[Federal Register Volume 60, Number 128 (Wednesday, July 5, 1995)]
[Notices]
[Pages 35032-35037]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-16453]
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FEDERAL TRADE COMMISSION
[File No. 951-0064]
Silicon Graphics, Inc.; Proposed Consent Agreement With Analysis
To Aid Public Comment
AGENCY: Federal Trade Commission.
ACTION: Proposed consent agreement.
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SUMMARY: In settlement of alleged violations of federal law prohibiting
unfair acts and practices and unfair methods of competition, this
consent agreement, accepted subject to final Commission approval, would
require, among other things, a Mountain View, California company to
take steps to ensure that companies other than the two it is acquiring
can develop and sell entertainment graphics software and the
workstations to run it to produce sophisticated computer-based graphics
for the entertainment industry.
DATES: Comments must be received on or before September 5, 1995.
ADDRESSES: Comments should be directed to: FTC/Office of the Secretary,
Room 159, 6th Street and Pennsylvania Avenue NW., Washington, DC 20580.
FOR FURTHER INFORMATION CONTACT:
Mary Lou Steptoe, FTC/H-374, Washington, DC 20580. (202) 326-2584 or
Howard Morse, FTC/S-3627, Washington, DC 20580. (202) 326-6320.
SUPPLEMENTARY INFORMATION: Pursuant to section 6(f) of the Federal
Trade Commission Act, 38 Stat. 721, 15 U.S.C. 46 and Sec. 2.34 of the
Commission's rules of practice (16 CFR 2.34), notice is hereby given
that the following consent agreement containing a consent order to
cease and desist, having been filed with and accepted, subject to final
approval, by the Commission, has been placed on the public record for a
period of sixty (60) days. Public comment is invited. Such comments or
views will be considered by the Commission and will be available for
inspection and copying at its principal office in accordance with
Sec. 4.9(b)(6)(ii) of the Commission's rules of practice (16 CFR
4.9(b)(6)(ii)).
Agreement Containing Consent Order
The Federal Trade Commission (``Commission'') having initiated an
investigation of the proposed acquisition by Silicon Graphics, Inc.
(``SGI'') of the stock of Alias Research Inc. (``Alias''), and the
stock of
[[Page 35033]]
Wavefront Technologies, Inc. (``Wavefront''), and it now appearing that
SGI is willing to enter into an Agreement Containing Consent Order
(``Agreement'') to port certain computer software to a computer system
other than that of SGI, to establish and maintain an open architecture
for SGI computers, and to provide for other relief,
It is hereby agreed by and between SGI, by its duly authorized
officers and its attorneys, and counsel for the Commission that:
1. Proposed respondent SGI is a corporation organized, existing,
and doing business under and by virtue of the laws of the State of
Delaware, with its office and principal place of business located at
2011 North Shoreline Boulevard, Mountain View, California, 94043.
2. SGI admits all the jurisdictional facts set forth in the draft
of Complaint.
3. SGI waives:
(a) Any further procedural steps;
(b) The requirement that the Commission's decision contain a
statement of findings of fact and conclusions of law;
(c) All rights to seek judicial review or otherwise to challenge or
contest the validity of the Order entered pursuant to this Agreement;
and
(d) Any claim under the Equal Access to Justice Act.
4. This Agreement shall not become part of the public record of the
proceeding unless and until it is accepted by the Commission. If this
Agreement is accepted by the Commission it, together with the draft of
Complaint contemplated thereby, will be placed on the public record for
a period of sixty (60) days and information in respect thereto publicly
released. The Commission thereafter may either withdraw its acceptance
of this Agreement and so notify SGI, in which event it will take such
action as it may consider appropriate, or issue and serve its Complaint
(in such form as the circumstances may require) and decision in
dispositon of the proceeding.
5. This Agreement is for settlement purposes only and does not
constitute an admission by SGI that the law has been violated as
alleged in the draft of Complaint, or that the facts as alleged in the
draft Complaint, other than jurisdictional facts, are true.
