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UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
__________________________________
UNITED STATES OF AMERICA, Plaintiff,
v. INTERNATIONAL BUSINESS MACHINES
CORPORATION and
STORAGE TECHNOLOGY CORPORATION, Defendants.
__________________________________
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Civil Action: Filed December 18, 1997
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FOR VIOLATION OF SECTION ONE OF THE SHERMAN ACT
The United States of America, acting by its attorneys and
under the direction of the Attorney General of the United
States, brings this action for equitable relief arising from an
agreement between International Business Machines Corporation
("IBM") and Storage Technology Corporation ("STK"). This
agreement unlawfully restrains competition in the United States
and worldwide in the sale of disk storage subsystems for
mainframe computers in violation of Section 1 of the Sherman
Act (15 U.S.C. &167; 1). In support of this complaint the United
Stat es alleges as follows:
I. NATURE OF ACTION
1. Before June 7, 1996, IBM and STK were two of only five
competitors worldwide in the production and sale of direct
access storage ("DASD") subsystems for IBM and plug-compatible
mainframe
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2.computers (hereafter, "mainframe computers"). In 1995, the
last full year in which IBM and STK competed against each
other, sales of DASD for mainframe computers (hereafter,
"mainframe DASD") exceeded $4 billion worldwide.
3. On June 7, 1996, IBM and STK entered into an OEM agreement
that gave IBM the de facto exclusive worldwide right to market
4. STK's mainframe DASD (hereafter, "OEM Agreement").
5. Prior to the OEM Agreement, STK had sold its principal
mainframe DASD product, called "Iceberg," in direct competition
with IBM's mainframe DASD product, called "RAMAC," as well as
in competition with other sellers of mainframe DASD. This
competition substantially benefited purchasers of mainframe
DASD during the two years prior to the signing of the OEM
Agreement.
6. Today STK sells its mainframe DASD products only to IBM,
which then resells those products to end-users. The OEM
Agreement contains provisions designed to ensure that as a
practical matter STK sells to no one other than IBM. After
executing the OEM Agreement, STK has sold mainframe DASD only
to IBM, which also continues to sell RAMAC.
7. By entering into the OEM Agreement, IBM and STK effectively
agreed to stop competing against each other in the sales of
mainframe DASD, to the detriment of purchasers of these
products. The OEM Agreement has substantially lessened
competition in the market for mainframe DASD.
II. JURISDICTION AND VENUE
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8. This Court has subject matter jurisdiction under Section 4 of
the Sherman Act (15 U.S.C. &167; 4) and under 28 U.S.C. &167;&167; 1331 and
1337 to prevent and restrain violations by IBM and STK of
Section 1 of the Sherman Act (15 U.S.C. &167; 1).
9. Venue is proper in this district under Section 12 of the
Clayton Act, 15 U.S.C. &167; 22, and under 28 U.S.C. &167; 1391(c)
because both IBM and STK transact business and are found in
this district.
III. THE DEFENDANTS AND INTERSTATE COMMERCE
10. Defendant IBM is a corporation organized and existing under
the laws of the State of New York, with its principal place of
business in Armonk, New York. IBM is by far the world's
largest supplier of mainframe computers and related products.
For the year 1996, IBM posted worldwide revenues of about $75
billion. Included in this total are over $2 billion in sales
of mainframe DASD, representing shipments of about 588
"terabytes" of data storage capacity. The terabyte --
equivalent to the amount of data that can be stored in hundreds
of millions of pages of paper -- is a standard industry measure
of sales volume. IBM's total U.S. DASD sales in 1995 were over
$1.2 billion, for 275 terabytes of mainframe DASD.
11. Defendant STK is a corporation organized and existing under
the laws of the State of Delaware, with its principal place of
business in Louisville, Colorado. STK reported total worldwide
revenues of about $2 billion in 1996. STK's core
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12.businesses are computer data storage and retrieval systems,
especially those for mainframe computer systems. Other than
mainframe DASD, STK's major products are automated tape library
storage systems for mainframe computers, and it is the world's
dominant supplier of these tape systems. STK's 1995 worldwide
sales of mainframe DASD were over $300 million, representing
shipments of about 155 terabytes. Its U.S. sales of mainframe
DASD in 1995 were about $190 million, representing shipments of
about 100 terabytes.
13. IBM and STK are engaged in, and their activities
substantially affect, interstate and foreign commerce.
IV. BACKGROUND
The Mainframe DASD Market
14. DASD are computer data storage systems that utilize
rotating magnetic disks. "Mainframe DASD" are specifically
designed to attach to and operate with mainframe computers. In
common industry usage, and as used in this complaint,
"mainframe computers" means IBM's System 390 computers,
predecessor models, and other manufacturers' IBM-plug-
compatible computers that operate with IBM mainframe computer
operating systems, principal examples of which are IBM's OS-
390, MVS, VSE, and VM operating systems.
