The opinion of the court was delivered by: O'NEILL
THOMAS N. O'NEILL, JR., UNITED STATES DISTRICT JUDGE.
AMI brought this action asserting federal and state law claims against IBM,
which filed several counterclaims.
The parties agreed to try the liability aspect of AMI's claim under Section 1 of the Sherman Act
separately. AMI's claim has two parts:
AMI alleges that IBM's net pricing policy constitutes an unlawful tying arrangement and that IBM's Installation and Warranty Service Charge constitutes an unreasonable restraint of trade. The issues were tried before me non-jury;
this memorandum constitutes my findings of fact and conclusions of law. See Fed. R. Civ. P. 52(a). Jurisdiction over the Section 1 claims is based on 28 U.S.C. § 1337. Suit is brought pursuant to Section 4 of the Clayton Act, 15 U.S.C. § 15.
IBM 308X net priced upgrade contracts provide that the installation and removal of parts is to be performed by IBM employees, and that the removed parts become the property of IBM and are returned to the company.
Ritchie, Tr. 1086-87; Rizzo, Tr. 1188-90; Levin, Tr. 78-80, 744; PX 139; PX 140; PX 138. IBM issues its net priced upgrade customers a credit for the parts removed by IBM engineers during the installation of a net-priced MES. E.g., Levin, Tr. 78; PX 457; PX 145. A customer who purchases a net priced upgrade from IBM is not charged separately for the labor associated with performing the upgrade. See DX 829. The customer receives a single price quotation for the final, installed product.
IBM's 308X product line consists of 14 models with a performance power range of 3 to 30 million instructions per second (MIPS), and a price range of $ 960,000 (3083E) to $ 6,300,000 (3084Q). See DX 1799. Upgrades are net priced only if they involve the removal and return of parts (such as TCMs)
from the upgraded computer. The majority of MIPS upgrades,
see Levin, Tr. 78, and numerous memory upgrades
are net priced by IBM.
Upgrades which do not require the removal of TCMs or other parts (such as the 3083J to 3081K model upgrade) are not net priced and are optionally available from IBM on an SWRPQ basis; i.e., without IBM's labor included.
An upgrade purchased on an SWRPQ basis may be installed by third parties, such as AMI, or by IBM, if the customer chooses and pays for the service. All 308X channel upgrades and many memory upgrades are available on an SWRPQ basis.
A tie exists when a seller refuses to sell a product (the tying product) alone and insists that any buyer who wants it must also purchase another product (the tied product). See L. Sullivan, Handbook of the Law of Antitrust § 150, at 431 (1977). "The Sherman Act does not prohibit 'tying', it prohibits 'contract[s] . . . in restraint of trade'." Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 21 n.34, 80 L. Ed. 2d 2, 104 S. Ct. 1551 (1984). Only a tying arrangement which imposes an unreasonable restraint of trade is unlawful.
Certain tying arrangements are per se unlawful under the antitrust laws; that is, they are deemed unreasonable as a matter of law and "no specific showing of unreasonable competitive effect is required." Fortner Enterprises v. United States Steel, 394 U.S. 495, 498, 22 L. Ed. 2d 495, 89 S. Ct. 1252 (1969) (" Fortner I"); see generally Northern Pacific Railway Co. v. United States, 356 U.S. 1, 5, 2 L. Ed. 2d 545, 78 S. Ct. 514 (1958) (respecting per se unlawful arrangements in general: "There are certain agreements or practices which because of their pernicious effect on competition and lack of any redeeming virtue are conclusively presumed to be unreasonable and therefore illegal without elaborate inquiry as to the precise harm they have caused or the business excuse for their use.").
A tying arrangement which does not warrant per se condemnation may be found to violate the Sherman Act under a rule of reason analysis.
Hyde, 466 U.S. at 17-18; Bogus v. American Speech & Hearing Ass'n, 582 F.2d 277, 287 (3d Cir. 1978). Per se rules and the rule of reason are mechanisms "employed 'to form a judgment about the competitive significance of the restraint.'" NCAA 468 U.S. at 103 (quoting National Soc'y of Prof. Engineers v. United States, 435 U.S. 679, 692, 55 L. Ed. 2d 637, 98 S. Ct. 1355 (1978)).