6. This Agreement contemplates that, if it is accepted by the
Commission, and if such acceptance is not subsequently withdrawn by the
Commission pursuant to the provisions of Sec. 2.34 of the Commission's
rules, the Commission may, without further notice to SGI, (1) issue its
Complaint corresponding in form and substance with the draft of
Complaint and its decision containing the following Order in
disposition of the proceeding, and (2) make information public with
respect thereto. When so entered, the Order shall have the same force
and effect and may be altered, modified, or set aside in the same
manner and within the same time provided by statute for other orders.
The Order shall become final upon service. Delivery by the United
States Postal Service of the complaint and decision containing the
agreed-to Order to SGI's address as stated in this Agreement shall
constitute service. SGI waives any right it may have to any other
manner of service. The Complaint may be used in construing the terms of
the Order, and no agreement, understanding, representation, or
interpretation not contained in the Order or the Agreement may be used
to vary or contradict the terms of the Order.
7. SGI has read the proposed Complaint and Order contemplated
hereby. It understands that once the Order has been issued, it will be
required to file one or more compliance reports showing it has fully
complied with the Order. SGI further understands that it may be liable
for civil penalties in the amount provided by law for each violation of
the Order after it becomes final.
Order
I
It is ordered That, as used in this Order, the following
definitions shall apply:
A. ``SGI'' means Silicon Graphics, Inc., its directors, officers,
employees, agents and representatives, predecessors, successors and
assigns; its subsidiaries, divisions, groups and affiliates controlled
by SGI; and the respective directors, officers, employees, agents,
representatives, successors and assigns of each.
B. ``Alias'' means Alias Research Inc.
C. ``Wavefront'' means Wavefront Technologies, Inc.
D. ``Respondent'' means SGI.
E. ``Entertainment Products'' means the computer software ALIAS
AnimatorTM and ALIAS PowerAnimatorTM products sold as of May
1, 1995, including Additional Fonts and the Advanced Options for ALIAS
PowerAnimatorTM, and any successor products or future versions or
general releases of such products, including any additions,
modifications, updates, and enhancements thereto released during such
period as specified in the Porting Agreement.
F. ``Entertainment Software'' means modelling, animation,
rendering, compositing and painting software, as individual software
programs or in combination, used in the production of two-dimensational
or three-dimensional images for film, video, electronic games,
interactive programming, or other entertainment or educational uses,
that compete with Entertainment Products or with any component thereof.
G. ``Porting Agreement'' means an agreement between Respondent and
a Platform Partner, entered in good fatih, to work together to port the
Entertainment Products to be compatible with the Platform Partner's
computer systems in their supported configurations and with associated
peripherals, which agreement shall provide, among other things, that
Respondent shall use reasonable best efforts to optimize the operation
of the Entertainment Products in the context of the Platform Partner's
computer systems; and which Agreement shall provide that the porting
shall occur as soon as reasonably practicable after the Porting
Agreement is entered and receives the approval of the Commission; and
which agreement shall state the method in which the ported
Entertainment Products shall be sold and marketed on terms competitive
with those applicable to Entertainment Products compatible with
Respondent's computers; and which agreement shall provide for
protection from disclosure or improper use of Non-public Information.
H. ``ISV Programs'' means programs and other arrangements that
Respondent makes avilable generally to independent software developers
that facilitate the development of software compatible with
Respondent's computers and operating systems.
I. ``Platform Partner'' means a company with which Respondent has
entered into a Porting Agreement pursuant to this Order.
J. ``Non-public Information'' means any information not in the
public domain furnished by the Platform Partner to Respondent in its
capacity as porter of the Entertainment Products, and (1) if written
information, designated in writing by the Platform Partner as
proprietary information by an appropriate legend, marking, stamp, or
positive written identification on the face thereof, or (2) if oral,
visual or other information, identified as proprietary information in
writing by the Platform Partner prior to the disclosure or within
thirty (30) days after such disclosure. Non-public Information shall
not include: (1) Information already known to Respondent, (2)
information which is
[[Page 35034]]
within the public domain through no violation of this order by
Respondent, or (3) information which is known to Respondent from a
person other than the Platform Partner not in breach of a confidential
disclosure agreement.
