Father, Son & Co.

by Thomas J. Watson

  We gave the project a lot of scrutiny at IBM, and probably the smartest thing we did was to analyze it thoroughly as a business proposition. We decided to go ahead in Bedford-Stuyvesant only after studying other ghettos we might have gone into, for example, and my involvement in the community was only one of many factors in the final decision. Kennedy himself never asked for a plant, nor did I tell him of the plan until we’d decided to go ahead. We also studied whether it made sense to start the plant with hard-core unemployed like the young men from Camp Rodman—and the answer was no. As Friedli pointed out, our primary goal was to establish a factory that worked, not to take on so many social burdens that the operation went broke. Of the first two hundred Bedford-Stuyvesant residents he hired, one hundred twelve were unemployed and forty had police records, but he rejected the applicants with very serious problems, such as alcohol and drugs. Friedli’s judgment must have been just about right, because the factory worked better than we’d hoped. While we’d expected it to be almost a nonprofit operation, we found we could make cables and other components there at slightly lower cost than at our other plants, and Bedford-Stuyvesant became a permanent part of the IBM system.

  Bobby Kennedy would have been proud to see the project succeed, but even before it was publicly announced, in April 1968, he had turned his attention away from New York politics and entered the presidential race. My last few meetings with him had to do with that. I remember most vividly the day in late February when he came to my office to sound me out on the issues. We talked for an hour, mostly about Vietnam. This was in the wake of the Tet offensive which had swung public opinion against the war. I asked him what he thought the United States should do.

  He said, “Tom, there is no sensible, easy solution. Just none. The only possible thing to do is to get our people out.”

  “How?”

  “I’d get out in any possible way. I think it is an absolute disaster. Being there is much worse than any of the shame or difficulty one would engender internationally by getting out. So, with whatever kind of apologies and with whatever grace I could conjure up, I’d get out of there in six months with all of the troops the U.S. has.”

  I was shocked by that; his thinking was much more radical than mine. I was still transfixed by the question of how to deal with our South Vietnamese allies and all the promises we’d made them. But Bobby really wasn’t interested in discussing the particulars of withdrawal—he said that no matter how we did it, it was going to be chaotic. To him that was all of secondary importance, because he had the long vision to see what the war was doing to our country.

  Three months after he announced his candidacy, early on the morning after the California primary, an IBM executive called to tell me Bobby had been shot. I couldn’t believe that two brothers could die in the same way, so I assumed he’d only been slightly wounded. I was scheduled to make a business trip to the West Coast that day with Burke Marshall, and Burke, who was very close to Bobby, was really shaken. He said, “Should I call the family office and see if we can give anybody a lift on our plane?” I said yes, and he found out that Jackie and her brother-in-law Stas Radziwill wanted a ride. So I arranged a car to take Jackie from the city to Kennedy airport, where Stas was arriving from London. As it happened the assistant manager at JFK was a fellow who had flown with me during the war. I called him and said, “This is a tragedy. I’ve got to take Jackie to California with me. I’m going to get her on board and then we want to taxi right up under the wing of Stas’s airplane and pick him up.”

  I got them both into the airplane, and since I was flying we hardly spoke. We made a rest stop at Grand Island, Nebraska, the exact center of the country, and ran into Tom McCabe of Scott Paper and a bunch of Republicans who were just coming back from having helped Nelson Rockefeller campaign in Oregon. It still wasn’t clear to any of us that Bobby’s condition was serious. But when we landed in Los Angeles, Chuck Spalding, a close friend of the Kennedy family, met us and rode with us into town. Jackie said, “Chuck, what’s the story? I want it straight.”

  Chuck said, “Well, Jackie, he’s dying.” Then we knew it was all over.

  That was the end of the Kennedy era, although the family has a fantastic ability to rise above tragedy and go on. They even sized me up briefly as a replacement for Bobby in the Democratic race. Not long after the assassination I went to visit at Hyannis, and when I stepped off the airplane a crowd of little Kennedys came running across the tarmac wearing yellow sweatshirts that said “Tom Watson for President.” Jackie had had them made up for the kids. I got in a car with her and Ethel and said, “Are you serious?”