AMI contends that IBM's net pricing of 308X upgrades is per se unlawful. A.M. at 15. To establish a per se tying violation, plaintiff must show: 1) the existence of two separate and distinct products or services and an agreement conditioning the sale of the tying product to the purchase of the tied product; 2) that the seller possesses sufficient economic power with respect to the tying product to restrain free competition appreciably in the market for the tied product; and 3) that the seller has thereby foreclosed a "not insubstantial" amount of interstate commerce in the tied product. See, e.g., Hyde, 466 U.S. 2, 80 L. Ed. 2d 2, 104 S. Ct. 1551; Fortner I, 394 U.S. 495, 22 L. Ed. 2d 495, 89 S. Ct. 1252; Columbia Pictures Indus. v. Redd Horne, Inc., 749 F.2d 154 (3d Cir. 1984); Bogus, 582 F.2d 277 (3d Cir. 1978). The Supreme Court's decision in Hyde, 466 U.S. 2, 80 L. Ed. 2d 2, 104 S. Ct. 1551, suggests that an inquiry into the legality of a tying arrangement under the per se rule requires an elaborate economic analysis.
I conclude that IBM's net pricing policy does not warrant per se condemnation. AMI has failed to establish that IBM possesses the requisite market power. AMI has also failed to prove that it, or anyone, has been foreclosed from a viable business opportunity as a result of IBM's conduct.
My finding that AMI has not been deprived of a viable business opportunity implicates several of the concerns underlying the Sherman Act and the per se rule against tying in particular.
Application of the per se rule against tying requires proof that the seller possesses economic power in the market for the tying product. The degree or form of economic power which must be established has been described in various ways. The Supreme Court, however, has consistently held that proof of the existence of monopoly power is not required.
In Times-Picayune Publishing Co. v. United States, 345 U.S. 594, 611, 97 L. Ed. 1277, 73 S. Ct. 872 (1953), in an attempt to define the requisite economic power, the Court referred to "the wielding of monopolistic leverage", or the exploitation by a seller of "his dominant position in one market to expand his empire into the next." This language was "construed" in Northern Pacific as requiring only "sufficient economic power to impose an appreciable restraint on free competition in the tied product." 356 U.S. at 11. "The source from which the power is derived and whether the power takes the form of a monopoly or not" were said to be irrelevant. Id. In Fortner I, the Court explained that "economic power over the tying product can be sufficient even though the power falls far short of dominance and even though the power exists only with respect to some of the buyers in the market." 394 U.S. at 502-03. For purposes of assessing economic power, the Court stated that the proper focus is "whether the seller has the power to raise prices, or impose other burdensome terms such as a tie-in, with respect to any appreciable number of buyers within the market."
394 U.S. at 504. In United States Steel Corp. v. Fortner Enterprises, Inc., 429 U.S. 610, 620, 51 L. Ed. 2d 80, 97 S. Ct. 861 (1977) (" Fortner II "), the Court repeated that there is no requirement "that the defendant have a monopoly or even a dominant position throughout the market for a tying product." Instead, the focus of attention is on "whether the seller has the power, within the market of the tying product, to raise prices or to require purchasers to accept burdensome terms that could not be exacted in a completely competitive market." Id. (footnote omitted). "In short," said the Court, the issue is "whether the seller has some advantage not shared by his competitors in the market for the tying product." Id.
In its most recent tying decision, the Court emphasized the importance of proof that the seller has "some special ability - usually called 'market power' - to force a purchaser to do something that he would not do in a competitive market." Hyde, 466 U.S. at 13-14. The focus is on the seller's power to "force" or "coerce":
The essential characteristic of an invalid tying arrangement lies in the seller's exploitation of its control over the tying product to force the buyer into the purchase of a tied product that the buyer either did not want at all, or might have preferred to purchase elsewhere on different terms.
Id. at 12. Proof of a seller's power to force involves proof that the seller enjoys "significant market power", id. at 26, or a "dominant market position." Id. at 27.
AMI relies in part on evidence of IBM's market share to support its contention that IBM possesses sufficient economic power to compel application of the per se rule. Market share is calculated by reference to a relevant product and geographic market.
