I.B.M. and the Limits of a Consent Decree

By Peter Passell
The New York Times

June 9, 1994

Is I.B.M. a colossus astride the computer industry, a force so potent that special court rules are needed to protect competitors?

The idea may seem bizarre at a time when the International Business Machines Corporation is shedding employees and reorganizing divisions in a desperate effort to remain a major player in the computer market. But that is the issue facing a Federal court, which on Tuesday was asked to release I.B.M. from a 1956 consent decree limiting its room to maneuver for new business.

Or rather it is one issue. For some antitrust experts, the case also points out the problematic nature of legal consent rules that remain in place long after the world has moved on. "What industry doesn't change radically in nearly half a century?" asked Robert Pitovsky, a professor at Georgetown University and former member of the Federal Trade Commission.

A consent decree, in essence, is a contract in which a company agrees to change or restrict its behavior in exchange for the Government's dropping an antitrust suit. It was a consent decree in 1982, for example, that resulted in AT&T agreeing to break up Ma Bell in exchange for the Justice Department agreeing not to prosecute the company as a rapacious monopolist.

In the case of I.B.M., the company seems likely to prevail in its bid for freedom. After all, the other party to the contract -- the Justice Department -- is telegraphing its approval, or at least neutrality.

The 1956 agreement, predating the explosive growth of the digital computer industry, focused on I.B.M.'s dominance of primitive electronic accounting machines that processed data from key punch cards. One goal was to enhance competition by creating a viable market for used I.B.M. machines. The other was to open the market for electronic equipment used by companies that provided data processing services -- payroll, bookkeeping and the like.

To accomplish the first goal, I.B.M. was required to sell equipment that it ordinarily only leased, and on terms that would put buyers at no disadvantage to lessors. "There were plenty of precedents in antitrust for believing that rent-only policies enhanced a company's market power," explained Lawrence White, an economist at New York University's Stern School of Business.

Of course, a used machine would not be attractive to own unless good service was obtainable at reasonable price. So the court also demanded that I.B.M. provide parts and information to the nascent industry that supplied independent maintenance for data processing equipment.

To accomplish the second goal, I.B.M. was required to sell data processing services through a subsidiary that could be treated no differently than a data processor lacking business ties to Big Blue. To comply, I.B.M. created a separate division -- currently called the Integrated Systems Solutions Corporation -- which neither gives nor gets special breaks from it parent.

'Pretty Weak Stuff'

It remains a matter of debate whether the punishment fit the crime. But the punishment, noted Phillip Areeda, a professor of law at Harvard, "was pretty weak stuff," which apparently had little impact on I.B.M.'s growth or profitability in the heady decades of the 1960's and 1970's.

No one is arguing that the decree is a primary source of I.B.M.'s current woes. But sources close to I.B.M. do insist that it is a burden that the floundering company can no longer afford.

For example, one provision of the decree designed to sustain a market for used machines makes it difficult for I.B.M. to buy back its own machines, and thus raises the costs of cannibalizing spare parts for older mainframe computers. Another, designed to insure an even break for companies that service I.B.M. equipment, requires the company to maintain larger inventories of parts than are justified by the economics.

Still other provisions -- and probably the most important -- concern the data services business. It is claimed that simply maintaining a data processing subsidiary at arm's length costs the company tens of millions of dollars in redundant personnel and offices. And provisions originally intended to keep the data processing unit from automatically buying I.B.M. hardware effectively stifles cooperation in the development of software.

Inhospitable Courts

Perhaps most troubling from the perspective of antitrust experts is the fact that the initiative for changing the provisions of the 38-year old consent degree rests squarely on the defendant. The Justice Department did, in fact, make an effort to review hoary consent decrees during the 1980's tenure of William Baxter as antitrust chief.

But Mr. Areeda acknowledges that "the courts remain inhospitable" to petitions by defendants to overturn consent decrees long after circumstances have changed. And in the I.B.M. case, the company has been driven to extreme methods. Today it asked Federal Judge David N. Edelstein, who oversaw the decree in 1956 -- and resisted the Government's decision to abandon a second antitrust suit against I.B.M. in 1982 -- to recuse himself.

Mr. Pitovsky would like to institutionalize regular reviews of the relevance of standing decrees. And Mr. White enthusiastically seconds the motion. "The burden," he argues, "should periodically shift to those who want the decrees to remain on the books."