Kodak's customers were not
sophisticated purchasers, that life-cycle pricing information was
difficult for them to obtain and
that life-cycle costs were difficult to calculate. The AS/400 and
System/390 markets have none
of these characteristics.
Unlike the customers for copiers described by the court in
Kodak, System/390 and
AS/400 customers tend to be relatively sophisticated and
well-informed customers who consider
and are experienced in calculating life-cycle costs. For example,
typical System/390 customers
are large corporations with in-house computer procurement officers
and data processing
managers. Oster Decl. at 13-14; see Carlton
Decl. at 9, 20. These customers consider
multiple factors in choosing among computer platforms and
negotiate effectively with vendors.
Oster Decl. at 14. The magnitude of an AS/400 or
System/390 purchase also creates an
incentive for customers to carefully consider the lifetime costs
when making acquisition
decisions. Id. at 13. Purchasers tend to pay particular
attention to aftermarket costs because
Page 33
the aftermarket portion of the total costs of owning and operating a
System/390 or AS/400
platform are substantial.
Life-cycle costing information is not difficult to obtain, nor is
life-cycle cost difficult to
calculate. Indeed, during the procurement process, many customers
routinely request, and
vendors provide, life-cycle cost information. Id. at 14. In
addition, numerous consultants
aggressively compete to supply customers with this information.
Id.
********************* INFORMATION
REDACTED **************************
AS/400 and System/390 customers are also able to enter into
long-term contracts with IBM that
provide protection against aftermarket price increases. Oster
Decl. at 26. The typical IBM
contract runs three to five years. Thus, virtually all existing
contracts will expire during the
sunset period. Customers, with full awareness that the decree will
terminate, may protect
themselves from being overcharged by negotiating service
contracts at the time of purchase and
by long-term contracts that cover service and parts Id;
Carlton Decl. at 21. Indeed, IBM today
offers contractual protection to its aftermarket customers by
offering an option of a single
transaction price for the anticipated life of its new CMOS
System/390 processors. IBM's Entry
Server Offering, if exercised by the customers, caps the cost of
hardware, CPU upgrade,
operating system software, software upgrades, and hardware and
software maintenance.
In Kodak, the Court stated that in the mid-1980s,
"consumers, such as the Federal
Government, have purchasing systems that make it difficult to
consider the complete cost of the
package' at the time of purchase." Kodak, 504 U.S. at 475.
Current federal procurement
Page 34 .
practices, however, have improved greatly since the Kodak
court considered the 1984-85
micrographic and copying equipment industry. Today, the
Government uses the same contract to
acquire mainframe and mid-range computers and maintenance.
McGalliard Declaration. at 6. 21
It is also common practice in mainframe and mid-range computer
acquisitions to evaluate the total life-cycle costs of the system,
including maintenance and requirements for electricity,
cooling and space. Id. at 6, 15. Government solicitations
require vendors to submit life-cycle
cost information, and the Government has available a variety of
sources to evaluate the
reasonableness of a vendor's life-cycle costs, including numerous
commercial market research
firms (e.g., Computer Price Watch, Meta Group, and
Gartner Group), industry publications (e.g.,
Computer World, Datamation and Federal
Computer Week) and commercial consulting firms
(e.g., Electronic Data Systems, Booz-Allen & Hamilton and
Anderson Consulting). Id. at 8-
11. Private sector computer purchasers have access to the same or
equivalent information
sources. Id. at 8, 11, & 15.
The sophistication of customers and the availability of life-cycle
information enable
aftermarket customers to identify opportunistic pricing behavior by
IBM. Oster Decl. at 23.
.
Page 35 . .
Customers can also use past service prices charged by IBM and
service prices charged by others
as benchmarks to determine whether or not they are being exploited
by IBM. Id.
Kodak involved a defendant who relied only upon an
economic theory that taught that
foremarket competition restrains the exercise of market power in
aftermarkets without submitting
evidence. Here, the evidence is that access to information and
increasing foremarket competition
over the sunset periods will protect IBM customers from the
exercise of market power in the
aftermarkets. According to Professor Oster, "the evidence suggests
that IBM's current ability to
exploit customers in the aftermarket is limited and likely to become
more so in the period
allowed by the sunset provisions of the termination proposal."
Oster Decl. at 3.
D. IBM's Ability To Exercise Market Power Is
Constrained By A Variety Of Factors
The second group of System/390 aftermarket customers -- those
with only locked-in
applications and no plans to purchase new applications or migrate
old ones -- may not fully
benefit from primary market competition and the availability of
life-cycle prices. These
customers, however, are protected by a variety of other factors that
will remain effective after the
sunset periods expires. And IBM's market power, all present
evidence indicates, will continue to
erode before that date. Several factors suggest that IBM is not
likely to exercise any market
power that might remain after the decree's termination.
Page 36 . .
1. Lock-In Is Eroding
To the extent IBM wields market power because of lock-in, by the
year 2001 these effects
will be significantly alleviated by IBM's strategy to move toward
more open systems. IBM is
making its System/390 operating systems -- MVS, VSE and VM --
"POSIX-compliant." POSIX
is the set of industry standard interfaces for UNIX, the non-IBM
operating system of choice for
unlocked applications. Software programs written with POSIX
interfaces are more easily ported
from the System/390 to POSIX-compliant UNIX-based platforms
offered by alternative platform
vendors. Carlton Decl at 15; See Oster Decl. at
9 .