K. ``Acquisitions'' means the acquisitions of Alias and Wavefront
by SGI.
L. ``Commission'' means the Federal Trade Commission.
II
It is further ordered That,
A. Not later than March 31, 1996, Respondent shall enter into a
Porting Agreement that receives the prior approval of the Commission.
After such Commission approval, Respondent shall port the Entertainment
Products to the Platform Partner's computer systems as provided in the
Porting Agreement.
B. Respondent shall enter into such Porting Agreement either with
Digital Equipment Corporation, Hewlett-Packard Corporation, IBM
Corporation, or Sun Microsystems, Inc., or with another company that
receives the prior approval of the Commission. Provided however,
nothing in this Order shall prohibit Respondent from entering into
additional porting agreements with one or more platform partners
without the prior approval of the Commission.
C. The purpose of the Porting Agreement and the porting of the
Entertainment Products, pursuant to the Porting Agreement, is to ensure
that ported Entertainment Products compatible with the Platform
Partner's computer system will be marketed and sold in competition with
the Entertainment Products operating on Respondent's computer systems,
and to remedy the lessening of competition resulting from the proposed
Acquisitions as alleged in the Commission's complaint.
III
It is further ordered That, absent the prior written consent of the
proprietor of Non-public Information or unless expressly permitted by
any Porting Agreement, (1) Respondent shall use any Non-public
Information only in porting the Entertain Products pursuant to such
porting agreement, and (2) any persons involved in porting the
Entertainment Products shall not provide, disclose, or otherwise make
available any Non-public Information to other employees of Respondent.
IV
It is further ordered That Respondent shall:
A. Establish and maintain an open architecture, and publish the
Application Program Interfaces (``APIs''), for Respondent's computers
and operating systems in such manner that software developers and
producers may develop and sell Entertainment Software, for use on
Respondent's computers, in competition with Entertainment Software
offered by Respondent; and
B. Respondent shall extend to developers of Entertainment Software
the right to participate in ISV Programs on terms no less favorable to
such developers than those terms applicable to developers of other
software for use on Respondent's computers and operating systems.
C. The purpose of this Paragraph IV is to allow Entertainment
Software developers and producers to develop and sell Entertainment
Software for use on Respondent's computers and operating systems in
competition with Respondent, and to remedy the lessening of competition
resulting from the proposed Acquisitions as alleged in the Commission's
compliant.
V
It is further ordered That, within sixty (60) days after the date
this order becomes final and every sixty (60) days thereafter until
Respondent has fully complied with the provisions of Paragraph II of
this order, Respondent shall submit to the Commission a verified
written report setting forth in detail the manner and form in which it
intends to comply, is complying, or has complied with those provisions.
Respondent shall include in its compliance reports, among other things
that are required from time to time, a full description of the efforts
being made to comply with Paragraph II of this order.
VI
It is further ordered That, one year from the date this Order
becomes final, annually thereafter for the next four (4) years, and at
other times as the Commission may require, Respondent shall file with
the Commission verified written reports setting forth in detail the
manner and form in which it has complied and is complying with
Paragraphs II, III and IV of this order.
VII
It is further ordered That, for the purposes of determining or
securing compliance with this order, and subject to any legally
recognized privilege, upon written request and on reasonable notice to
Respondent, Respondent shall permit any duly authorized representatives
of the Commission:
A. Access, during office hours and in the presence of counsel, to
inspect and copy all books, ledgers, accounts, correspondence,
memoranda and other records and documents in the possession or under
the control of Respondent relating to any matters contained in this
order; and
B. Upon five (5) days notice to Respondent, and without restraint
or interference from Respondent, to interview officers or employees of
Respondent, who may have counsel present, regarding such matters.
VIII
It is further ordered That Respondent shall notify the Commission
at least thirty (30) days prior to any proposed change in Respondent,
such as dissolution, assignment, sale resulting in the emergence of a
successor, or the creation or dissolution of subsidiaries or any other
change that may affect compliance obligations arising out of this
Order.
IX
It is further ordered That this Order shall expire five (5) years
from the date it becomes final.