  “Why not? Why not?” they said. But we all knew I’d never stand a chance, and when a columnist friend of the family called a few days later to ask if I was indeed going to run in Bobby’s place, I told him I’d already gotten over my vague aspirations to elective office.

  It took two more years of upheaval on the college campuses for me to come around to Bobby’s position on Vietnam. In June 1970 I was called to testify before the Senate Foreign Relations Committee; they wanted to explore the effect of the war on the U.S. economy, but I decided to use that platform to make the strongest possible case for pulling out of Vietnam right away. I said that as long as the war was allowed to go on, it would demoralize our young, erode our prestige abroad, make the economy unhealthy, and ultimately cause our society irreparable harm. “It’s impossible to figure out an efficient, orderly, and dignified way of getting out,” I said. “We must end this tragedy before it overwhelms us.” I did nothing more than echo what Bobby had told me long before—but it was still so unusual for a prominent person to speak bluntly about withdrawal that the New York Times quoted me on the front page. That was how far ahead of us Bobby Kennedy had been.

  The last working day of the Johnson administration, January 17, 1969, was Black Friday at IBM. The Justice Department filed a massive antitrust complaint, accusing us of monopolizing the computer industry and asking the courts to break IBM into pieces. It was one of the biggest antitrust cases ever brought, comparable to the one in 1911 when the U.S. took apart Rockefeller’s Standard Oil trust. The government objected to virtually our entire way of doing business, from our use of total system sales—supplying customers with complete installations including hardware, software, engineering help, training, and maintenance—to the big discounts we gave universities.

  Strangely, none of these practices was illegal per se. We’d used them to build a fantastic industry, and all of our competitors did business the same way. But that was irrelevant, the government said; the point was that in the hands of a company of our size and strength, these marketing tools became weapons that crushed competition. The Justice Department asked the court to force us to change these practices, and added an ominous request for “relief by way of divorcement, divestiture, and reorganization … to dissipate the effects of the defendant’s unlawful activities.”

  We’d seen this suit coming because we’d been under investigation by the Justice Department for two years. But what really alarmed me was the precipitous way in which the complaint was brought. Since the Johnson administration was almost over, I had thought the Justice Department would hold off and let the incoming Nixon administration decide how to handle the case. That would have been reasonable, and I had no cause to expect the government to act otherwise. The Antitrust Division had called IBM to task before, in 1935 and 1952, and they’d always been fair. We’d avoided a showdown in the courts on both occasions, and had been able to compromise with consent decrees that gave IBM plenty of room to grow. To me it seemed natural for the Justice Department to keep an eye on us because we dominated an important industry, and in the early 1960s I even gave speeches acknowledging the need for the Sherman and Clayton antitrust acts. I saw our dealing with the Antitrust Division as part of a healthy process of regulation to protect the public good. Nothing in my experience prepared me for how treacherous the legal process can be when it gets out of hand.

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nbsp; We tried in every way to head off the suit. Burke Marshall and I had even gone to Washington at the last minute to make a personal appeal to Attorney General Ramsey Clark. That meeting was one of the most uncanny experiences of my life. I’d been witness to an almost identical scene as a young executive seventeen years before. It was 1951, the Justice Department was about to sue us for monopolizing the punch card industry, and Dad and I had gone to Washington to meet with the attorney general on that case—Tom Clark, Ramsey’s father. The argument that Dad had used on Tom Clark was not terribly different from the one I used on Ramsey. I pointed out that the data processing field was very broad, and that the competition IBM faced was strong and increasing thanks to the constant evolution of technology, which no one had a monopoly on.

  Like his father before him, Ramsey was impervious to these arguments. He refused to budge even when I appealed to him as a fellow Democrat. I told him, “I’ve been loyal to this party all my life, and my father was a loyal Democrat before me, and it makes me ashamed for an administration to behave the way you are behaving. You have less than a week left in office and if you’d really wanted to pursue the matter, you could have brought the suit a year ago. The only reason you’re doing it now is that the Republicans have won and you want to dump a big problem into their laps.”