Customer demand has pushed, and will continue to push, IBM
toward making OS/390
more open so that applications may be more easily moved from the
System/390 to UNIX
platforms. Professor Oster finds that the continuation of this trend
will, over the sunset period,
reduce the lock-in problem:
[I]t is reasonable to assume that IBM will continue to be pushed to
undertake strategic
investments to make its applications more open. This in turn will
result in a reduction
over time of the lock-in problem. Thus, I would expect that the
residual power which
IBM retains as a consequence of its legacy software will diminish
over time as new
software becomes more open.
Id. at 20. Professor Carlton reaches the similar conclusion
that IBM's movement toward a
more open environment demonstrates that IBM will not exercise
market power over customers
with locked-in applications. Carlton Decl. at 31.
2. IBM's Strategic Concern For Its Reputation Further Limits IBM's
Ability
To Exploit Its
Installed Base
Adopting a strategy to exploit primary and aftermarket customers
would harm IBM's
reputation and further encourage existing customers to migrate
unlocked applications off the
Page 37 . .
mainframe and new customers to seek other vendors. Oster
Decl. at 22; Carlton Decl. at 23.
*********************** INFORMATION
REDACTED **********************
**************************************************************
Indeed, Professor
Oster, in her widely used text, Modern Competitive
Analysis, cites IBM as the classic example of
the competitive benefits of reputation in attracting customers.
Id. Professor Carlton also
identifies IBM's reputation as one of its major strategic assets, and
explains why reputational
concerns restrain IBM's ability to exercise market power:
IBM recognizes that a reputation for harming its customers in the
aftermarket will
adversely affect its ability to compete for new customers and
applications. For customers
that make decisions about the likely costs of a vendor's system on
the basis of past
experience, reputation plays a large role in the formation of
expectations about future
costs. If IBM acquires a reputation for overcharging locked-in
customers, that reputation
could adversely affect its ability to make sales to unlocked
customers or even to
customers in other markets.
Carlton Decl. at 23.
IBM's concern for its reputation should protect locked-in
System/390 customers (those
customers with no plans to purchase new applications or migrate
old applications off the
mainframe). Many locked-in customers purchase a wide variety of
computer equipment from
IBM and other companies. IBM would jeopardized its relationship
with these customers if it
acquired a reputation for overcharging in the aftermarket.
Id.
3. IBM's Business Plans Are Inconsistent With A Strategy To Exploit
Its
Primary Market
And Aftermarket Customers
In view of the competitive factors discussed, it is unsurprising that
IBM's recent high-
level strategy and planning documents reveal that IBM has decided
not to exploit its ever
narrowing circle of locked-in System/390 customers, but instead,
plans to offer better-quality and
Page 38 .
lower-priced equipment in order to attract the more numerous
customers able to select PCMs and
alternative platforms.
********************** INFORMATION
REDACTED **********************
********************** INFORMATION
REDACTED **********************
********************** INFORMATION
REDACTED **********************
In response to competition from alternative platforms for new and
unlocked applications,
IBM lowered the cost of the System/390 platform. IBM has
modified its software pricing
practices and introduced its new CMOS technology, which together
have drastically reduced the
cost of System/390 computing. IBM's efforts to make the
System/390 attractive relative to
alternative platforms is inconsistent with a strategy to exploit its
installed base. Carlton Decl. at
14-15.
Second, although IBM could change course upon decree
termination, its current practices
suggest that it recognizes that its equipment sales may be enhanced
by the availability of efficient
providers of AS/400 and System/390 products and services. For
example, IBM voluntarily
supplies independent software vendors ("ISVs") with the
information they need to develop IBM-
Page 39 . .
compatible applications and systems software, even though many
of these products directly
compete with IBM products. Post-decree, IBM may adopt the
same strategy with respect to
PCMs and ISOs. "Thus, even after termination of the Consent
Decree, IBM may continue to
make the necessary information and parts available to third parties
so that they may continue to
keep abreast of newer IBM products and compete with IBM for the
service and maintenance of
IBM mainframes." Id. at 30.
Finally, IBM has a history of responding to customer demands.
For example, IBM's
attempt to discontinue VSE and transition customers to MVS failed
in the face of customer
resistance. Customers today have computers from multiple
vendors and place a premium on
maintenance providers who can service multi-vendor,
multi-platform environments. IBM may
not be able to eliminate ISOs given increasing customer demand
for multi-vendor service
providers. Oster Decl. at 24; see Carlton Decl. at
13.
E. The Proposed
Sunset Periods Further Protect Customers And Competitors
The proposed four-year sunset for the AS/400 and five-year sunset
for the System/390
further protects IBM's customers and competitors. See
Cyanamid, 719 F.2d at 566. A phase-out
period protects IBM customers and competitors by affording
opportunities to enter into new
contracts and make plans in anticipation of a post-decree
marketplace. A phase-out period is also
necessary for equitable reasons to protect AS/400 and System/390
customers and IBM
competitors who have made business investments and other
decisions in reliance on the decree.
