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252 The Market and Business

39.

J. Fred Weston, Big Corporations: The Arguments For and Against Breaking Them
Up, Business and Its Changing Environment, proceedings of a conference held by the
Graduate School of Management at UCLA, July 24-August 3, 1977, pp. 232-33; see
also John M. Blair, Economic Concentration: Structure, Behavior, and Public Policy
(New York: Harcourt Brace Jovanovich, 1972).
40. J. A. Schumpeter, Capitalism, Socialism, andDemocracy (New York: Harper, 1943), pp.
79 ff.
41. L. Von Mises, Planned Chaos (New York: Foundations for Economic Education,
1947).

CASES FOR DISCUSSION


Playing Monopoly: Microsoft J

On November 5, 1999, Bill Gates, then the richest man in the world, leamed that a federal
judge had just issued findings of fact declaring that his company, Microsoft, enjoys
monopoly power, and that it had used its monopoly power to harm consumers and crush
competitors to maintain its monopoly. On the day the judgment was issued, Microsoft stock
began its decline. Five months later, on April 3, 2000, the same judge, Thomas Penfield
Jackson, issued a sec- ond verdict, concluding on the basis of the findings of fact that
Microsoft had violated antitrust law and was subject to the penalties allowed by the law.
The price of Microsoft stock plunged, bringing the entire stock market down with it. Two
short months later, on June 7, 2000, Judge Jackson ordered that Microsoft should be broken
up into two separate companiesone devoted to operating systems and the other to
applications such as word processing, spreadsheets, and web browsers. With the price of
Microsoft stock now skidding, Gates, who was no longer the richest man in the world,
vowed that Microsoft would appeal this verdict and would never be broken apart.1
Bill Gates was bom in 1955 in Bremerton, Washington. When he was 13 years old,
his grammar school acquired a Computer terminal, and by the end of the year he had
written his first Software program (for playing tic-tac-toe). During high school, he held a
few entry-level programming jobs, and when he finished high school, he set up his first
company, named Traf-O-Data. Traf-O- Data sold a Computer that used the new Intel
8008 microprocessor to count cars being driven past a fixed point. Gates enrolled in
Harvard University in 1974, but quickly lost interest in classes and quit to start a Software
business in Albuquerque, New Mexico, with a friend, Paul Allen, whom he had known
since grammar school in Seattle. At the time, the first small but primitive personal
computers were being manufactured as kits for hobbyists by small engineering companies.
These computers, like the Altair 8080 Computer (which used Intels

Ethics in the Marketplace 253

new 8080 microprocessor, had no keyboard, no screen, and only 256 bytes of memory),
had no accompanying Software and were extremely difficult to program because they had
to use machine code (consisting entirely of sequences of zeros and ones) that is virtually
incomprehensible to humans. Gates and Allen together revised a program called BASIC
(Beginners All-purpose Symbolic Instruction Code, a program written several years earlier
by two engineers who gave it away for free), which allowed users to write their own
programs using an understandable set of English instructions, and they adapted it so that it
would work on the Altair 8080. They sold the adaptation to the maker of the Altair 8080 for
$3000.
In 1977, Apple Computer marketed the first personal Computer (PC) aimed at
consumers, and by 1978, more than 300 dealers were selling the Apple II. That year,
Gates and Allen began writing Software for the Apple U, renamed their company
Microsoft, and moved it to Seattle, where, with 13 employees, it ended the year with
revenues of $1.4 million. In 1979, two hob- byists developed VisiCalc, the first spreadsheet
program, for the Apple II, and Microsoft developed MS Word, a rudimentary word
processor for the Apple
II. With these new Software applications, sales of the Apple II took off and the
personal Computer market was bom. By 1980, Microsofts revenues had reached
$8 million.
1980 was the year that IBM belatedly decided to enter the rapidly growing market
for personal computers. By now many other companies had flocked into the PC market,
including Radio Shack, Commodore, COMPAQ, AT&T, Xerox, DEC, Data General, and
Wang. By 1984, some 350 companies around the world would be making PCs. Because
IBM needed to enter the market quickly, it decided to assemble its Computer from
components that were already available on the market. A key component that IBM needed
for its Computer was an oper- ating system. An operating system is the Software that
allows application programs (like a word processor, spread sheet, browser, or game) to
run on a particular machine. Every Computer must have an operating system or it cannot
run any application programs. The operating system coordinates the various components of
the Computer (keyboard inputs, monitor, printer, ports, etc.) and contains the applications
programming interface (API), which consists of the codes that applications use to
command the Computer to carry out its func- tions. AppUcations programs are written so
that they will run on a specific operating system by making use of that operating systems
API to make the Computer carry out the programs commands, and a program written for
one operating system will not work on another operating system. Most of the companies
making PCs had developed their own operating systems, although several made use of one
called CP/M, which was written to work on many different computers. AppUcations
developed to run on CP/M could run on any Computer using CP/M. This meant that an
application did not have to be rewritten for each different kind