Briefly stated, "the outer boundaries of a product market are determined by the reasonable interchangeability of use or the cross -- elasticity of demand between the product itself and substitutes for it." Brown Shoe Co. v. United States, 370 U.S. 294, 325, 8 L. Ed. 2d 510, 82 S. Ct. 1502 (1962). "The purpose of market definition is to determine whether market power exists"; therefore, "market definitions must account for all factors affecting the ability of the [defendant] to raise prices or restrict competition." Weiss v. York Hosp., 745 F.2d 786, 826 (3d Cir. 1984), cert. denied, 470 U.S. 1060, 84 L. Ed. 2d 836, 105 S. Ct. 1777 (1985).
For purposes of determining IBM's economic power with respect to the tying product, AMI defines the relevant market as the market for large scale main frame computers. E.g. A.P.F. at para. 251. According to AMI, a large scale main frame computer is one that is, at the time of its introduction into the market place, among the largest in memory capacity, the fastest in computing speed, and the most expensive of computers available. Levin, Tr. 752. Large scale mainframes, says AMI, typically are priced in excess of $ 1.75 million.
Levin, Tr. 753. IBM's revenues from the sale of new large scale mainframes (including MES sales)
from 1981 to 1985 exceeded $ 16 billion (1981: $ 1.918 billion; 1982: $ 3.07 billion; 1983: $ 3.589 billion; 1984 $ 3.807 billion; 1985: $ 3.666 billion). PX 482; PX 15; PX 48. Based on AMI's definition of what constitute non-IBM large scale main frames
and its calculation of the revenues received by firm's selling such products, IBM's share of revenues of all sales of new large scale mainframes was 70.2% in 1981, 78.0% in 1982, 79.0% in 1983, 78.6% in 1894, and 75.9% in 1985. PX 482; PX 15, PX 48. Also based on AMI's definition of what constitute non-IBM large scale main frames, IBM's share of total shipments of large scale main frames (presumably shipment of MESs is included in IBM figures) was 61.0% in 1981, 70.1% in 1982, 76.0% in 1983, 74.5% in 1984, and 65.0% in 1985. PX 483; PX 15, PX 48.
Standing alone, AMI's market share evidence tends to show that IBM enjoys substantial economic power. However, AMI's definitions of large scale mainframes and the relevant market are flawed in several respects and tend to overstate IBM's market share and power.
AMI does not expressly include upgrades of large scale main frame computers in its relevant market definition, but does include IBM's revenues from the sale of 308X upgrades in its calculation of IBM's share of the purported relevant market. If it is AMI's contention that upgrades do not belong in the relevant market, then AMI's calculation of IBM's share of the relevant market must be reduced accordingly. However, upgrades of large-scale main frame computers belong in the relevant market. Professor Richard C. Levin, AMI's expert economist, included parts and labor required to upgrade large scale main frame computers in the relevant market consisting of large scale main frame computers. Levin, Tr. 750-51. According to Prof. Levin, the parts and services required for an upgrade, and the upgrade that they together produce, can under certain circumstances be a substitute for a new machine; and "the prices of upgrades are constrained to some extent by the . . . prices of computers themselves." Id. If upgrades were excluded from the relevant market definition, AMI would have to be excluded from the market, since AMI does not sell large scale mainframes. See Levin, Tr. 792.
Even if AMI's market share evidence properly accounted for all sales of new large scale mainframes, a relevant market consisting solely of large scale main frame computers (and upgrades) is unduly narrow for purposes of assessing IBM's economic power and tends to overstate it.