Analysis to Aid Public Comment on the Provisionally Accepted Consent
Order
The Federal Trade Commission (``the Commission'') has accepted, for
public comment, an agreement containing a proposed Consent Order from
Silicon Graphics, Inc. (``SGI''). The proposed Consent Order has been
placed on the public record for sixty (60) days for reception of
comments from interested persons. Comments received during this period
will become part of the public record. After sixty (60) days, the
Commission will again review the agreement and the comments received
and will decide whether it should withdraw from the agreement or make
final the agreement's proposed Order.
The Commission's investigation of this matter concerns the proposed
acquisitions of Alias Research Inc. (``Alias'') and Wavefront
Technology, Inc. (``Wavefront'') by SGI. The Commission's proposed
complaint alleges that Alias and Wavefront are two of the top three
developers of Unix-based, entertainment graphics and animation software
(``entertainment graphics software'') in the world. Entertainment
graphics software consists of compatible modelling, animation,
rendering, compositing and painting software tools for use on
entertainment graphics workstations in the production of high-
resolution, 2D and 3D digital images for film, video, electronic games,
interactive
[[Page 35035]]
programming, or other entertainment or educational, graphic media.
Entertainment graphics workstations are computer workstations
compatible with entertainment graphics software.
The Complaint alleges that the entertainment graphics workstation
and software markets are extremely concentrated with SGI the dominant
provider of entertainment graphics workstations, with over 90% of the
market. According to the complaint, although various other companies
manufacture workstations, most entertainment graphics software was
developed for use on SGI workstations and is available only for SGI
workstations. The complaint further states that alias and Wavefront
compete principally with SoftImage Inc., a subsidiary of Microsoft
Corp, and that other developers and producers of entertainment graphics
software produce particular software tools that are used as complements
rather than substitutes for the product suites offered by Alias,
Wavefront and SoftImage, or produce software suites that have found
limited customer acceptance relative to the entertainment graphics
software offered by Alias, Wavefront and Soft Image.
The complaint further alleges that Alias, Wavefront, and SoftImage
are the industry standards, and the ability to run Alias, Wavefront, or
SoftImage entertainment graphics software is critical for any computer
workstation manufacturer to compete successfully in the entertainment
graphics workstation market. According to the complaint, before the
proposed acquisitions, Alias negotiated with manufacturers of
workstations, other than SGI, to port its entertainment graphics
software products to those manufacturers' workstation platforms. The
complaint alleges that the effect of such agreements, if consummated,
would be to enable such workstation manufacturers to compete in the
entertainment graphics workstation market. Also, according to the
complaint, before the proposed acquisitions, SGI maintained an open
software interface for its entertainment graphics workstations,
sponsored independent software developer programs and shared with
developers of entertainment graphics software advance information
concerning new SGI products to facilitate and promote competitive
development of entertainment graphics software.
The Commission complaint also alleges that the acquisition would
have anticampetitive effects an would violate Section 7 of the Clayton
Act and section 5 of the Federal Trade Commission Act. The Commission
alleges further that anticompetitive effects of the acquisitions may
include, among other things, a foreclosure of workstation producers
other than SGI from significant, independent sources of entertainment
graphics software; SGI gaining proprietary, competitively sensitive
information pertaining to other workstation producers if such
workstation producers are able to get Alias or Wavefront entertainment
graphics software ported to their workstations; a foreclosure of, or an
increase in costs to, competitors to Alias and Wavefront in the
entertainment graphics software market in developing software for use
in connection with future entertainment graphics workstation products
developed by SGI; and causing consumers to pay higher prices for, or
reducing innovation competition among producers of, entertainment
graphics software and workstations.
The agreement containing consent order would, if finally accepted
by the Commission, settle charges that the acquisition may
substantially lessen competition in the entertainment graphics software
and hardware markets.