254 The Market and Business


of Computer, but could be written once for CP/M and would then run on any Computer
using CP/M.
IBM needed an operating system quickly and approached the maker of CP/M for a
license to use CP/M, but was tumed down. The somewhat desperate IBM representatives
then met with Bill Gates to ask whether Microsoft had one available. Although Microsoft at
the time did not own an operating system, Bill Gates told IBM that he could provide one to
them. Immediately after the IBM meeting, Bill Gates went to a friend who, he knew, had
written an operating system that was a knock-off of CP/M and that could work on the
Computer IBM was planning. Without telling his friend about the meeting with IBM, Gates
offered to buy his friends operating system for $60,000. The friend agreed. After some
tweaking, Microsoft licensed the system to IBM as MS-DOS, with the proviso that
Microsoft could also license MS-DOS to other Computer manu- facturers. When IBM
started mass producing its personal Computer in 1981 (IBMs share of the market went
from nothing in 1981, to 10 percent in 1983, and 40 percent in 1987) and other Computer
makers began producing copies of IBMs Computer, MS-DOS became the Standard
operating system for personal computers built according to IBMs standards. Bill Gates
company was on its way to becoming a billion dollar firm.
Because an application program has to be written to work on a specific operating
system, and because so many personal computers were now using MS-DOS, Software
companies were much more willing to produce programs for the large market of MS-DOS
users than for the much smaller numbers of people using competing operating systems.
Thousands of new Software programs were developed for MS-DOSincluding
Microsofts own spreadsheet, Multiplan, and its word processor, MS Wordinitiating
what some have called a virtuous circle. In this virtuous circle, the more people that use an
operating system, the more that Software companies are willing to write programs for that
operating system. The more Software programs they write for the operating system, the
more people want to buy that operating system. Because of this virtuous circle or network
effect, the proportion of computers using MS- DOS gradually increased, and the
proportion of computers using other operating systems (such as CP/M, Apple computers,
or Ataris or Commodores) gradually declined.
However, in 1984, Apple Computer developed an innovative new operating system
for its own computers that used intuitive graphics or pictures that let users issue commands
to the Computer by selecting icons and pull-down menus on the screen using a mouse. The
new operating system was tremendously pop- ular, and Apple sales began to climb. In 1987,
however, Microsoft began selling Windows, a new operating system for IBM-compatible
computers that copied Apples operating system. Unlike MS-DOS, which had used obscure
combina- tions of characters to issue commands to the Computer, Windows used graphics