15. Mainframe DASD perform high-speed and high-capacity
data storage and retrieval functions that are essential to the
operation of mainframe computer systems. Mainframe computers
and
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16.mainframe DASD are commonly and widely used for mission-
critical data processing by business, educational,
governmental, and other organizations throughout the world.
Data search times measurable in milliseconds and high data-
transfer rates make DASD suitable for on-line transaction
processing, large volume batch processing, and other
applications in which rapid access to large amounts of data is
important.
17. Although other types of data storage devices exist --
18. for example, tape, optical and electronic memory products --
because of performance or cost differences, none of these
other products are effective substitutes for DASD. Conversion
to a non-mainframe computer system is also not an effective way
to substitute away from mainframe DASD because of the
substantial costs and risks of switching to an alternative
computer platform.
19. IBM, STK, and other manufacturers sell DASD
subsystems throughout the United States and worldwide.
Competition and Market Structure
20. IBM invented DASD in the 1950s and was historically
the dominant producer and seller of DASD products worldwide.
In the early 1990s, however, IBM began to face significant
competition from DASD products built with a new architecture,
called "RAID" (Redundant Array of Inexpensive Disks). This new
DASD architecture used fault-tolerant arrays of many
inexpensive disk drives linked together for redundancy to
ensure against data loss in the event of the failure of any
particular drive. It
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21.permitted the manufacture of highly reliable mainframe DASD
at a cost far lower than that of producing IBM's highly
reliable but very expensive individual disk drives.
22. While STK was recognized as an innovative developer
of mainframe RAID technology in the late 1980s and early 1990s,
product development difficulties delayed the introduction of
its RAID product, Iceberg, until 1994. These delays allowed
another firm, EMC Corporation, to become in 1991 the first
company to market a RAID-type mainframe DASD product. EMC
effectively used the technical and cost advantages of its RAID
product to attract market share from IBM. In 1994, IBM
introduced its own RAID product, RAMAC, and STK brought Iceberg
to market.
23. As with most computer hardware products, one of the
most significant trends in the mainframe DASD market has been a
rapid decline in cost. Because of continuing technological
advances and improvements, largely related to exponential
increases in the amount of data that can be stored on a disk
drive of constant size, mainframe DASD costs and prices as a
function of storage capacity have declined steadily and should
continue to decline over the foreseeable future. For example,
the average selling price of DASD, measured on a cost per
megabyte basis ($/MB) fell from approximately $10.00 in 1990 to
between $1.00 and $2.00 per megabyte in 1995-96.
24. Until the OEM Agreement, IBM, STK, and EMC were the
three leading marketers of such products both in the U.S. and
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25.worldwide. Only one other firm, Hitachi Data Systems, had a
significant share of the mainframe DASD market. Hitachi did
not introduce a RAID product until the end of 1995.
26. The mainframe DASD market is highly concentrated. In
1995, there were only four major competitors, which were
reduced to three by the OEM Agreement. Using a measure of
market concentration called the Herfindahl-Hirschman Index
("HHI"), explained in Appendix A, the OEM Agreement
substantially increased concentration in the already highly-
concentrated mainframe DASD market. In 1995, the last full
year in which IBM and STK were independent competitors, in the
United States, IBM had a market share, in terabytes, of 33%;
STK had a market share of 12%. The post-OEM Agreement HHI
increased 792 points from 3242 to 4034. Measured worldwide,
the post-OEM Agreement HHI increased 720 points from 3047 to
3767.
The OEM Agreement
27. Pursuant to the terms of the OEM Agreement, as of
July 1, 1996:
(a) STK is to supply, and IBM is to purchase, STK's
mainframe DASD products at fixed prices that decline
over time. The declining prices to IBM reflect the
expected continuing decline in STK's manufacturing
costs. IBM effectively has the exclusive right to
resell STK's DASD products. It sells these products
under its own trademark and sets the price at which
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they are sold or leased.
(b) IBM is committed to purchase quarterly and annual
minimum volumes of STK DASD, expressed in terabytes.
The OEM Agreement imposes financial penalties on IBM
if it fails to purchase these minimum volumes.
(c) IBM is required to pay STK "recovery payments," the
amounts of which decline proportionately with
increasing volume purchases by IBM of STK's DASD
products. The recovery payments also take into
account the proportion of IBM's total sales that
consist of STK products: the higher the proportion of
sales of STK products to IBM's total sales, the lower
the recovery payment.
(d) IBM is to provide STK with funding for improvements
to STK's mainframe DASD products that were planned
prior to the OEM Agreement.
28. Under the OEM Agreement, IBM may continue to sell its
RAMAC products, and it has done so. IBM intends to sell RAMAC
at least until it introduces its next generation mainframe DASD
product, currently known as "CPSS" (Common Parts Storage
Systems). IBM expects to introduce CPSS sometime in 1998.
