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A Study of the Computer Manufacturing Industry in the United States

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A Study of the Computer Manufacturing Industry in the United States A STUDY OF THE COMPUTER MANUFACTURING INDUSTRY IN THE UNITED STATES by Thomas Had ley Billings . SV3 hosiqraduaie Sc mm\\l (/ v . V" - 1. JL A iLJJ k_ A STUDY OF THE COMPUTER MANUFACTURING INDUSTRY IN THE UNITED STATES by Thomas Hadley Billings and Richard Claude Ilogan December 197 Tk<J> document hcu> bzen appnavnd ^oh. public Kt- icajsz and &ati} i£t> dutsUbuution 16 untunltzd. 15 A Study of the Computer Manufacturing Industry in the United States by Thomas Hadley Billings Lieutenant Commander, Supply 'Corps , United States Navy B.S., United States Naval Academy, 1959 and Richard Claude Hogan Lieutenant Commander,' Supply Corps, .United States Navy B.A. , University of Mississippi, 1958 M.A. , Roosevelt University of Chicago, 1962 Submitted in partial fulfillment of the requirements for the degree of MASTER OF SCIENCE IN COMPUTER SYSTEMS MANAGEMENT from the NAVAL POSTGRADUATE SCHOOL December 1970 / ARY L POSTGRADUATE SCHOQD . CALIF. 93940 ABSTRACT A study of the origins and evolution of the computer manu- facturing industry in the United S-cates, with emphasis on the economic importance of its present structure and conduct. The examination of supply and demand as determinants of the market mechanism is presented in a classic outline of current economic form for the market structure, conduct and performance of basic industries. The analysis of demand utilizes the first pub- lished government material on the computer industry. Derivation of Lorenz curves for this new industry and its concentration represent the first so produced. The synthesis of the manu- facturers' performance is developed from the structure and conduct. That performance is separately examined in reference to public policy, with emphasis on current legal actions and antitrust suits. TABLE OF CONTENTS I. INTRODUCTION 9 II. THE EVOLUTION 12 A. HISTORY 12 1. Data Processing - The Beginnings 12 2. The Generations 15 3. The Chronology 17 B. SIZE AND COMPOSITION 53 1. The Industry 54 2. The Firms 57 3. The Foreign Market 62 III. COMPUTER INDUSTRY MARKET MECHANISM 68 A. BASIC CONDITIONS IN THE COMPUTER INDUSTRY . 71 1. Computer Industry Supply 7 3 a. Raw Materials 74 b. Technology 80 c. Patents 89 d. Product Durability 98 e. Product Value 101 f. Business Attitudes 104 g. Unionization 104 2. Demand for Computers and Computation . 107 a. Demand in Computer Manufacturing . no b. Elasticity of Demand Ill c. Rate of Growth of Demand 118 d. Substitutes 123 e. Marketing and Hardware Acquisition . 125 f. Cyclical Character of Demand 128 B. MARKET STRUCTURE AND MARKET MECHANISM .... 129 1. Oligopolistic Structure 129 2. Product Differentiation 137 3. Barriers to Entry 144 4. Cost Structures 146 5. Vertical Integration 151 6. Conglomerateness 154 C. CONDUCT • . 156 1. Pricing Behavior 1157 2. Product Strategy 1(31 3. Research and Innovation 166 4. Advertising 172 5. Legal Tactics 174 D. PEREORMANCE 17 6 1. Production and Alloceitive Efficiency . 177 2. Progress 184 3. Equity 185 4. Full Employment 186 IV. GOVERNMENT REGULATION 188 A. PREVIOUS ANTITRUST ACTIONS 190 1. The 1936 Conviction 190 2. The 1956 Decree 193 B. CURRENT LITIGATION 196 1. Control Data Suit 197 2. Suit by Data Processing Financial and General Corporation 200 3. The Justice Department Suit 201 4. Action by Applied Data Research and Programmatics 204 5. Unbundling and More Lawsuits 205 6. The Federal Communications Commission . 207 C. THE EFFECTIVENESS OF ANTITRUST 207 BIBLIOGRAPHY 211 INITIAL DISTRIBUTION LIST 224 FORM DD 1473 227 LIST OF TABLES Table Page I World-Wide Computer Activity of U. S. Based Manufacturers 56 II World-Wide Revenues of American- Based Companies from Rentals and Sales of Computing Equipment 58 III The Major U. S. Computer Manu- facturers World-Wide Census - 1969 .... 59 IV Current Read-outs on "General Purpose" Computer Industry Worldwide (U. S. based) 61 V U. S. Exports of Electronic Computers and Parts, 1969 64 VI 1967 Annual Survey of Manufactures, General Statistics 76 VII 1967 Census of Manufactures, Raw Material Input . 78 VIII 1967 Summary of Material Consumed by Kind 86 IX Summary of Memory Technology 88 X Sample of Memory Improvements oq XI Number of Oligopolistic Industries ..... 131 XII Standard Industrial Classification System 135 XIII Annual Government Inventory of Computers by Manufacturers 138 XIV 1967 Balance Sheet and Census Data .... 