Substitutes exist for every product and a relevant market definition "cannot meaningfully encompass that infinite range;" therefore, "the circle must be drawn narrowly to exclude any other product to which, within reasonable variations in price, only a limited number of buyers will turn." Times Picayune, 345 U.S. at 612 n.31 (including general and classified newspaper advertising and excluding advertising placed in other communications media in New Orleans). However, it is also improper "to require that products be fungible to be considered in the relevant market." United States v. E.I. duPont deNemours & Co., 351 U.S. 377, 394, 100 L. Ed. 1264, 76 S. Ct. 994 (1956) (including cellophane and all flexible wrapping materials in same relevant market in Section 2 case). The relevant market definition must include all "commodities reasonably interchangeable by consumers for the same purposes. . . ." Id. at 395. It must include all producers which "have the ability - actual or potential - to take significant amounts of business away from each other." Smithkline Corp. v. Eli Lilly & Co., 575 F.2d 1056, 1063 (3d Cir.), cert. denied, 439 U.S. 838, 58 L. Ed. 2d 134, 99 S. Ct. 123 (1978). Prof. Levin substantially agreed with these statements of the considerations pertinent to market definition, see Levin, Tr. 171, and acknowledged that products may be in the same relevant market when they are alternatives only "under certain circumstances", or when the pricing of one product constrains the pricing of another only "to some extent." Id. at 750-51.
To support its relevant market definition, AMI relies heavily on IBM documents which AMI contends demonstrate that IBM recognizes a separate market for large scale main frame computers. See A.M. at 76-77. IBM "Significant Win/Loss Reports" (SWLRs) were monthly reports prepared by IBM's marketing divisions and furnished to IBM's Chairman and members of IBM's Management Committee. Armstrong, Tr. 909-910; Levin, Tr. 756, 800. The SWLRs stated, for each reported competitive situation, the IBM product offering, the competitive product offering(s) faced by IBM, and whether IBM won or lost the sale. Levin, Tr. 756. Prof. Levin examined a sample of SWLRs covering the periods December 1980 through September 1981, April and June 1983, December 1984, January 1985, February 1985, May 1985, and June 1985. Id. at 759. For each reported situation in which the IBM product offering was a large scale mainframe (a 3033 product, a 308X product, or MES upgrade of such a product), Prof. Levin classified the reported competitive alternative as a large scale or mid-scale computer, based on the International Data Corporation's "Large Scale Computer Census" classification scheme. Id at 757-59. In 281 out of 288 (or 97.6%) reported cases in which the IBM offering was a large scale mainframe, the competitive alternative was also a large scale mainframe or an upgrade to a large scale mainframe. Id ; PX 480. The competitive alternatives included leasing company placements of new or used large scale mainframes, and leasing company offerings of upgrades or reconfigurations of large scale mainframes.
The usefulness of IBM's SWLRs and Prof. Levin's analysis of them to support AMI's relevant market definition is limited by several considerations. IBM regarded SWLRs as poor and unrepresentative indicators of actual market activity, and discontinued their use. See Armstrong, Tr. 910-13; see also Quinlan, Tr. 1050-53, 1057-59; DX 2201.
Nevertheless, assuming that SWLRs accurately reflect actual market activity, they show a large number of situations in which non-IBM large scale main frame computers (included by AMI in its relevant market definition) competed with IBM computer offerings which AMI does not include in its market definition.
AMI's reliance on only those instances in which the large scale mainframe offering was an IBM computer, rather than a non-IBM computer, is inconsistent with the relevant market definition it advances. Finally, it is worth remembering that "it is not the perceptions of manufacturers but those of consumers which are most salient in the determination of market boundaries." Columbia Metal Culvert Co. v. Kaiser Aluminum & Chemical Corp., 579 F.2d 20, 30 (3d Cir.) cert. denied, 439 U.S. 876, 58 L. Ed. 2d 190, 99 S. Ct. 214 (1978) (footnote omitted) (Section 2).
The evidence compels the conclusion that AMI's asserted market definition is untenably narrow. AMI improperly excludes from its market definition a host of products which provide reasonable alternatives to purchases of large scale mainframe computers and upgrades and constrain IBM's ability to raise the prices of these products or exclude competition. The result is that IBM's market power is significantly less than AMI contends, even before evidence relevant to assessing IBM's economic power other than demand substitutability evidence is considered.
AMI's proposed market definition fails to account for the competition IBM faces from companies offering large scale main frame computers for lease. AMI acknowledges the presence of such competition, see A.P.F. at para. 21 and the evidence cited therein,
but fails to incorporate it into the relevant market definition. An economically meaningful market definition must include all the products and services that actually or potentially compete with IBM products in question or constrain IBM's pricing and product decisions. Levin, Tr. 171.