The order, accepted for public comment, contains provisions
requiring SGI to enter into a Commission-approved porting agreement, by
March 31, 1996, with Digital Equipment Corp., Hewlett-Packard Corp.,
IBM Corp. or Sun Microsystems, Inc., or another Commission-approved
platform partner, and port Alias's two major entertainment graphics
software programs, AnimatorTM and PowerAnimatorTM, and their
successor programs. The porting agreement, to be approved by the
Commission, will be an independent contract between SGI/Alias and a
platform partner. The order requires, however, that the porting
agreement contain provisions requiring SGI to exercise reasonable best
efforts to optimize the operation of the entertainment graphics
software in the context of the platform partner's computer systems;
requiring SGI to port the entertainment graphics software as soon as
reasonably practicable after the porting agreement is entered and
receives the approval of the Commission; and stating the method in
which the ported entertainment graphics software shall be sold and
marketed on terms competitive with those applicable to entertainment
graphics software compatible with SGI's computers. The order requires
an information firewall, specifically prohibiting the exchange of non-
public information between the platform partner porting the Alias
software and those SGI/Alias employees not participating in the porting
procedures. The purpose of the porting agreement and the porting of
Alias software is to remedy the lessening of competition resulting from
the acquisitions as alleged in the Commission's complaint.
The order also requires SGI to maintain an open architecture and
publish its application programming interfaces. Additionally, pursuant
to the order, SGI is required to refrain from discriminating against
those software companies, other than Alias and Wavefront, that develop
software for the SGI platform by continuing to maintain a software
development program with no less favorable terms than those development
programs SGI maintains for software developers who develop software for
applications other than for entertainment graphics. The purpose of the
open architecture and non-discrimination provisions is to allow
entertainment graphics software developers and producers to develop and
sell entertainment graphics software for use on SGI's computers and
operating systems in competition with SGI, and to remedy the lessening
of competition resulting from the acquisitions as alleged in the
Commission's complaint.
The purpose of this analysis is to facilitate public comment on the
proposed order, and it is not intended to constitute an official
interpretation of the agreement and proposed order or to modify in any
way their terms.
Donald S. Clark,
Secretary.
Dissenting Statement of Commissioner Mary L. Azcuenaga in Silicon
Graphics, Inc., File 951-0064
The proposed complaint in this matter alleges that the two
companies that Silicon Graphics proposes to acquire, Alias and
Wavefront, are two of the three leading developers and sellers of
entertainment graphics software in a highly concentrated market in
which entry is difficult and time consuming.\1\ The Commission alleges,
and I agree, that the elimination of competition between Alias and
Wavefront will substantially lessen competition in violation of section
7 of the Clayton Act.\2\ The evidence persuades me that the Commission
has a strong case under section 7 based on this horizontal combination,
and the obvious course of action would be to challenge the acquisitions
on this basis. Such a challenge, if successful, would leave
[[Page 35036]]
either Alias or Wavefront free to contract to produce entertainment
graphics software for other hardware manufacturers.
\1\Complaint paragraphs 10, 11, and 15.
\2\Complaint paragraph 16e.
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Instead, the Commission chooses to rely on vertical foreclosure
theory to impose requirements that fail to preserve existing
competition and that ultimately may create inefficiency and reduce
competition. To the extent that any vertical problems should concern
us, they would be resolved by stopping the horizontal transaction. The
proposed decision and order having failed to achieve straightforward
relief for the real competitive problem, the combination of Alias and
Waterfront, I dissent.
Dissenting Statement of Commissioner Roscoe B. Starek, III in the
Matter of Silicon Graphics, Inc. (Alias Research, Inc., and Wavefront
Technologies, Inc.)
File No. 951-0064
I respectfully dissent from the Commission's decision to initiate
this proceeding against Silicon Graphics, Inc. (``SGI''). The proposed
complaint alleges anticompetitive effects arising from the vertical
integration of the leading manufacturer of entertainment graphics
workstations, SGI, with two leading suppliers of entertainment graphics
software, Alias Research, Inc., and Wavefront Technologies, Inc.\1\ I
am not persuaded that these vertical acquisitions are likely
``substantially to lessen competition'' in violation of section 7 of
the Clayton Act, 15 U.S.C. 18. Moreover, even if one assumes the
validity of the theories of anticompetitive effects, the proposed order
does not appear to prevent the alleged effects and may create
inefficiency.
\1\The Commission apparently finds that the horizontal
combination of Alias and Wavefront is not anticompetitive on net:
the order addresses alleged vertical problems only.