149 XV World-Wide Revenues of U. S. Computer Firms 153 XVI Major Computer Manufacturers' Financial Data I 78 XVIII General Statistics on Profit, Entry, and Concentration 180 6 LIST OF FIGURES . Figure Page 1 Market Mechanism Outline 70 2 Long Run Computer Demand Curve 115 3 Long Run Computer Market Growth 120 4 Fifteen Year Hardware Growth and Projection 122 5 Dominant Theory of the Firm Model 158 6 Merging of Hardware Disciplines 171 7 Computer Industry Lorenz Curve : 10 Firms 182 8 Computer Industry Lorenz Curve: 134 Firms 183 ACKNOWLEDGEMENTS - We are indebted to Professor Gerald L. Musgrave, our thesis advisor, whose generous donation of time and suggestions were a valuable contribution to the general enlightenment of the authors and the content of the resultant thesis. We are especially grateful for his careful reading and constructive comments. He helped to clarify sorre of our vague thinking. We wish also to express our gratitude to Dr. W. Creighton, Chairman of the Department of Business Administration and Economics, for his personal interest and envolvement in our efforts, and his continuing encouragement and support through- out the preparation of the paper. We are also appreciative of the. encouragement and infor- mation-gathering assistance of our numerous correspondents, including Distinguished University Professor Walter Adams; George H. Brown, Director, U. S. Bureau of the Census; and Richard W. Mclaren, Assistant Attorney, U. S. Department of Justice. Finally, we wish to thank Miss Georgia P. Lyke , Miss Diane S. Nixon, and other staff members of the Technical Library, whose special assistance in locating and obtaining necessary reference materials, measureably contributed to the successful completion of our work. For any errors or misrepresentations, we assume full responsibility. 8 s I. INTRODUCTION The computer industry has been described as the major growth industry of the 20th century. Economists predict that by the year 2000, more persons will be employed in the data processing and related industries than in any other single business. The computer industry has drastically affected the entire fabric of our society, and has significantly influenced many other segments of American industry, ranging from pub- lishing to insurance, transportation to retail trade. The census takers reveal that in a brief span of twenty years, the world wide total of U. S. computers has reached 90,000 systems, valued at $30 billion. One dramatic illus- tration of the industry's growth is the rapid tempo of change in associated technology. Calculations in Charles Babbage ' 19th century analytical engine, involving the acceleration, rotation and stopping of a cog-wheel, were performed on the order of about one per second. Relays, utilizing a spring- loaded switch, could be opened or closed in a millisecond. Vacuum tubes, with no moveable parts at all, decreased this time unit another thousandfold. Today, semiconductor elec- tronics make use of components which can change state in a nanosecond (i.e., one thousandth of a millionth of a second). The purpose of this study is to examine an industry which is currently in its early stages of growth. The origins and 1 Computing - Past, Present, Nievergelt , J., "Computers and 58. Future," IEEE Spectrum , January 1968, p. evolution of the industry will be presented, with emphasis on its present structure and conduct. Additionally, the effects of public policy and government regulation on this "young industry" will be analyzed. Finally, this case study adds one more industry to the works of other authors covering the organization of American industry. Following this introduction, the thesis is organized into three sections. The first section begins with a history emphasizing the chronological relationships in the develop- ment of the industry, examines the size and composition- of the industry, and looks briefly at the international operations. Sections III and IV examine the two major forces which mold the architecture and character of the industry - market mechanism and government regulation. Responding to the influence of a competitive market, the natural interaction of supply and demand tends to formulate the structure of an industry, govern its conduct, and establish the prices. When the market process goes astray, public justice demands that the government intervene to control and regulate the industry in keeping with federal antitrust policy. The computer industry today consists of several distinct sectors - computer manufacturers, component manufacturers, service bureaus, time-sharing vendors, used computer brokers, 2 computer leasing companies, and software firms. Each of these, sectors rightfully plays a significant role in the overall industry, and while none has escaped the attention 2 University Sharpe, W. F. , The Economics of Computers , Columbia Press, 1969, p. 183. 10 of this study, the primary focus has been placed on the com- puter manufacturing portion of the industry. One further qualification is necessary. Although the production of special purpose and analog computers , such as airbourne and radar system computers, constitutes a significant part of the business of computer manufacturers, this study will con- cern itself solely with general-purpose digital computers. 11 II. THE EVOLUTION - A. HISTORY This section of the study will hopefully provide some in- sight into the origins of the computer industry and its growth and development into the giant of the American economy. An attempt is made to look into several aspects of its develop- ment such as early data processing methods, the birth of new concepts, the breakthrough in technology, the people involved, the laboratory work at universities and colleges, the early partnerships and companies, the mergers and formation of trusts, and the migration of scientists and technology from one operation or company to another.
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