Leasing companies, such as Comdisco and CMI, purchase computer equipment from manufacturers and lease it to users. From a consumer's standpoint, they are an alternative source of computer equipment. They compete with IBM. See Lewis, Tr. 452-3; LaRocca, Tr. 1209; Phillips, Tr. 1586; Pontikes, Dep. Tr. 16; Walker, Dep. Tr. 19-20. Leasing companies own approximately 40 percent of all large scale mainframe computers, as defined by AMI. Levin, Tr. 764-65, 858-9. Prof. Levin testified that IBM's share of the market would be reduced by an amount he was unable to determine if leasing companies were taken into account in AMI's market definition. See Levin, Tr. 837-38, 764, 804. If leasing company transactions involving computers comparable and in many cases identical to the large scale mainframes marketed by IBM are included in the relevant market, and the market is measured on a "transaction basis",
IBM's share of the market, according to Prof. Almarin Phillips, who testified for IBM as an expert economist, drops to 34.4 percent. Phillips, Tr. 1600-11; DX 1923. Prof. Phillips testified that such a share would not reflect "overwhelming" activity in the market on IBM's part. Id. at 1611.
AMI relies on United States v. Aluminum Company of America, 148 F.2d 416 (2d Cir. 1945) to support its exclusion of leasing companies from the relevant market. See A.R.M. at 79-86. In Alcoa, upon consideration of the defendant company's market position over a period of years and based on the conclusion that the production of "secondary" ingot was as much within Alcoa's control as the production of the "virgin" ingot from which it was derived, the Court decided to disregard "secondary" competition in its calculation of Alcoa's market share. 148 F.2d at 425. Unlike the situation in Alcoa, there is evidence in this case that leasing companies, which also lease non-IBM equipment, effectively compete with IBM and constrain IBM's ability to set prices or exclude competition in the market for new large scale main frame computers. See e.g., A.P.F. para. 29 and the evidence cited therein. Leasing companies, therefore, properly belong in the relevant market applicable to this litigation. See ILC Peripherals Leasing Corp. v. IBM Corp., 458 F. Supp. 423, 428 (N.D. Cal. 1978), aff'd sub nom. Memorex Corp. v. IBM Corp., 636 F.2d 1188 (9th Cir. 1980), cert. denied, 452 U.S. 972, 69 L. Ed. 2d 983, 101 S. Ct. 3126 (1981) ("Memorex II").
As shown below, AMI also improperly excluded from its relevant market definition other products and services which offer potential buyers reasonable and viable alternatives to the purchase (or leasing) of large scale mainframe computers or upgrades to such computers. Their availability in the marketplace constrains IBM's power to command noncompetitively high prices and restricts IBM's ability to impose unwanted or burdensome terms on an appreciable number of buyers interested in acquiring computer systems or enhancing the performance of existing computer systems. These alternatives also pressure IBM to keep up with the market's growing technological demands. See e.g., Phillips, Tr. 1585.
Thus, AMI incorrectly excluded many smaller capacity computers manufactured both by companies which do and companies which do not also manufacture large scale mainframe computers as defined by AMI. See Levin, Tr. 796-800. AMI excludes these products from the relevant market in part because the IDC report on which Prof. Levin relied did not classify them as large scale mainframes, and in part because AMI contends that there is only limited evidence of substitutability between these smaller computers and large scale mainframes. Id., at 759-60, 782. For purposes of this action, the reliability of the IDC report is suspect. See supra. p. 271. The evidence shows sufficient competition between the smaller computers and large scale mainframes to require their inclusion in the relevant market.