  “The facts are the facts,” Ramsey said. “We think you’re guilty and it is my duty as attorney general to bring this suit.” I thought that was pompous and started to lose my temper, so I left.

  I’d always thought Dad was irrational for refusing to face the realities of antitrust law. But now that I was confronted by similar accusations twenty years later, I had exactly the same reaction. My first public response to the suit echoed a move Dad had made: I declared our innocence in the newspapers. This was accomplished with typical IBM drama, by taking out double-page ads in eighty newspapers all over the United States. “Has IBM Spoiled the Computer Business for Others? Let’s look at the record” was the way the ads began, and to show how the company had drawn together and was acting like a team, we had the IBM branch manager in each city hand-deliver the copy to the local daily. Those ads cost IBM three quarters of a million dollars—almost as much as our entire annual corporate-advertising budget—but I thought they were worth it because I wanted to reassure our customers, shareholders, and employees that IBM had a strong case.

  My own private impulse, after being spurned by Ramsey Clark, was to forget the niceties and fight like hell to protect IBM. It was like some primitive instinct—as though Ramsey Clark were threatening my child. This powerful feeling came over me again and again through the years as our antitrust problems unfolded. When I sat down with our lawyers I’d be perfectly conscious of the difference between righteousness and greed one minute, and the next minute I’d be plotting defensive strategy with a totally unfettered and lawless mind. Only after I’d figured out what tactic I wanted to use would I go back and think about its legality. There was something wrong with that thought process: perhaps it is the best explanation for why antitrust law is necessary in the first place. I realized now how Dad must have felt during all those years I urged him to knuckle under and settle.

  I struggled to put the government case in perspective. Remarkably, in spite of the sweeping changes and heavy penalty asked for by the government, the reaction on Wall Street was mild. Our stock, which was selling at around three hundred dollars a share before the complaint was filed, dropped only about eight points, and investors seemed to figure there was no use worrying since the case would take years to resolve. That was reassuring news, and it confirmed my sense that the case never should have been brought. I had been working for years to keep IBMers from taking unfair advantage of our position in the industry. IBM machines accounted for about 70 percent of all the computers sold, and one of the challenges senior management faced was not to exaggerate threats or overreact to competition, particularly in the 1960s as we began to come up against smaller companies. As early as 1961 I circulated a standard of ethics about what our people could and could not do. There were rules against bare-knuckle selling practices, such as disparaging other companies’ products or leaking information about machines we hadn’t yet announced in order to block a competitor from making a sale. Perhaps most important, I told the salesmen that in fighting for orders they had to show a sense of fair play:

  Turn the situation around. Suppose that you were a competitor—small, precariously financed, without a large support organization, and without a big reputation in the field—but with a good product. How would you feel if the big IBM Company took the action which you propose to take? Would you regard the IBM Company as taking unfair advantage of you? Would you consider that the IBM Company was using a sales tactic which IBM possessed solely because of its size and reputation, and which, therefore, was unavailable to you?… We simply cannot shoulder people around or give the appearance of doing so.

  Each year every salesman was required to sign a statement that he understood the rules. I wanted our record kept clean because IBM already had a great business. We had no reason to monopolize, no reason to be predatory in our actions. It would have been stupid.

  In spite of all our efforts, we often found it hard to pull our punches, especially against companies who jumped into the business to piggyback on our success. In the late ’60s a whole crop of new businesses sprang up, specializing in cut-rate disk drives, terminals, and other peripherals designed to plug into System/360 equipment. These so-called plug-compatible manufacturers, or PCMs, took business away from some of the most lucrative segments of our product line, and were a constant annoyance. Because they were parasites, they were terribly vulnerable to any move we made, and we faced a legal and customer-relations dilemma whenever it was time for us to update our designs or lower our prices. Say, for example, IBM’s engineers wrote an improved piece of software—could we introduce it if, as a side effect, it would cause our computers to reject data that were being stored on a Brand X disk? Could we introduce it even if this, in turn, might put the Brand X Disk Corporation out of business? It was a very gray area of the law. We were forever asking our lawyers for opinions and getting mystifying answers like, “If you release the product that way, you have a forty percent risk of getting in trouble.” This made the business very difficult to manage, and in addition to the Justice Department complaint we were slapped with more than a half dozen additional antitrust suits by plug-compatible manufacturers, computer leasing firms, and other companies all claiming we’d tried to do them in. The most important of these was a suit filed by Control Data, a Minneapolis computer maker, whose lawyers worked in close cooperation with the Justice Department.

