FTC SETTLEMENT WOULD PRESERVE COMPETITION ON PRICE AND INNOVATION FOR ENTERTAINMENT GRAPHICS SOFTWARE AND HARDWARE

Silicon Graphics, Inc.'s plan to acquire two of the world's three leading entertainment graphics software firms could go forward under a settlement agreement it has reached with the Federal Trade Commission to resolve alleged antitrust law violations. The FTC's goal in bringing the case is to preserve competition on the basis of price and innovation for software and hardware involved in producing sophisticated computer-based graphics for the entertainment industry. The settlement would require Silicon Graphics to take steps to ensure that other companies that develop and sell such software and the workstations to run it can compete with Silicon Graphics.

FTC Chairman Robert Pitofsky noted that the settlement "is designed to preserve competition in a dynamic, high-tech industry, but to do so with care. The remedy is tailored to provide the opportunity for future entry in an important and growing market, while still permitting the pro-customer efficiencies that would be generated by the transaction."

Silicon Graphics plans to acquire Alias Research Inc. and Wavefront Technologies, Inc. in two interdependent transac- tions valued at total of nearly $500 million. Based in Moun- tain View, California, Silicon Graphics had total revenues of approximately $1.4 billion in 1994. Alias is based in Toronto, Canada, and had $38 million in sales in 1994. Wavefront, based in Santa Barbara, California, had sales exceeding $27 million in 1994. The market for entertainment software, which generates animated images, is expected to grow quickly over the next few years, the FTC staff said.

The software at issue is used in producing high- resolution two-dimensional and three-dimensional digital images for movies (for example, such software has been used to produce special effects in the recent movies, "Jurassic Park," "Forrest Gump" and "Terminator 2"), electronic games, inter- active programming and other graphic media. Silicon Graphics has a 90 percent share of the market for the workstations that run such software, according to the FTC complaint detailing the charges in this case. Although other companies manufac- ture workstations with graphics capabilities, entertainment graphics software has been developed almost exclusively for use on Silicon Graphics workstations, the FTC said. Moreover, Alias, Wavefront and the other leading competitor for this software, SoftImage Inc. (owned by Microsoft Corp.), are industry standards and other workstations must be able to run their software in order to compete successfully, the Commission said.

Prior to the announcement of the acquisitions at issue, the FTC alleged, Alias negotiated with other workstation manufacturers to enable its entertainment graphics software to run on their computer operating systems. Silicon Graphics also maintained an open software interface for its entertain- ment graphics workstations, which meant that independent software developers could access specification information about Silicon Graphics workstations to ensure that their products would run on them. It also sponsored independent software developer programs, and shared advance information about its new products with software developers so as to promote competitive development of new entertainment graphics software, the FTC alleged.

Absent the requirements in the Commission's settlement with Silicon Graphics, the company's acquisition of Alias and Wavefront could substantially reduce competition for enter- tainment graphics software and workstations in violation of antitrust laws by, among other things:

• foreclosing access by other workstation producers to significant, independent sources of entertainment graphics software;
  
  
• giving Silicon Graphics proprietary, competitively sensitive information about other workstation producers (Silicon Graphics--06/09/95)
  
  if such producers were able to get Alias and Wavefront software ported to their workstations;
  
  
• foreclosing, or increasing the costs to, competitors of Alias and Wavefront that are developing software for Silicon Graphics workstations;
  
  
• raising the barriers to entry by new competitors by making it necessary for them to enter on two levels, workstations and software;
  
  
• making it easier for Silicon Graphics to use its market power in workstations to engage in price discrimination and raise prices to entertainment customers; and
  
  
• leading to higher prices, or reducing innovation, for entertainment graphics software and workstations.
  
  The proposed consent agreement to settle these charges, announced today for public comment, would:
  
  
• require Silicon Graphics to enter into a Commission- approved porting agreement, by March 31, 1996, with Digital Equipment Corp., Hewlett-Packard Corp., IBM Corp., Sun Microsystems, Inc., or another FTC-approved partner, by which Alias's two major entertainment graphics software programs (Animator and PowerAnimator and their successor programs) could be run on their porting partner's computer system;
  
  
• prohibit the release of non-public information from the platform partner porting the Alias software to those Silicon Graphics or Alias employees not participating in the porting process;
  
  
• require Silicon Graphics to maintain an open architecture and to publish its application programming interfaces so that software developers other than Alias and Wavefront could develop entertainment graphics software for use on Silicon Graphics workstations; and
  
  
• require Silicon Graphics to offer independent enter- tainment graphics software companies participation in its software development programs on terms no less favorable than it offers other types of software companies.

The settlement also contains various reporting provisions that would assist the FTC in monitoring Silicon Graphics' compliance.

The Commission vote to accept the proposed consent agreement for public comment was 3-2 with Commissioners Mary L. Azcuenaga and Roscoe B. Starek, III dissenting. In her dissenting statement, Azcuenaga said the evidence persuades her that the Commission should challenge the horizontal combination of Alias and Wavefront. "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 competi- tion," Azcuenaga said. "To the extent that any vertical problems should concern us, they would be resolved by stopping the horizontal transaction," she said.

Starek said in his dissenting statement that he is not persuaded that these vertical acquisitions are likely "sub- stantially to lessen competition" in violation of antitrust law. "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," Starek said.

The proposed consent agreement will be published in the Federal Register shortly and will be subject to public comment for 60 days, after which the Commission will decide whether to make it final. Comments should be addressed to the FTC, Office of the Secretary, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580.

NOTE: A consent agreement is for settlement purposes only and does not constitute an admission of a law violation. When the Commission issues a consent order on a final basis, it carries the force of law with respect to future actions. Each viola- tion of such an order may result in a civil penalty of $10,000.

Copies of the complaint, proposed consent agreement, an analysis of the agreement to assist the public in commenting, and the Commissioners' statements are available from the FTC's Public Reference Branch, Room 130, same address as above.

(FTC File No. 951 0064)