Whether IBM can exercise any substantial market power over
mainframe computers into
the next century is very doubtful. While System/390 computing
capacity continues to grow, so
Page 40
does the capacity of UNIX-based mid-range systems and the
number of applications that can
migrate from the System/390. Indeed, IBM has increasingly
positioned the System/390 as a
competitive alternative in the fast-growing client-server
environment. These trends almost
certainly will continue, and the sunset periods will enable IBM's
competitors and customers to
prepare for the period when IBM's conduct will no longer be
constrained by the decree.
Because the markets in which IBM competes are becoming
increasingly competitive, it is
difficult to predict precisely the extent to which any customers will
be locked-in to the
System/390 platforms after decree termination. We assume,
however, that there may be some
number of customers who will remain locked-in after decree
termination. Any locked-in
customers should continue to be protected by the competitive
alternatives offered by PCMs and
the substantial inventories of skills, replacement parts and used
equipment that will be available
well past the sunset periods. Carlton Decl. at 32.
The sunset provisions also protect investments made by IBM
competitors that may be
adversely affected by decree termination. Leasing companies,
PCMs, and ISOs have made
substantial investments in skills and inventories of computers and
parts. The sunset provisions
will permit the continued growth of the used equipment market and
assure the continued
availability of interface information, replacement parts and
maintenance information and thereby
permit these firms to continue after the sunset period expires. Id
. Importantly, ISOs will have
the opportunity to acquire the skills and replacement parts to
service IBM's new generation
CMOS processor. Id.
The sunset provisions are not intended to encourage competitors
to recoup their
investments and exit the industry, although they are free to do so.
Rather, the purpose of the
Page 41 .
sunset periods is to allow IBM's competitors a reasonable period of
time to re-design and re-
focus their operations to develop some competitive advantage over
IBM in a post-decree era.
Oster Decl. at 28; Carlton Decl. at 33.
F. The Decree May Not Effectively Restrain
IBM's Exercise Of Market Power
Designed for a different era, the decree may not effectively
restrain IBM's ability to
exercise any market power which it may currently possess, or any
residual market power
remaining after 2001. Both the AS/400 and System/390 can
function with only a proprietary
IBM operating system. IBM currently leases its operating systems
and, subject to contractual
limitations, may increase its operating system software licensing
fee. The decree prevents IBM
from discriminating between lessees and purchasers, but does not
limit IBM's software royalties.
IBM, therefore, can currently raise its monthly licensing fee to
extract monopoly profits from its
locked-in customers. Thus, "[i]f the Consent Decree places few if
any restrictions on IBM's
software pricing policies beyond the nondiscrimination requirement
between lease and
ownership, then IBM already may be able to price operating
systems in a way which harms
locked-in users." Id. at 28.
IBM might also be able to exploit any AS/400 and System/390
customer in the hardware
maintenance aftermarket, today as in 2001, if it were so inclined,
without resorting to exclusion
of ISOs in violation of the decree. The decree does not limit the
price IBM charges for parts, but
simply requires that IBM charge ISOs the same price for
replacement parts that it charges its own
maintenance organization. Thus, IBM already has the ability to
extract monopoly prices in the
aftermarket by increasing the price it charges for parts. Any
overcharge IBM imposes upon itself
Page 42 . .
it automatically recoups. Professor Oster observes that "IBM
controls the price it can charge to
the independent service organizations for parts used in repair work.
As such, to the extent IBM
has market power, it can set those prices at
above-competitive-levels." Oster Decl. at 25.
VII. RESPONSE
TO COMMENTS
A. Favorable Comments
The Government received three comments supporting the joint
motion. 22
These
comments came from Computer Service Corporation ("CSC"), the
CCIA, and Amdahl.
CSC commended the Government for reaching a settlement that
allows customers and
competitors of IBM to "have a fairer opportunity to adjust as
necessary to meet changes in these
[AS/400 mid-range and System 390 mainframe] markets." 23 CSC is the only
customer that filed
comments. Through a subsidiary it also competes with IBM in
outsourcing services.
Amdahl has been IBM's leading PCM mainframe competitor since
introducing the first
System/390 plug-compatible mainframe in 1975. Amdahl supports
the proposed modification,
but believes the sunset provisions should be tolled if IBM violates
the decree prior to 2001.
Amdahl notes that the Federal Trade Commission has adopted this
policy. Amdahl believes that
it is particularly appropriate here since IBM and the Government
disagree as to the meaning of
Page 43
several provisions in the decree. Such a provision need not be
imposed now. We do not believe
that this is a basis for departing from our normal enforcement
policy of a final termination date
with respect to judgment terminations but the Government will
take appropriate action if IBM
violates the decree during the sunset period. The Court will retain
jurisdiction over this case and
if IBM violates the decree, the court may then exercise its equitable
power appropriately.
CCIA is a trade association comprised of 27 companies, many of
which are
manufacturers or providers of computer products in competition
with IBM. CCIA has a
"significant interest" in continuing essential provisions of the
consent decree and sought
intervenor status. CCIA supports the judgment modification,
provided that the Government is
vigilant in enforcing the decree. A number of CCIA's members
produce computer systems and
products that are compatible and interfacible with IBM mainframe
computer systems. CCIA
interprets Section IX of the decree to require IBM to furnish its
members with System/390
interface information and believes that enforcement of its
interpretation is essential inasmuch as
IBM has withdrawn from its 1984 Undertaking with the EEC to
make interface information
available. IBM disputes that Section IX requires it to provide
System/390 information but its
practice has been to provide interface information. The
Government assures CCIA and the Court
that we shall be vigilant in enforcing the decree throughout the
sunset period.