  Republicans have never been known as trustbusters, and it wasn’t clear that the administration would take a hard line, although Nixon’s new antitrust chief told reporters that he would pursue the case vigorously. We tried to mollify them by cleaning up our act voluntarily. Six months after the suit was filed, we made the drastic move of abandoning an age-old marketing practice known as bundling, a key element in our total-sales approach. It had always been our custom, whenever we rented or sold a machine, to lump everything together in a single price—hardware, software, engineering help, maintenance, and even training sessions for the customer’s staff. This practice dated all the way back to the days of Herman Hollerith, the inventor of the punch-card machine, and it had been a powerful method for making customers feel secure enough to try computers when the technology was still new and hard to understand. Burke Marshall, however, was shocked to find IBM doing business in this way. He saw bundling as a glaring violation of antitrust law known as a “tie-in sale,” such as when a local electric company tries to dictate the appliances you buy for your house. By requiring customers to buy our products by the bundle, we were making it almost impossible for independent companies specializing, say, in software to break into the business. At first people at IBM had trouble grasping this. No one could understand what Marshall objected to—bundlin
g was like the Apostles’ Creed at IBM, and since we looked at what we were doing as selling a service, it seemed perfectly natural that there should be one all-inclusive price.

  Burke Marshall is a mild man, but as the public officials of Mississippi and Alabama learned from his work at the Civil Rights Division, he also has a precise mind and an unbendable will. In 1968 he stood up at an executive conference and told us that things had to change. We were going to have to undo the bundle and price each of our goods and services separately.

  “But why?” people kept asking. “Why change now?”

  He went through his explanation again and again until finally he lost his temper. “Because you’ve got a tie, goddammit, you’ve got a tie! It’s illegal! If you try to defend it in court, you’ll lose!” He was shouting in a voice an octave above normal.

  I went back to my room with Learson and a couple of others. “The guy really means this,” somebody said, and I decided that we ought to follow Burke’s advice rather than risk a showdown in court. In June 1969, after months of hectic preparation under the apt code name “New World,” we announced à la carte prices for our systems engineering services, customer training, and some of our software. Some executives thought we were giving up our birthright, that unbundling meant the death of the systems-selling technique on which my father had built IBM. But to me the bundle was simply another tradition that had to go, just as we had agreed in 1956 to sell our machines as well as rent them, and to license our patents to other companies. There had been doomsayers before those moves as well, but IBM had prospered—which made the antitrust laws easier for me to accept.

  We wanted a quick settlement with the government, and might have succeeded if the Justice Department hadn’t found the perfect ally in its plan to litigate against IBM. It was Control Data, which in December 1968 had filed a massive antitrust suit against us that closely paralleled Uncle Sam’s. Of all IBM’s competitors in all my years of management, Control Data was the worst thorn in my side. It had been founded in 1957 by a team of electronics engineers who had worked together since the war, including a number of years at Remington Rand. Their leader was an entrepreneur named William Norris and their top computer architect was Seymour Cray, a skinny, reclusive fellow who quickly became an industry legend. Norris’s skill as a businessman and Cray’s genius had made Control Data one of the industry’s great success stories, growing in six years from nothing to annual sales of more than sixty million dollars. Their specialty was building big, ultra-fast machines for the scientific market—what people now call supercomputers. These products appealed to the same clientele that gave the computer industry its impetus in the first place—weapons labs, airplane and rocket manufacturers, elite universities—customers who were willing to fork over millions of dollars for the fastest state-of-the-art processors.