At trial, marketing executives and users of complex computer systems acknowledged a trend toward "distributed data processing", in which smaller capacity computers are used in conjunction with or in place of large scale mainframes. Mr. Quinlan, President of IBM's North Central Marketing Division, discussed the increasing phenomenon, perhaps beginning in the 1970's, of "hierarchal systems" and "distributed systems" involving combinations of large computers, smaller computers, and terminals. Quinlan, Tr. 1043-44. Such systems provide alternatives to the acquisition of large scale main frames, as the situation involving J.C. Penney illustrates. Id. He also referred to instances in which the smaller computers (which, in fact, tend to be quite large) are "clustered" to look like and perform functions comparable to those performed by IBM's large scale mainframes. He referred to numerous instances (e.g., involving DuPont Research and Carrier Corporation) in which the smaller computers (excluded from AMI's market) competed successfully against IBM large scale mainframes. Id. at 1050-53, 1058-59; see DX 2201. Mr. Armstrong, IBM's Senior Vice President and Director General of IBM Europe, gave several examples of such competition, including the New York Stock Exchange's replacement of its IBM System 360 Model 50 computer (included in AMI's market) with over 200 Tandem "mini-computers" (excluded from AMI's market). Armstrong, Tr. 897-98. An executive of Core States Financial Corporation testified that his company moved away from using IBM large scale mainframes for at least one application, and opted for a system of multiple computers manufactured by Tamden and not included in AMI's market. Shah, Tr. 1516-20. A Hewlett Packard executive stated that his company's HP 3000 product line of computers (excluded from AMI's market) competes with IBM 308X computers in part because of a trend toward decentralized processing. Ikezoye, Dep. Tr. 4-6. An NCR official expressed a similar view. Nielson, Dep. Tr. 4-5; see English, Tr. 1557, 1565 (illustration of trend toward decentralized processing, involving Federal Mogul Corporation); DX 1786. A study entitled "Long Range Computing Strategy Report" prepared for Kent State University by Peat, Marwick, Mitchell and Company in 1984 discussed the "trend away from older, large single processing systems . . . towards systems based on large number of small processors with local intelligence, linked by communications." DX 360, pp. 4-5, 49-52. Kent State's Director of Informations Systems testified that Kent State ultimately replaced a Burroughs model 6812 computer (included in AMI's market) with an IBM 3081D, but not without seriously considering purchasing a system of clustered DEC VAX 11/785 computers (excluded from AMI's market). McKinley, Tr. 1487-90, 1494-90.
There were many instances in which systems of smaller computers provided alternatives to large scale mainframe computers; the instances involved wide-ranging computer applications in different commercial settings. Such competition cannot be considered marginal. IBM considered the competition significant. In 1975, it reviewed one hundred of IBM's largest accounts and concluded that a significant number of customers, "almost two-thirds, were concluding to off-load their systems, their large systems to competitive distributed processing systems," Armstrong, Tr. 887-94; DX 1632, none of which are included in AMI's market. Prof. Levin's assertion that such competition is limited and therefore excludable from the market is unsupported by the record.
The same is true with respect to fault tolerant processing, in which smaller capacity computers are used essentially in parallel to ensure continuous processing capability for applications frequently performed by large scale mainframes. AMI excludes fault tolerant computers from its relevant market on the theory that they occupy a "specialized market nitch." See A.P.F. at para. 269; Levin, Tr. 802. The weight of the evidence, however, was to the contrary and compels their inclusion in the market. See Shah, Tr. 1517-21, 1524, 1530; Quinlan, Tr. 1055-56, 1059-63.
AMI's relevant market also improperly fails to include peripheral products such as storage devices, input/output devices, disk drives or disk tapes. Storage devices store data for later access by the central processing unit (CPU). Input devices feed data to the CPU; output devices receive or accept data from the CPU. Disk drives and desk tapes may perform all three functions.
AMI acknowledges that "external data storage devices are in a limited sense technological substitutes for the internal memory of a large scale mainframe." A.P.F. at para. 278. AMI excludes storage devices from the relevant market in part because it contends that they are not economic substitutes in the sense that their prices constrain the pricing power of a hypothetical monopolist of large scale mainframes. Levin, Tr. 761-62. AMI takes substantially the same position with respect to computer software, the programs that enable computer systems to function and perform a variety of tasks, A.P.F. at para. 279, which AMI excludes from the market. AMI's assertions are inconsistent with the evidence. Mr. Beckwith, IBM's Director of Service, testified that IBM always considers the peripheral products offered by competitors when IBM arrives at a "competitive price" for its computers. Beckwith, Tr. 1279-83. Input/output devices particularly are among the various "components" IBM examines to determine the price of its products. Id. Competitive software offerings also influenced IBM pricing decisions, Beckwith, Tr. 1279-83, and at least one computer user testified concerning the "trade offs" between software and hardware. McKinley, Tr. 1493.