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The Commission alleges, inter alia, that the acquisitions will
reduce competition through two types of foreclosure: (i) Nonintegrated
software vendors will be excluded from the SGI platform; and (ii) rival
hardware manufacturers will be denied access to Alias and Wavefront
software, without which they cannot effectively compete against SGI.\2\
Vertical foreclosure theories generally provide a weak basis for
Section 7 enforcement;\3\ and this double foreclosure scenario has
particular problems, both logical and factual.
\2\Precedent for this ``double foreclosure'' analysis lies
uncomfortably in A.G. Spalding & Bros., Inc., 56 F.T.C. 1125 (1960),
in which the Commission rejected Spalding's acquisition of Rawlings
Manufacturing Co. Before the acquisition, Spalding did not
manufacture baseball gloves, but instead purchased them for resale;
Rawlings manufactured baseball gloves and sold them to other
resellers. The Commission found that, ``by acquiring Rawlings,
Spalding can not only prevent competitors from purchasing (gloves)
from Rawlings but can also foreclose manufacturers of (gloves) from
access to Spalding as a purchaser thereof.'' 56 F.T.C. at 2269.
\3\For a description of criticisms of pre- and post-Chicago
theories of foreclosure, see David Reiffen and Michael Vita, Is
there New Thinking on Vertical Mergers? A comment, 63 ANTITRUST L.J.
______ (1995). See also Roscoe B. Starek, III, ``Reinventing
Antitrust Enforcement? Antitrust at the FTC in 1995 and Beyond,''
Remarks at ``A New Age of Antitrust Enforcement: Antitrust in
1995,'' Marina Del Rey, CA, Feb. 24, 1995.
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In general, the two types of foreclosure tend toward mutual
exclusion. The very possibility of excluding independent software
producers from the SGI-platform suggests the means by which competing
workstation producers will avoid foreclosure. The nonintegrated
software producers surely have incentives to supply the ``foreclosed''
workstation producers, and each workstation producer has incentives to
induce nonintegrated software suppliers to write for its platform.
Otherwise, ``we are left to imagine eager suppliers and hungry
customers, unable to find each other, forever foreclosed and left to
languish.''\4\ This predicament is improbable in the dynamic markets at
issue.
\4\Robert Bork, THE ANTITRUST PARADOX 232 (1978). Referring to
A.G. Spalding, Bork concludes that ``the Commission could cure (this
problem) by throwing an industry social mixer.''
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The acquisition appears very unlikely to give rise to significant,
anticompetitive foreclosure of nonintegrated software producers. The
proposed complaint's own description of the premerger state of
competition tends to exclude this possibility. The complaint alleges
that software producers other than Alias, Wavefront, and Microsoft's
SoftImage are either competitively insignificant or complementary, and
that there is virtually no likelihood of entry by producers of
substitutable SGI-compatible software owing to the entrenched positions
of Alias and Wavefront. If both propositions are true, then the merger
cannot appreciably foreclose software entry or expansion. One cannot
find both that the premerger supply elasticity of substitutable
software is virtually zero and that the merger would result in the
substantial post-merger foreclosure of software producers. In addition,
SGI has strong incentives to induce expanded supply of SGI-compatible
software: increasing the supply of compatible software (or of any
complementary product) increases the demand for SGI's workstations.
It is perhaps more plausible that the transaction could result in
reduced supplies of software, or higher costs of obtaining software,
for SGI's workstation rivals. Even so, this would be primarily a
consequence of the horizontal aspects of the transaction--i.e., the
combining of two of the three principal vendors of the relevant
software--rather than the vertical aspects. The Commission eschews an
enforcement action based on a horizontal theory, however, because of
its cost in foregone efficiencies. If the horizontal software
combination is efficiency-enhancing, the net anticompetitive impact of
these transactions comes from SGI's vertical integration with Alias and
Wavefront. If this is so, why not seek injunctive relief against the
vertical integration, and avoid the costs of the ineffective regulatory
remedy presented in the proposed order?
There are at least two reasons for rejecting this course of action.