Page 44 . . .
B. Unfavorable Comments
The Justice Department received four unfavorable comments,
three from IBM
competitors or trade associations representing IBM competitors and
one anonymous comment. 24
Except for the anonymous comment, these comments claim
termination will harm competition
for service in AS/400 and System/390 aftermarkets.
1. COHR, Inc.;
Association of Service and
Computer
Dealers International ("ASCDI");
and
Anonymous
COHR is a leading ISO in the
healthcare field with about 1,500 customers.
COHR believes that competition in the primary market of computer
equipment may sometimes
have an effect in the maintenance aftermarket, but in many cases, it
will not. COHR quotes
Kodak for the proposition that "one cannot presume that
competition in the sale of equipment
will ensure competitive results in the maintenance aftermarkets"
and then asserts that effective
competition in the sale of System/390 systems "does not even exist
yet." COHR maintains that
there is effective competition in the sale of nearly all the high
technology equipment for which it
provides maintenance and management service, yet only with the
recent emergence of ISOs did
costs fall by about 25 percent. We addressed the Kodak
argument previously at Section VI
supra. The effect of emerging ISOs on terms and quality of
service provided by OEMs may be
competitively beneficial, as COHR maintains. If these benefits are
valued by customers and if
Page 45
the OEMs sell their equipment in competitive markets, OEMs will
be forced by customer
demands not to cut off ISOs. Indeed, the recent growth of ISOs in
this industry may be testimony
to the difficulties OEMs face in limiting competition from
ISOs.
ASCDI is a trade association representing computer dealers,
brokers, lessors, and ISOs
who primarily deal in the market for new and used IBM machines
and plug-compatible
peripherals. ASCDI first claims that the Court's January 17, 1996,
Order terminating the decree
with respect to products other than the AS/400 and System/390 was
not in the public interest
because the ISO industry "is not the independent competitive force
contemplated by the drafters
of the Final Judgment" owing to its symbiotic dependence on IBM
for parts. ASCDI's comment
with respect to the Court's January 17th Order is nearly a year late.
Interestingly, it does not
allege that IBM has blocked competition from ISOs in the ten
months since termination of these
portions of the decree.
ASCDI believes that IBM's history shows that it will eliminate
ISO access to parts,
operating system upgrades, and other items necessary to the service
of IBM machines after the
decree terminates in 2001. IBM's behavior from 1930s to the
1950s, when it enjoyed an
unchallenged monopoly in the electrical tabulating machine
market, is not a useful predictor of
its behavior in the computer industry after the year 2001. In recent
years, IBM's dominance of
the computer industry has greatly diminished, and, as discuss in
greater detail in Section VI
supra, a variety of constraints limit IBM's ability to exploit its
aftermarket position.
ASCDI also objects to the immediate termination of Section
IV(c)(7), which requires
IBM to produce machines in the chronological order in which
orders are received. Section
IV(c)(7) was intended to ensure that IBM did not discriminate
against purchasers in favor of
Page 46
lessees. We found no support for retention of this provision during
our customer interviews and
some evidence that it has imposed some inefficiencies on IBM.
Similarly, ASCDI predicts that
the termination of Section V(a), which limits IBM's right to acquire
used machines, and Section
VI(a), which requires IBM to offer purchasers the same service it
provides to lessees of
machines, will enable IBM to discriminate against purchasers and
to acquire used machines, a
needed source of used parts for ISOs.
We disagree that termination of these provisions will make a
"mockery" of the sunset
periods. IBM cannot move to a lease-only policy or discriminate
against purchasers of
System/390 machines under the sunset provisions and is unlikely to
do so with respect to AS/400
customers because it faces substantial competition. It is equally
unlikely that IBM will expend
its resources acquiring the vast inventory of used equipment. Such
behavior is contrary to IBM's
business incentives and we found virtually no support for ASCDI's
predictions during our industry interviews.
We also received an anonymous one-page letter that urges that the
"consent decree must
continue and be strengthened" since IBM "has shown no remorse or
fairness" in the way it does
business. Specifically, IBM "bundles" hardware, software, and
service so that customers do not
know true hardware costs. The comment also alleges that former
IBM employees have been
"planted" with customers who favor IBM against its competitors.
The substance of this comment
is not supported by our industry interviews and also raises matters
outside of the 1956 Decree.
Page 47 . . .
2. Independent Service Network International ("ISNI")
ISNI is a trade association of about 200 ISOs that service various
high-tech equipment
manufactured by others, including copiers, computers,
micrographic equipment, and medical
equipment. ISNI earlier unsuccessfully sought intervenor status in
this proceeding.
ISNI submitted a lengthy comment in which it argues that the
decree is still needed to
constrain IBM's market power in the System/390 market and that
the parties have failed to
establish that competition in the mid-range market will constrain
IBM's market power in the
AS/400 service aftermarket. It also contends that the minimal harm
to IBM imposed by retention
of the decree is outweighed by the extreme hardships customers
and ISOs will suffer in the event
of termination. ISNI believes that Cyanamid requires the
Court to undertake a full and
independent analysis of the proposed decree modification,
including fact-finding concerning the
state of the relevant markets.