There is a more fundamental reason for including peripheral products and software (systems software and application software) in the relevant market than the fact that they constrain IBM's pricing decisions with respect to large scale mainframes. As discussed below, peripheral products and software provided significant and reasonable alternatives to a wide variety of upgrades and modifications of large scale mainframes. See, e.g., Staire, Dep. Tr. 19-20; Armstrong, Tr. 876-78. Other such alternatives which AMI's market definition also failed to take into account include smaller computers used to offload applications from large scale mainframes (including computers smaller than those previously discussed); devices for adding memory, speed, or capacity to processors; and computer service bureaus, which are companies providing data processing services to others. Further, AMI's market definition, to the extent that it includes upgrades at all, appears limited to MIPS upgrades. A.P.F. at para. 291. Such a limitation also is unwarranted and inconsistent with the evidence.
According to Charles I. Staire, Consultant to B.F. Goodrich, there are "many different ways," to enhance the performance capabilities of a computer system. Staire, Dep. Tr. 3-4, 19-20. Mr. Armstrong testified that a buyer interested in increasing the capacity of a computer system will consider "all of [the] elements that make up the computer systems in order to determine what is the most efficient way, most economical way to solve his problem." Armstrong, Tr. 876-78. Among the possibilities are increases in the computer's memory capacity and channel speed, and improvements in the computer software or peripheral devices like disk drives or disk tapes. Id. Mr. McKinley of Kent State added disk storage and main memory components as an alternative to upgrading the CPU of a 3081D computer. McKinley, Tr. 1500-01. Bipin Shah of Core States Financial Corporation postponed an upgrade or the purchase of a larger computer by improving "inefficiencies in the software," in communications, and in disk drive utilization. Shah, Tr. 1523. Thomas English of Federal Mogul testified that his company has "upgraded the CPUs from one model to the next, but usually before [the company] get[s] to that it's a memory upgrade, it is adding channels, it is adding other I/O [input/output] devices, disk, tape, so forth." English, Tr. 1565-66. Gary Smith of CMI testified that alternatives to upgrading a computer, in the sense of adding a MIPS upgrade, include replacing the computer, adding a second computer, adding additional memory, adding additional I/O devices, and off-loading work to other computer systems including those operated by service bureaus. Smith, Tr. 605-06. Robert Van Hellemont of Thomson McKinnon Securities stated that, "rather than upgrading," a user can "add increased memory," add "increased discs or tape storage," offload "application to service [bureaus]", or offload "applications onto some number of other smaller computer systems." Van Hellemont, Dep. Tr. 7, 76-79. Numerous other witnesses testified similarly. Harry Myland, one of the founders of AMI, acknowledged that a user "has a variety of options" to upgrading a CPU, including "memory upgrades or feature designs," "channel adds," and "internal speed improvements." Myland, Dep. Tr. 62, 187. Such components, enhancements, and available services permit users at least to postpone buying upgrades of CPUs or larger (new or used) computers for a significant period of time. Phillips, Tr. 1587. A market definition which ignores such competition is unrealistic.
A box swap, which typically refers to the purchase of a new machine and the sale of an old one, is the "functional" and physical equivalent of an upgrade. See Levin, Tr. 170-72, 766. Box swaps can also be performed with used machines; for example, with machines owned by leasing companies. Allen, Dep. Tr. 59-60; Myland, Dep. Tr. 189-90; Van Hellemont, Dep. Tr. 76-77. Users seek box swaps or upgrades at roughly the same time in the life cycles of computers actually in place. See Lewis, Tr. 1718-19, 1727-28. Although AMI has shown that a box swap is not an alternative to a 3081K to 8084Q upgrade, box swaps are viable alternatives to most MIPs upgrades and should therefore be included in the relevant market definition.
