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July 19, 1987

THE ELEPHANT & THE FLEA – 2 OF PASSPORTS, PUMPS & CURRENTS

By CBR Staff Writer

Allen-Myland Inc, a small computer refurbishing company located in Broomall, Pennsylvania, has taken IBM to Federal Court on antitrust charges (CI No 725). A key issue in the case, an IBM policy called IWSC, was described in an internal IBM memo. That memo, according to AMI’s attorney, Robert G Levy, said that the purpose of the policy was to block competition. If this memo could be shown to represent official IBM policy, AMI would be in a very strong legal position. Levy thought that the memo, called Plaintiff’s Exhibit 10, had been written by IBM’s vice chairman Paul Rizzo. During a deposition, Rizzo had said under oath that the handwriting in the memo looked like his. But three months later, in the courtroom, Rizzo denied writing the memo. The memo, said IBM, was written by a staff person who did not make policy.

Airlift of 3033s

The specific IBM tactic cited by AMI in its antitrust case against the giant is the Installation and Warranty Service Charge, or IWSC, that Plaintiff’s Exhibit 10 refers to, a policy instituted on July 1, 1980. At that time, there was a significant difference in the prices posted in the US and Europe for new 303X mainframes. Third party dealers and lessors were able to beat IBM out of some business by selling new as well as used American machines in Europe. But before the 3033s could be installed, they had to be converted to European electric current – 50Hz rather than the US 60Hz standard. International traders used AMI and other refurb houses to perform the conversion. Some of the machines sent across the Atlantic were relatively new, and still under IBM’s one-year warranty when they were mofed. At first, IBM continued to honour its warranty. But as the pace of international shipments accelerated, IBM slapped the IWSC on its machines in return for extending its warranty coverage to mainframes that were shipped internationally. The charge came to roughly 10% of a computer’s list price… enough to discourage further traffic and curtail AMI’s cycle conversion business.As the airlift of IBM 3033 mainframes by third parties dwindled, some lease rates in Europe rose slightly. End users who had been able to arrange leases based on the lower cost of the machines from other nations could no longer get the bargain mainframes. However, only a relative handful of systems, a few dozen by most experts’ reckoning, were actually involved in international deals IBM’s IWSC closed the window of economic opportunity. A couple of years later, as numerous used 3033s no longer under warranty came on the market, international shipments resumed whenever there were large price disparities between the American and foreign used computer markets. Nevertheless, a flourishing trade in 3033s bearing passports never did did develop.

Warranty withdrawn

AMI was not alone in complaining about IBM’s IWSC. In 1984, Comdisco, IBM’s largest customer by virtue of its position as the largest of the independent computer lessors, had criticised the IWSC in discussions with IBM. Comdisco had even considered going to court or to the US Department of Justice’s Antitrust Division over the issue. Comdisco’s position, though never made public, was apparently that the price of an IBM mainframe included the cost of IBM’s one-year warranty. According to inside sources, the IWSC, in Comdisco’s view, made the owner of a machine pay for the warranty a second time.It’s impossible to tell now how serious Comdisco was about going to war with IBM over the IWSC. The dispute between the lessor and IBM was settled in a series of discussions. Subsequent friction over the policy was halted when the IWSC was dropped on January 1, 1985. At that time, IBM reverted to a provision in its sales contract that had existed, in one form or another, even before the IWSC was instituted. Today, the IBM sales contract states that its warranty may be withdrawn if equipment is shipped out of the country or region in which it was purchased. AMI contends that before it imposed the IWSC, IBM had, in practice, honoured its warranties on the relative handful of mainfr

ames shipped internationally by third parties, regardless of the wording in its sales contract. In any event, IBM says it now enforces the warranty provisions in its sales contract. The IWSC was but one aspect of the suit brought by AMI in October. A more dramatic charge revealed by the 30-employee refurbisher was its accusation that IBM had acted unscrupulously and illegally in interfering with AMI’s attempt to convert mainframes between 50Hz and 60Hz current. IBM, said AMI, had actually bullied an independent seller of critical parts into refusing to do business with AMI.

Water-cooled

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When an IBM water-cooled mainframe is converted to a different electric power system from the one for which it was built, it needs a new coolant pump with a motor designed to work on local current. These pumps are not made by IBM, but by an outside organisation, the Marlow Pump Co, a division of ITT Corp. IBM sold the Marlow pump to users or independent service companies, but charged $12,500 a unit. At the same time, Barrish Pump Co, an authorised Marlow distributor, sold an identical unit for $1,500. AMI tried to buy some Marlow pumps from Barrish for use in mainframe cycle conversions. But, the refurbisher alleges, it was refused the merchandise. AMI says that IBM blocked Barrish’s sale of the Marlow pumps by intimidating either the manufacturer or the distributor. IBM says it has no idea what AMI is talking about, and asserts that it never tried to restrain trade in the water pumps.This issue has some tricky legal angles. Even if it can be shown that Barrish or Marlow refused to sell AMI the pumps out of fear that IBM would take its business elsewhere, AMI still has other work to do. Generally speaking, in order to have a valid claim, AMI would have to show that IBM and Barrish conspired together in order to lock AMI out of the market. The trial record shows that AMI did not follow up in court on its accusation. Copyright (C) 1987 Hesh Wiener

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