ISNI claims that post-decree, IBM will still have the power to tie
sales of service to sales
of replacement parts. ISNI believes that, as in Cyanamid,
the Court is being asked to approve a
consensual modification of a consent decree premised on an
economic theory that is inconsistent
with Supreme Court precedent. Specifically, ISNI points out that
economic theory teaching that
competition in the equipment foremarket constrains the exercise of
market power in derivative
aftermarkets was an insufficient basis for summary judgment in
Kodak, supra, when the plaintiff
alleged facts showing an actual exercise of market power.
ISNI further contends that the balancing of the equities favors
continuation of the decree
since the Government has not shown that the decree harms
competition. Furthermore, IBM has
shown minimal losses from inefficiencies from operation of the
decree and has formed no
Page 48
business plans upon its termination, but ISOs have invested
hundreds of millions of dollars in the
AS/400 and System/390 platforms. In this connection, ISNI
proposes that the decree should not
be terminated "unless and until third party entrants become fully
viable without benefit of
provisions of the decree."
In the alternative, ISNI suggests that, if the Court approves the
proposed judgment
modification, it make the following amendments:
1. With respect to AS/400s, ISNI
believes that the six-month limit on making sales
terms substantially equivalent to lease terms could permit IBM only
to lease AS/400s.
Consequently, ISNI asks either that the sunset period for Section
IV(c) be extended to four years
or that Section VII(c) be amended to prohibit IBM from preventing
"any purchasers or lessees"
from dealing with ISOs.
2. Since IBM may interpret the
immediate elimination of Section IV(c)(7) (requiring
production orders to be filled in order of receipt) as permitting it to
put parts orders for ISOs at
the end of the list, or otherwise disadvantage ISOs who need to fill
customers' orders promptly,
the Court should either not order immediate termination or confirm
that other provisions prevent
IBM from discriminating against customers who deal with
ISOs.
3. ISNI believes that the immediate
termination of Section IV(b)(3), which requires
IBM to sell, and not just lease, "special purpose" computers, could
be construed to permit IBM
only to lease nearly all System/390s, since most System/390s are
customized to the requirements
of a particular customer.
Page 49 . . . .
RESPONSE
Where the Government opposes termination, the court must
resolve a continuing
controversy between the parties. To prevail on a termination
motion the Government opposes,
the defendant, in most cases, must prove that the basic purposes of
the decree have been fully
achieved. Rufo v. Inmates of the Suffolk County Jail, 502
U.S. 367 (1992); United States v.
Eastman Kodak Co., 63 F.3d 95 (2d Cir. 1995). Throughout
its comment, ISNI intermixes the
standard in cases where the Government opposes modification or
termination with that for cases
in which modification or termination is consensual. In cases such
as this, where the Government
consents to a proposed modification, the court has a more limited
role. There is no continuing
controversy between the decree parties and the purpose of the
court's review is to ensure that the
Government has carried out its duty to represent the public interest
in competition. Thus, the
court should determine whether the Government has offered a
reasoned and reasonable
explanation of why termination is in the public interest.
Loews, 783 F. Supp. at 214. The
reasonableness of the Government's consent to terminate or modify
is judged under the same
public interest standard that is applied when a decree is presented
to a court for approval. Swift,
1975-1 Trade Cas. at 65,702; United States v. General Electric
Co., 1977-2 Trade Cas. (CCH)
72,717. Courts properly defer to the Government's judgment in
consenting to termination where
Page 50 . . . .
it offers a reasonable explanation and there is no showing, as there
has been none here, of
Government bad faith or malfeasance.
25 See, e.g., Sam Fox Publishing,
366 U.S. at 689; Bechtel,
648 F.2d at 666.
ISNI relies primarily on Cyanamid in claiming that this
Court must undertake a "full
analysis" requiring proof by the Government that market conditions
at the time the decree was
entered no longer obtain. As part of its contention that
Cyanamid requires the Court to develop
an extensive evidentiary record in this proceeding, ISNI claims
that: "It is incumbent upon the
Government and IBM to carry this burden of proof and show that
IBM no longer has this market
power [in the provision of repair parts and repair and maintenance
services for the System/390
and AS/400]." In a case of this complexity, and indeed in most
Government antitrust cases, this
would impose an enormous burden on the Government and the
courts. Cyanamid should not be
understood as requiring virtually the same burden of proof in a
consensual decree modification
proceeding that is required in a contested proceeding. 26
At issue in Cyanamid was whether the defendant should
be released from Part XI of that
decree which required it to make annual purchases from
competitors. The provision permitted
the defendant to be relieved of the purchasing requirement "upon a
showing by Cyanamid to the
satisfaction of [the] Court that the effect of such relief will not be
substantially to lessen
Page 51 . .
competition or tend to create a monopoly in any line of commerce
in any section of the country."
This is a very unusual consent decree provision. 27 Although the
Government believed that the
Appellate Court erred, the Government determined that the
decision did not warrant plenary
review because it "construes language that appears in only a few
government antitrust decrees"
and "does not conflict with any decision of this [Supreme] Court or
any other court of appeals."