Upgrades using parts provided by the customer, or by a leasing company from a machine of one of its lessees, also provide computer users with important alternatives to new upgrades or new machines. See Levin, Tr. 744-45. At his deposition, Mr. Allen acknowledged that the existence of 308X donor parts impacted on a user's decision to purchase new upgrades from IBM. Allen, Dep. Tr. 964. As with box swaps, upgrades using parts taken from other machines may yield physically and functionally identical results to the purchases of new upgrades. Levin, Tr. 171, 182-83. The viability of used-parts upgrades as an alternative to upgrades performed with new parts may be limited, in practical terms, by the relative scarcity of necessary used parts, especially those needed for MIPs upgrades. Levin, Tr. 110-12; Allen, Tr. 339-40. However, the evidence does not support their total exclusion.
See, e.g., Levin, Tr. 182-83. For example, between 1983 and 1986, AMI performed 237 (out of 244) 308X memory upgrades or downgrades, and 137 (out of 138) 308X channel upgrades or downgrades, with parts removed from and reinstalled on existing equipment. See DX 1363, pp. 8792-94, 9276-78; 8977; DX 1894D; DX 1894 B; DX 1894C; DX 1363, pp. 8543-44; DX 1895C. CMI also goes into the "user community" to purchase "memory, features, machines, and upgrades". Loria, Dep. Tr. 228-29; see also Nolin, Dep. Tr. 85-86 (AMI); LaRocca, Tr. 1165-67 (UCS).
IBM's market share declines steeply from the figure suggested by AMI if the relevant market definition is expanded, as the evidence requires, to include (at least to some extent) leasing companies, smaller capacity computers, peripheral products (storage devices, input-output devices, etc.), memory upgrades, channel upgrades, software, and service bureaus. Prof. Phillips, IBM's market expert, while not attempting to measure IBM's share of a strictly defined market, see Phillips, Tr. 1594-95, established that IBM accounted for: 20.3 percent of the "value of shipments of [electronic data processing] products worldwide from U.S. plants plus software and service revenues"; 30.8 percent of 1984-1985 "shipments of general purpose digital computers with the unit value" exceeding $ 250,000 (recorded at FOB platform; the actual installed retail price of such computers exceeded $ 1 million); and 32.2 percent of the "data processing revenues from the top one hundred firms who [had] data processing revenue" for 1984 and 1985.
Phillips, Tr. 1596-1600; DX 1749, DX 1751; DX 1753. AMI did not attempt to measure IBM's share of any market other than the untenably narrow relevant market it advanced at trial. Although market share is but one measure of a firm's economic power and should be considered in light of other market factors, it seems clear that market shares in the range suggested by Prof. Phillips do not support a finding that a company possesses sufficient economic power to apply the per se rule against tying arrangements. E.g., Hyde, 466 U.S. at 26-27 & n.43 (30 percent share in market for tying product not enough to constitute market power); Times Picayune, 345 U.S. at 611-13 (30 to 40 percent not enough); Ball Memorial Hosp., Inc. v. Mutual Hospital Ins. Inc., 784 F.2d 1325, 1330-31, 1334-37 (7th Cir. 1986) (over 50 percent not enough).
The analysis so far has focused on what may be described as demand substitutability or cross-elasticity. A thorough analysis of a firm's economic power also takes into account such considerations as: supply substitutability; other aspects of market structure, general market performance; and the market performance of the defendant company. An examination of important market and industry characteristics further supports the conclusion that IBM lacks the requisite economic power.
The absence of significant entry barriers in a given market or industry suggests that firms operating in the market or industry lack market power, even when they enjoy appreciable market shares. See, e.g. United States v. Waste Management, Inc., 743 F.2d 976, 983-84 (2d Cir. 1984); Ball Memorial Hosp., 784 F.2d at 1335.
Conversely, "the greater the barriers faced by a new entrant, the more probable it is that control of a particular market share would enable defendant to exercise monopoly power."
In re IBM Peripheral, 481 F. Supp. at 976 (footnote omitted). The evidence established substantial entry
and growth of competition in the data processing industry embraced by the correctly defined relevant market.
A number of companies other than IBM manufacture a wide range of computers having the processing power of IBM large scale mainframe computers. Several of these (including Digital Equipment Corporation, Data General, Hewlett Packard, Tandem, and NCR) were admittedly excluded from the report upon which Prof. Levin relied to determine what constitute large scale mainframes. See Levin, Tr. 786-87, 789; ...