Monday, April 16, 2012

Monopoly Regulation - A Success Story

The 1970s through the 1990s saw the flowering of the Information Age in the United States, where information processing services and equipment were made available to individuals and became a major sector of the economy.

While the microprocessor was the seed, a major facilitator of this boom was the regulatory influence of the 1956 consent decree[1] on IBM when it introduced the personal computer[2](PC) in 1981, allowing that seed to grow. The introduction of the microprocessor made personal and minicomputers a feasible proposition, with a lot of small time operators building their own machines and having some success selling them. IBM clearly expected to sell a lot of PCs, and still does. I think IBM also expected their offering to clear the market of competitors, and that also happened initially. However, the 1956 consent decree forced them to design and market it under conditions that really made the information processing industry in particular, and technology generally, take off.

Lets start by taking a look at some of the key terms of this decree, the effect in the early 1980s, and how things have changed since then.

Key Terms of 1956 IBM Consent decree

1) IBM was required to offer to sell equipment in addition to leasing equipment, and on terms that were no more favorable to IBM than terms leasing its equipment.
2) IBM was required to provide parts and information to third party providers of maintenance services for the equipment it sold on equal terms as its own divisions/companies providing such service.
3) IBM could not require information from purchasers about what use was being made of its machines.
4) IBM could not restrict the purchaser on the use, modifications, or attachments to the machines it sold. Lessees could only be restricted to that reasonably necessary to facilitate servicing of the machines.
5) IBM could not lend its name or employees to any servicer of its equipment, including wholly owned subsidiaries of IBM!
6) Applicability was limited to the US.

The effect of the introduction of the PC was electric. While it validated the market, practically every PC manufacturer at that time went out of business. IBM's purchasing power effectively made it impossible for smaller manufacturers to acquire components as cheaply as IBM could. Apple held on with the Mac and a famous Superbowl ad, but was relegated to a small niche servicing the artistic community. Minicomputer manufacturers, who were threatening IBM's mainframe business from the low end, were knocked off. Without the decree, this would have been the end of the story.

What the decree did

IBM was quite used to dealing with the decree by 1980. In spite of its restrictions, they continued to dominate the information processing market. All equipment they manufactured and sold (especially input/output processors) came with clearly defined interfaces and documentation about those interfaces, as well as specifications necessary for the maintenance of that equipment. The personal computer was not going to be any different. It came with a BIOS that was specifically designed to allow the PC to be easily extended by additional I/O equipment manufactured by third parties, and the complete specification was publicly available. The processor was a third party chip manufactured by INTEL. The memory interface was public and you could design and add your own memory. Even the operating system was built by a third party, Microsoft, who supplied a knockoff for others. In current terminology, it was the ultimate "open" platform.

The decree effectively made the PC a publicly usable standard and a huge market for third party vendors. An immediate consequence was the decimation of the US memory business. The huge market, the public standard, and the small size made it feasible for manufacturers in Taiwan, Korea, PRC, and Japan to invest in and build factories to supply add-on memory chips and cards for the PC and ship it to the US. Companies like INTEL who made a living supplying memory chips were forced to abandon memory, and focus on maintaining their lead in microprocessor chip technology, and pour vast sums into R&D to do so. Anybody who takes a serious look is always amazed at just how far ahead INTEL is in microprocessor manufacturing technology. Disk drive manufacturers and display terminal manufacturers flourished. Anybody could build a special purpose IO card or device with complete assurance that there was a processor and platform to make use of it. A user did not even need to load software to use the card, the BIOS specification included a mechanism for the PC to discover the memory provided on the IO card and use the software loaded into that memory by the manufacturer of the card.