Brief for the United States in its Opposition to Defendant's
Certiorari Petition at 6, United States
v. American Cyanamid Co., 719 F.2d 558 (2d Cir. 1983)
cert. denied sub. nom. American
Cyanamid Co., v. Melamine Chemicals, Inc., 465 U.S. 1101 (1979)
(No. 83-1085). Indeed, the
court of appeals stated that the issue was "whether the district court
erred in applying a public
interest' standard to decide whether to terminate Part XI of the
decree which provided its own
higher standard, simply because the government consented to
the termination." (emphasis
added). Cyanamid, 719 F.2d at 559. 28 The IBM decree contains
no such separate, explicitly
higher standard. The proposed modification and termination meets
the public interest test as it
has been applied by hundreds of district courts in approving
consensual judgment modifications
and terminations. Applying the "higher standard" test to all
consensual modifications and
terminations, as ISNI urges, would enormously burden the courts,
the Government, numerous
defendants, and would remove control of Government litigation
from the executive branch.
Cyanamid involved a unique decree, unique facts, and does not
stand for the broad application
urged by ISNI.
Page 52 . .
ISNI's reliance on Cyanamid is misplaced for other
reasons. While the court in
Cyanamid viewed the district court's decision as having
forsaken the legal theory under which
the case was filed in 1952 for current economic theory -- the
Appellate Court believed that
economic theory disfavoring challenges to vertical mergers
motivated the Government's
acquiescence to the decree termination in Cyanamid -- we
do not ask this court to reject the
theory on which this case was filed. Our consent to the
modification of the 1956 decree follows
a lengthy and thorough investigation of the effect on
competition.
ISNI relies on Kodak in urging that even if the System/390
and AS/400 systems are sold
in competitive equipment markets, the Court cannot find that the
modification and termination of
the decree is in the public interest unless the parties prove that IBM
will be unable to exercise
market power in spare parts and repair aftermarkets after the decree
terminates in 2001. This is
an extreme misreading of the public interest standard and also a
misreading of Kodak.
As discussed, Kodak held that evidence of anticompetitive
effects could not be overcome
on summary judgment by a purely theoretical argument. ISNI,
which has provided no evidence
that IBM can or will exercise market power in service aftermarkets,
stands Kodak on its head by
presuming in this proceeding that IBM (and all manufacturers of
proprietary equipment that
requires aftermarket service) can exercise market power in
aftermarkets. 29
Page 53
IBM must continue to provide parts to ISOs during the sunset
periods. If, after the
expiration of the sunset periods, IBM decides not to deal with
ISOs, they still may seek antitrust
and other remedies for the cut-off.
30 Thus, after decree termination, IBM will be in
the same
position as its equipment competitors.
IBM's ability to exercise market power in service markets, if it has
any, should continue
to erode before 2001. We recognize, however, that as long as
customers have made substantial
investments in equipment and software that lock them into
proprietary IBM systems, IBM, like
any other systems manufacturer, can conceivably exercise "market
power" in its licensing of
operating system software, sale of parts, and, ISNI's concern,
possibly tying the sale of parts to
the sale of service. While IBM may now be able to exercise some
market power in System/390,
and possibly AS/400, maintenance aftermarkets, industry changes,
IBM's marketing and business
strategies and customer access to life-cycle costing information
make any IBM exploitation of
locked-in customers less and less likely. See Section VI,
supra.
During our interviews, many customers expressed confidence that
they have leverage in
negotiating with IBM. This confidence appears well-founded.
Customers increasingly have non-
IBM alternatives and can and do engage in life-cycle pricing. IBM
also has reputational reasons
for not wanting to exploit customers who have some applications
locked-in to the System/390
Page 54 .
platform. If IBM creates the perception that it is exploiting
System/390 customers, it will cause
more System/390 applications to migrate and will encourage
customers to invest more heavily in
non-IBM equipment and alternative platforms. 31 See Section
VI(D)(2), supra.
None of the three specific modifications proposed by ISNI is
necessary. First, ISNI's
concern that IBM may begin in six months only to lease AS/400s is
unrealistic. AS/400 systems
are sold in a competitive market and IBM would be foolish to
ignore customer preferences.
Second, following the termination of the sequential production
requirement of Section IV(c)(7),
if IBM were to put ISO's purchase orders at the end of its
production lists or otherwise
disadvantage ISOs in filling orders, its behavior will violate the
nondiscrimination provision of
Section VI(c) of the Final Judgment. Finally, IBM cannot take its
System/390 systems out from
under the decree by simply designating them "special purpose"
computers pursuant to Section
IV(b)(3). Such conduct would blatantly violate the purpose and
letter of the 1956 decree.
VIII. CONCLUSION
The proposed staged termination set forth in the parties' Joint
Motion is a reasoned and
reasonable settlement of this 44-year litigation in the public
interest. The computer industry
today has vastly changed since l956. IBM no longer dominates the
industry and any remaining
Page 55
power it has clearly will continue to dissipate. The five-year
termination also affords equitable
protection to customers and competitors who have made business
decisions in reliance on the
l956 decree.
Respectfully submitted,
_______________________
N.
Scott Sacks (NS-6689)
Bruce Pearson (BP-8829)
James J. Tierney (JT-7842)
U.S.