The first is that there are demonstrable efficiencies associated with
exclusive arrangements between hardware and software vendors;\5\ the
second is that the merger's anticompetitive effects are commensurately
difficult to establish. More generally, in order to establish SGI's
preeminence among producers of entertainment graphics workstations, the
complaint alleges that entry into such hardware is extremely unlikely
because of the substantial costs of porting SGI-specific software
(especially the ``high end'' variants) to non-SGI platforms. This
undermines the contention that the merger would induce a substantial
lessening of competition in the entertainment graphics workstation
market.\6\
\5\A software producer's premerger exclusive commitment to SGI
suggests an efficiency rationale for its subsequent integration with
SGI: to avoid the expropriation by SGI of the software producer's
SGI-specific assets. This is a well established procompetitive
rationale for vertical mergers. See, e.g., Benjamin Klein, Robert G.
Crawford, and Armen A. Alchian, Vertical Integration, Appropriable
Rents, and the Competitive Contracting Process, 21 J.L. & ECON. 297
(1978); Kirk Monteverde and David J. Teece, Supplier Switching Costs
and Vertical Integration in the Automobile Industry, 13 BELL J.
ECON. 206 (1982a); Kirk Monteverde and David J. Teece, Appropriable
Rents and Quasi-Vertical Integration, 25 J.L. & ECON. 321 (1982);
Benjamin Klein, Vertical Integration as Organizational Ownership:
The Fisher Body-General Motors Relationship Revisited, 4 J.L., ECON.
& ORG. 199 (1988).
\6\All of the preceding assumes, arguendo, defining the relevant
markets that are most favorable to the Commission's theory of
competitive harm from vertical integration. Whether these narrowly
defined markets are appropriate is questionable. For example, to the
extent that PCs are becoming closer substitutes for entertainment
graphics workstations, it is increasingly unlikely that a
prerequisite for anticompetitive effects from a vertical merger--
premerger market power in a relevant market--is satisfied.
[[Page 35037]]
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Overall, I am unpersuaded that this transaction diminishes
competition in any relevant market.\7\ Even had I concluded otherwise,
however, I would not endorse the proposed consent, the terms of which
would require (1) SGI to port its software to a workstation competitor
and (2) SGI to maintain an open architecture and to provide access to
software developers on nondiscriminatory terms. The problems with
remedies of this sort are significant.\8\ First, requiring a firm to
sell an input to a rival is an ineffective remedy unless the Commission
also regulates terms of the sale. Otherwise, the seller simply raises
price and/or diminishes quality to the point where profitable entry is
precluded. The Commission could seek an order that confers such
regulatory power (the current order does not); however, the burden
associated with enforcing such an order--the Commission would be
required to determine the ``competitive price'' and `'competitive
quality'' for such porting rights--cannot be overestimated. For this
reason, the Commission historically has shied away from such remedies.
\7\The complaint also alleges that vertical integration of SGI
with Alias and Wavefront will foster anticompetitive price
discrimination against certain entertainment graphics customers. If
the customers already are differentiable according to their demand
elasticities for SGI workstations (or for the acquired software
products), it is not clear how the vertical integration enhances the
probability of price discrimination. To the extent that price
discrimination possibilities are enhanced, it would appear to be as
a result of the horizontal combination of Alias and Wavefront. And
if SGI and the combined Alias/Wavefront would have market power in
their respective complementary markets, the most likely effect of
vertical integration may be lower prices.
\8\For a discussion of why nondiscrimination remedies are
problematic, see Timothy Brennan, Why Regulated Firms Should Be Kept
Out of Unregulated Markets: Understanding the Divestiture in U.S. v.
AT&T, 32 Antitrust Bulletin 741 (1987).
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Second, requiring SGI to port entertainment graphics software to
third parties will likely create substantial inefficiencies. The
evidence clearly suggests that there are efficiencies associated with
exclusive arrangements between software and hardware vendors; such
arrangements existed well before the current transaction was proposed.
Preventing SGI from availing itself of those efficiencies will not
benefit consumers.
[FR Doc. 95-16453 Filed 7-3-95; 8:45 am]
BILLING CODE 6750-01-M