The history of computing is littered with examples where a newly introduced product killed an established and profitable market for another product - very fast. The HP35 calculator killed the market for slide rules - the year I joined engineering college (1972) you had to have a slide rule, the next year it was a decoration. WYSIWIG word processors killed the typewriter. Commercial organizations keep tabs on competition, and initially will try to prevent or suppress innovation that could kill a profitable business. So very importantly, the decree made it hard for IBM to track applications to see what was taking off and thereby decide to cut off its competition by introducing its own product in that space. At least not before giving the market a chance to reward the competitor addressing the new application with significant business and a foothold or lock on the new application. Once validated, the assembly of the new product quickly moved offshore to take advantage of lower labor costs. And as offshore suppliers developed their capabilities and technology, the assembly of the PC itself moved offshore. The suppliers started making their factories and technology available to smaller companies for their own products and the virtual fab was born. Then companies could take advantage of the public standard, the lowered costs, and the available infrastructure to challenge IBM on the manufacture of the PC itself. IBM no longer manufactures PCs, it buys them from Lenovo.

What the decree did not do

1) The decree did not prevent IBM from entering any space in the market.
2) The decree did not prevent IBM from leasing its equipment to those who felt that was the best option.
3) The decree did not actually prevent IBM from maintaining a dominant position in the market! Existing PC and minicomputer manufacturers died very quickly when IBM introduced its PC. But they kept trying and it had to out-compete its competitors and provide a significantly better product to do so.
4) The decree did not force IBM to give up its intellectual property.
5) The decree did not force IBM to conform in countries where US law did not apply.

Fundamentally, the decree worked because it took away the power of a dominant player to block access to equipment and technology by competitors.

Where are we now?

Microsoft, (as well as practically every software vendor) "licenses" rather than sells its products. To get a new application to be supported by a modern operating system, one has to inform the OS supplier - whether it is Microsoft with Windows drivers, Apple with iOS, or Google with Android. Electronic equipment manufacturers write restrictive licensing agreements and are generally cagey about providing interface information; so if you want to use it on a different operating system or computer or with other equipment you have a hard time. The 1960s saw most electronic equipment sold with the circuit diagram pasted on the back - this has completely disappeared. Copyright has been extended to almost 100 years, making new development mostly unnecessary - the prime example here is Mickey Mouse and Walt Disney. One would think that it is about time Walt Disney Inc came up with some new characters! Defense and national security regulations force you to inform many suppliers of the particular use you are making of their products, and make it difficult for an individual to acquire some products, or even technical data, for experimentation or design purposes. There is a general lack of publicly available documentation about most modern computer hardware, and definitely about computer software. Worst of all, extra-territorial reporting regulations at both state and federal levels, and mandated back-doors and tracking make use of US products, and even US financial institutions, fraught with hazard for non-US organizations. One can envision a world that rejects US related products, companies and individuals simply for being too much trouble. This is already happening with European banks; they do not like taking on customers who are US residents.

We are now a society that is attempting to rest on its past achievements - we want to stamp out the competition instead of out-competing them. We are willing to sanction the use of simple, blunt instruments by our government that do a lot of collateral damage. SOPA, PIPA, ACTA and the 100 year extension of copyright are prime examples of this - courtesy of RIAA, MPAA, and Walt Disney (although SOPA and PIPA have been abandoned, for now).

In order to preserve innovation and our competitiveness, it might be worthwhile to consider enshrining some of the terms of the decree in law as basic standards of doing business.

1) Every product must be marketed with a "sale" option - where the buyer can do whatever they want with the product.
2) The interface specifications must be published and physically attached to the product - so you can attempt to attach other equipment, or in the case of software, attempt to run it on another machine. The specifications must be physically attached so you can determine how to use it years later.
3) Licensing terms for "sold" products can not limit use of the product or modifications to it.
4) Licensing terms and implementation of "sold" product cannot include reporting requirements.
5) Licensing terms and implementation of "sold" product cannot require automatic update. This is new, and required to prevent modifications a person makes to a product from becoming worthless when the product is updated.
6) Software should be sold with a license to make one backup copy on another medium. This is also new, and is now common practice.

With respect to copyright, I think it would be better for us to confront that lobby directly and knock back copyright protection to 28 years (which was the original extent), allowing generous exemptions for derivative work. Laws with extra-territorial applicability should be barred, and access to technology should be considered at the same level as freedom of speech - as an individual right. Mere possession of anything or attempt to acquire possession should not be illegal or prosecutable.


1) U.S. v IBM Corp., Civil Action No. 72- 344. Filed and Entered January 25, 1956
2) Timeline of Computer History - Computer History Museum

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