Department of Justice
November 13, 1996
.
Page 56
CERTIFICATE OF SERVICE
This is to certify that a copy of the United States'
Memorandum in Support of its Motion to
Terminate the 1956 Final Judgment and Response to Public
Comments was served by Messenger to
the following counsel of record on November 13, 1996:
INTERNATIONAL BUSINESS MACHINES CORPORATION
Peter S. Barbur,
Esq.
Cravath, Swaine
& Moore
Worldwide
Plaza
825 Eighth
Avenue
New York, New
York 10019-7475
__________________________
JAMES J. TIERNEY
.
.
FOOTNOTES
1 Sharon M. Oster
is the Frederick Wolfe Professor of Economics and Management at the Yale School of
Management. Her Declaration in support of the Joint Motion ("Oster Decl.") is attached as
Exhibit 1.
2 Dennis W.
Carlton is a Professor of Business Economics at the Graduate School of Business of The
University of Chicago, and Executive Vice President of Lexecon, Inc., an economics consulting
firm that specializes in the application of economic analysis to legal and regulatory issues. His
Declaration in support of the Joint Motion ("Carlton Decl.") is attached as Exhibit 2.
3 IBM also filed a
petition to disqualify Judge Edelstein. In January 1995, the Second Circuit granted the petition
and the case was reassigned. In re International Business Machines Corp., 453 F.3d 641
(2d Cir. 1995).
4 With respect to
the System/390 and AS/400, the parties joined issue regarding: (1) whether the purpose of the
decree was to constrain IBM's exercise of market power in computers or to prevent IBM from
leveraging its dominant position in the tabulating machine industry into computers; (2) whether
IBM, in a contested proceeding, must identify relevant System/390 and AS/400 markets,
submarkets and aftermarkets, and prove lack of market power in any relevant market; (3) the
significance to this proceeding of United States v. IBM, 69 Civ. 200 (S.D.N.Y. 1969); (4)
whether the decree applies to System/390 and AS/400 operating system software; (5) whether the
decree requires IBM to disclose "interface information;" and (6) the scope of discovery, including
whether the Government should be permitted discovery of IBM's practices outside the United
States.
5 Attached as
Exhibit 3 is a chart outlining the decree and describing the substance and status of each
provision.
6 A simplified
description of the purpose and history of the decree is provided here for context. For a detailed
description, see United States Preliminary Statement of Issues.
7 The Complaint
also alleged that IBM's practices had prevented competition from independent service
organizations, independent service bureaus, independent parts manufacturers, and competing
manufacturers.
8 The decree also
remedied the allegations in the Complaint that IBM's lease-only policy prevented entry of firms
with attaching products (January 25, 1956 Tr. at 73 (U.S. Selected Docs. Tab 11); Complaint
51 (filed on January 21, 1952)); IBM's control of all "facets" of commerce involving its
computers, including the manufacture and sale of the equipment and peripheral attachments, as
well as financing and servicing of the equipment, would have required entrants to enter in all of
the facets provided by IBM.
9 Indeed, IBM's
principal mainframe service competitor, Decision One, notes the trend toward multi-vendor
maintenance providers and has stated that customers with multi-vendor and multi-system
environments are reluctant to use original equipment manufacturer ("OEM") service, which they
may perceive as favoring the OEM's equipment and not providing as broad a range of
multi-vendor services as ISOs offer. Decision One Holdings Corp., Securities and Exchange
Commission Form 10-K (for fiscal year ended June 30, 1996).
10 IBM
manufactured the System/360 family from 1964 to 1971. The System/370 was introduced in
1971 and was manufactured until 1983. In 1983, IBM introduced the System/370 Extended
Architecture ("370-XA") which ran until 1987. The Enterprise Systems Architecture/370
("ESA/370") was manufactured from 1987 to 1990. In 1990, IBM introduced the Enterprise
Systems Architecture/390. For convenience, for all of these we use the generic designation
"System/390."
11 Interface
information is necessary for the design of compatible System/390 products (e.g., software
applications and peripheral hardware) that are sold in competition with IBM. The Government
contends that Section IX requires IBM to disclose interface information to purchasers of IBM
computers. IBM contends that the decree does not require disclosure.
12 Though the
Microsoft court in dictum suggests that a district judge must be even more
deferential in reviewing "entry of an initial proposed decree" than in reviewing "the parties'
request for approval of a modification," Microsoft, 56 F.3d at 1460-61, the court made
clear that stipulated modifications deserve considerable deference from the reviewing court.
Indeed, the D.C. Circuit observed that "[u]nder our own precedent dealing with uncontested
modifications of a consent decree, we have repeatedly said that a district judge must approve
such modifications so long as the proposal falls within the reaches of the public
interest.'" Id. at 1457-58 (citing United States v. Western Elec. Co., 900 F.2d 283
(D.C. Cir. 1990) (emphasis in original).
13 Although
IBM initially opposed the Government's discovery efforts, IBM ultimately produced information
related to: (1) relevant System/390 and AS/400 markets and aftermarkets; (2) IBM's market
power in any relevant market; (3) IBM's ability to exercise or increase any market power it may
have; and (4) costs or inefficiencies imposed upon IBM by the decree.
