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High Tech Repairs: Are Giants Hogging The Pie?


Information Processing

HIGH-TECH REPAIRS: ARE GIANTS HOGGING THE PIE?

In the mid-1980s, ex-Marine Paul Hernandez was happily cashing in on one of the most lucrative revenue sources in high technology. His Image Technical Service Inc. in Sacramento successfully challenged Eastman Kodak Co. for the highly profitable business of maintaining Kodak microfilm and microfiche gear. By 1985, he says, he was maintaining more such gear in the state capital than Kodak was. Then, Kodak struck back. Nationwide, it stopped selling spare parts for new models to servicers. Says Hernandez: "Our business was drained dramatically."

Now, the fight between ITS and Kodak is headed for the Supreme Court and has become the focus of an intense struggle over who gets to repair all sorts of high-tech equipment--everything from computers and office phone systems to medical equipment. Indeed, a Supreme Court ruling could have ramifications in many businesses. For example, a ruling that permits manufacturers to withhold spare parts from competitors could have a major impact in the auto service business, too.

SOME BIG FRY. In high tech, the issue goes straight to the bottom line. With profit margins on product sales shrinking, manufacturers seek more money in service. They also contend that shoddy repairs by outsiders could hurt their customers. So they're battling the outside repair outfits that they once tolerated. And they're often winning. Donald F. Blumberg, a Fort Washington (Pa.) consultant, estimates that customers may spend $1 billion a year extra for service because of high-tech manufacturers' success in choking off competitors.

The service competitors include major independents such as TRW and Bell Atlantic Business Systems Services (formerly Sorbus), as well as big equipment makers such as Digital Equipment, NCR, and IBM. Those companies are adding service revenue by fixing other suppliers' gear. Together the outsiders have $8 billion of the $52 billion U. S. high-tech service market (chart), says Blumberg. He figures their share could rise 50% if the Supreme Court sides with ITS--or slide if they lose.

The path to the Supreme Court has been twisting. A federal judge in San Francisco threw out a lawsuit against Kodak by ITS and others in 1988. But an appellate panel ordered it back for trial. On June 11, the Supreme Court agreed to hear Kodak's appeal for dismissal. It may grant Kodak's appeal or send the matter back for trial without considering the merits of the case.

Lower courts would welcome direction from the Supreme Court. While some plaintiffs' suits have been dismissed, others have hit the jackpot. Prime Computer Inc. was assessed treble damages of $25 million last year for steering customers toward its hardware maintenance. Hewlett-Packard Co. had to pay $2 million for changing the terms of its maintenance contracts in a way that harmed a competitor. Both cases are on appeal. IBM has also been sued by competitors, even though it makes spare parts freely available under a 1956 consent decree that ended a government antitrust suit. General Electric, Wang Laboratories, and Northern Telecom have also been enmeshed in legal battles with outside service companies.

Top computer makers, the Justice Dept., and the big auto makers have filed briefs on Kodak's behalf. They argue that equipment makers couldn't possibly succeed with a monopolistic strategy because if they tried to extract unreasonable profits from parts and service, word would quickly spread, and customers would switch brands. The independents counter that information doesn't spread that easily, and that only a few large customers consider the cost of service in selecting equipment.

LEVERAGE. Technology is also making life harder for companies in the outside-maintenance business. Hardware is generally more reliable now, and many machines diagnose themselves with special software that the makers zealously guard. Creating competing diagnostic software is too costly for small independents. It's a different story in Britain, where outsiders do better because major customers won't buy gear from manufacturers that won't cooperate with designated third-party service companies.

Customers haven't exerted that kind of leverage in the U. S.--yet. But if outside maintenance companies are shunted aside, the biggest losers could be their customers, who might end up paying more for service and getting less.Peter Coy in New York


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