29. The facially non-exclusive nature of the OEM
Agreement is illusory because STK would suffer severely adverse
financial consequences if it were to sell DASD independently of
IBM. Thus, the OEM Agreement effectively eliminates all
competition between
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30.IBM and STK, and STK has made no mainframe DASD sales except
to IBM since it took effect.
31. The OEM Agreement extends through the end of 1998,
with IBM and STK expressly reserving the right to renew the
agreement thereafter. Thus, this antitrust violation will
continue unless the relief prayed for is granted.
V. HARM TO COMPETITION
32. The OEM Agreement has deprived customers of the
benefits of free and open competition in the manufacture and
sale of DASD products by eliminating direct and significant
competition between IBM and STK in that market. Prior to the
OEM Agreement, STK was well known to IBM, other DASD producers,
customers, and industry analysts as an aggressive competitor in
the mainframe DASD market. STK was the low-price bidder for
numerous DASD sales; and for many customers, IBM and STK
products were the top two choices in numerous bidding
situations.
33. Entry into the mainframe DASD market is difficult,
and there are unlikely to be new entrants able to counteract
the anticompetitive effects of the OEM Agreement. The
development, testing and marketing of mainframe DASD require
considerable time and expense. STK spent several hundred
million dollars over a period of six years before it was able
to offer a DASD product with the functionality and reliability
required by most customers. A new entrant would also have to
overcome the strong customer preference for products with an
established reputation
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34.of reliability, availability and customer support. At a
minimum, it takes years and a significant investment of
resources to build such a reputation. No entrant is likely to
enter the DASD market in any reasonable time and replace the
competition lost through the elimination of STK as an
independent competitor.
VI. VIOLATION CHARGED
35. Prior to July 1, 1996, IBM and STK were substantial,
direct horizontal competitors in the manufacture and sale of
DASD. Today, as a result of the OEM agreement, the two no
longer compete. The OEM Agreement has caused anticompetitive
effects, and it constitutes an unreasonable restraint of trade
in the worldwide market for mainframe DASD. It adversely
affects interstate and export commerce and violates Section 1
of the Sherman Act, 15 U.S.C. &167; 1.
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VII. REQUESTED RELIEF
36. The United States seeks judgment against IBM and STK
as follows:
(a) That the court adjudge and decree that the OEM
Agreement constitutes an illegal restraint of
interstate trade and commerce in violation of Section
1 of the Sherman Act and issue an injunction
requiring modification or rescission of the OEM
Agreement.
(b) That the Court issue an injunction requiring IBM and
STK to take all steps necessary to ensure that STK
can sell mainframe DASD in competition with IBM and
other sellers of mainframe DASD.
(c) That the United States recover the costs of this
action.
(d) That the United States have such other relief as the
Court may deem just and proper to prevent recurrence
of the alleged violation and to dissipate the
anticompetitive effects of IBM's and STK's past
violation.
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DATED: December __, 1997
_________________________
Joel I. Klein
Assistant Attorney General
_________________________
Rebecca P. Dick
Director, Civil Non-Merger
Enforcement
_________________________
Charles E.
Biggio
Senior Counsel
_________________________
John F. Greaney
Chief, Computers &
Finance
Section
_________________________
N. Scott Sacks
Assistant Chief
Computers & Finance
Section
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_________________________
Weeun Wang_________________________
James J.
Tierney ________________________
Sanford M. Adler _________________________
Richard I. Irvine _________________________
Don Allen
Resnikoff ________________________
Molly L. DeBusschere _________________________
J. Roberto Hizon Attorneys
Antitrust
Division
U.S. Department of Justice
Computers & Finance Section
Suite 9500
600 E Street, N.W.
Washington, D.C.
20530
(202)307-6200
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HERFINDAHL-HIRSCHMAN INDEX CALCULATIONS
"HHI" means the Herfindahl-Hirschman Index, a commonly
accepted measure of market concentration. It is calculated by
squaring the market share of each firm competing in the market
and then summing the resulting numbers. For example, for a
market consisting of four firms with shares of thirty, thirty,
twenty, and twenty percent, the HHI is 2600 (302 +
302 + 202 + 202 = 2600). The
HHI takes into account the relative size and distribution of
the firms in a market and approaches zero when a market
consists of a large number of firms of relatively equal size.
The HHI increases both as the number of firms in the market
decreases and as the disparity in size between those firms
increases.
Markets in which the HHI is between 1000 and 1800 points
are considered to be moderately concentrated, and those in
which the HHI is in excess of 1800 points are considered to be
highly concentrated. Transactions that increase the HHI by
more than 100 points in concentrated markets presumptively
raise antitrust concerns under the Horizontal Merger Guidelines
issued by the U.S. Department of Justice and the Federal Trade
Commission. See Merger Guidelines &167; 1.51.
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