14 James J.
Tierney is a trial attorney in the Computers and Finance Section of the Antitrust Division. His
Declaration ("Tierney Decl.") is attached as Exhibit 4.
15 A legacy
system refers to a mainframe or mid-range platform that has been in existence for a long time
and has had a large number of specialized applications custom-designed to run on the platform.
16 IBM also
faces competition from leasing companies that finance System/390 and AS/400 hardware.
Leasing companies finance both new and used equipment and play a significant role in
maintaining markets for used System/390 and AS/400 CPUs. Numerous firms offer
plug-compatible peripheral equipment that competes with IBM System/390 and AS/400
peripheral equipment.
17 Segmenting
the computer market by price, as does IDC, does not necessarily define a meaningful market for
competitive analysis. For one thing, the range of functionality is quite broad.
18 These market
share estimates are dollar-weighted shipments based on list or "street" prices and do not
necessarily reflect revenue received by the manufacturer. IBM shares are reported separately for
System/390, AS/400 and RS/6000 (UNIX) products. Share estimates are for multiuser systems,
which include servers, mid-range computers and mainframes and exclude workstations and PCs.
19 UNIX is a
multiuser, multitasking operating system developed by AT&T in 1969. UNIX, written in the "C
language," is more portable -- that is, less machine-specific -- than other operating systems.
Because UNIX can run on a wider variety of hardware than other operating systems, the term has
become synonymous with "open systems." In an open system, various computer platforms can
be connected and interoperate.
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21 James W.
McGalliard is a project manager at the Federal Systems Integration and Management Center
(FEDSIM). FEDSIM is an office of the General Services Administration and provides federal
agencies with a wide-range of information resources and management services, including
assistance in the acquisition of mainframe and mid-range computers. McGalliard's declaration in
support of the Joint Motion ("McGalliard Decl.") is attached as Exhibit 5.
22 Additionally,
David Poisson, the president of the Computer Dealers and Lessees Association ("CDLA"), which
earlier had moved to intervene and vehemently opposed IBM's June 1994 motion, described the
Joint Motion as a "key victory" that "will allow CDLA members to reposition [their] sales and
leasing practices in alignment with market forces and will enable competition between these
independent resellers and IBM when the decree finally expires." Data Trends, July 17,
1996, 1996 WL 5803004. CDLA subsequently issued a press release headlined "Computer
Leasing Trade Body Declares Victory In Its Dispute With IBM," 1996 WL 10472463, July 5,
1996 (attached as Exhibit 6). CDLA's counsel also referred to the proposed modification as "a
significant victory for CDLA and for consumers. . . ." (p. B4, The Wall Street Journal, July
3, 1996 (attached as Exhibit 7).
23 CSC's
comment was not filed with the court. A copy is attached as Exhibit 8.
24 The
anonymous comment appears to be written by the same person who submitted an anonymous
comment last year concerning the termination of the Final Judgment as it applied to IBM
products outside the AS/400 and System/390 families of products. The comment does not
appear to have been filed with the court. A copy is attached as Exhibit 9.
25 Even in the
landmark AT&T case, where the district court afforded less deference to the
Government's discretion because of the court's familiarity with the case and its issues resulting
from a decade's close supervision of the decree, the standard in deciding whether to grant an
uncontested judgment modification was that the court may reject the proposal only if "it has
exceptional confidence that adverse consequences will result -- perhaps akin to the confidence
that would justify a court in overturning the predictive judgments of an administrative agency."
United States v. Western Electric, 993 F.2d 1572, 1577 (D.C. Cir.), cert. denied, 114 S.
Ct. 487 (1993).
26 In the past 25
years, the Government has consented to over 140 antitrust decree terminations (about 35 in this
District) and to over 225 antitrust decree modifications (about 50 in this District). Tierney
Decl. at 8.
27 This is the
language of Section 7 of the Clayton Act, 15 U.S.C. 18. Very few Government consent decrees
have contained a similar termination standard.
28 The Court of
Appeals also ruled that the district court erred in declining to order a phase-out of the decree after
having found that one would have been desirable. Here, the parties have agreed to a reasonable
phase-out period.
29 ISNI may also
have a fundamental misunderstanding of the purposes of this decree. If, in 1956, IBM had sold
mid-range computers and personal computers in a competitive market, there is little chance that
the Government would have filed suit to require IBM to deal with ISOs that competed with IBM
in service aftermarkets. Yet, ISNI seems to believe that the purpose of this decree should be to
require IBM perpetually to deal with ISOs since, as ISNI stated in the affidavit attached to its
Motion To Intervene: "Each manufacturer therefore almost always has power in the market
for the maintenance of its own equipment" (emphasis added, Betzner Affidavit at 19). In
other words, what ISNI is saying is that it is impossible for the parties to meet the burden of
proof ISNI would impose on us.
30 As ISNI
noted, Kodak was returned to the district court where the plaintiff won a substantial
judgment. It is now working upward through appellate review and should be decided before the
sunset period expires.
31 Also, as
noted in Section VI(F), supra, the decree may not now prevent IBM from exploiting
aftermarkets, should it so desire. The decree does not prevent IBM from charging monopoly
prices for replacement parts, as long as lessees, purchasers, and ISOs are treated comparably.
Similarly, IBM could impose monopoly license terms for its System/390 and AS/400 operating
systems under the decree.
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