Ethics in the Marketplace 255

that were similar to Apples, had virtuaUy the same pull-down menus and icons, and the
same usage of the same mouse. Apple sued Microsoft on the grounds that, in copying the
look and feel of their operating system, Microsoft had stolen a key piece of their
copyrighted property. Apple lost the suit and, with the loss of its key Software advantage,
its market share whithered away.
The early versions of Windows still required that MS-DOS be loaded onto the
Computer, but in 1995 Microsoft issued Widows 95, which was a stand-alone operating
system that dispensed with MS-DOS. In 1998, Microsoft issued Windows 98, and in 2000
it issued its Millennium version of Windows. By the end of the century, Microsoft
controlled 90 percent of the personal Computer operating system marketa virtual
monopolyand Bill Gates was fabulously rich.
In the early 1990s, however, two threats to Microsofts monopoly had emerged. 2
One was Netscape, an Internet browser, and the other was Java, a programming
language. The Internet is a network through which digital infor- mation, pictures, sounds,
text, and other digital data can be sent from one Computer to another. To make these data
usable, a users Computer must be connected to the Internet and must have a Software
program called a browser. The browser takes the digital data that come through the
Internet and transforms them into an intelligible picture or text that can be displayed on the
users Computer screen or into a sound that can be played on the computers speakers.
However, a browser is not only capable of displaying digital data that come over the
Internet; it can also execute the instructions of Software programs, whether those
programs are sent over the Internet or reside in the users own Computer. In this respect, a
browser functions much like an operating system. Some people predicted that someday
every Computer might rely on a browser instead of an operating system to run Software
programs. Although the browser would still need some rudimentary operating system to
run, this operating system did not have to be Windows. Windows could become obsolete.
Netscape, a company that began selling a browser named Navigator on December 15,
1994, quickly captured 70 percent of the browser market. In May 1995, Bill Gates wrote
an internal memo to his executives waming:
A new competitor "born" on the Internet is Netscape. Their browser is dominant,
with a 70% usage share, allowing them to determine which network extensions
will catch on. They are pursuing a multi-platform strategy where they move the
key API [applications programming inter- face] into the client to commoditize the
underlying operating system.
In addition to the browser threat, Microsoft was also worried about Java, a
programming language that Sun Microsystems, a manufacturer of Computer

256 The Market and Business


hardware and Software, had developed in May 1995. Programs that are written in the Java
language can operate on any Computer equipped with the Java Software, regardless of the
operating system the Computer used. In this respect, Java Software also functioned like an
operating system and also threatened to make Windows obsolete. In an internal memo, a
Microsoft senior executive stated that Java was our major threat, and in September 1996,
Bill Gates wrote an e-mail saying, This scares the hell out of me, and asked managers to
make it a top pri- ority to neutralize Java.
To make matters worse, Java and Netscape joined forces. Netscape agreed to
incorporate the Java Software into its Navigator browser so that any programs written in
Java would work on a Computer that was using Netscape. This meant that short programs
written in Java could be sent over the Internet and then run on the users Computer through
its Netscape browser. This also meant that Java programs did not need Windows, but could
run on any Computer using any operating system so long as it was also using Netscapes
Navigator browser. Because Java was now being distributed together with Netscape, the
number of computers equipped with Java rapidly multiplied. A Microsoft executive
fearfully wrote in a memo that Netscapes browser had become the major distribution
vehicle for Java.
According to the findings of fact accepted by the judge presiding over the
Microsoft antitrust trial, Microsoft quickly embarked on a campaign to undercut the threat
that Netscape now posed to its monopoly. First, a team of Microsoft executives met with
Netscapes executives in June 1995. Microsofts people proposed that Microsoft should
provide the browser for Windows computers while Netscape should provide browsers for
all other computersessen- tially the 10 percent of computers that ran on Apples operating
system, on OS/2, or on other relatively minor operating systems. A memo written the next
day by a Microsoft executive who was present stated that a goal of the meeting was to
establish Microsoft ownership of the Internet client platform for Win95. Netscape refused
to go along with this plan to divide the browser market. Microsoft then refused to share
with them the codes for Windows 95 so that Netscape would be unable to develop a
browser for Windows 95. Netscape had to wait several months after Windows 95 was
released before it finally got hold of its codes and was finally able to develop a new version
of Navigator that would take advantage of the Windows 95 applications interface.
Microsoft also developed its own browser by borrowing a browser program it had
earlier licensed from Spyglass Inc, naming it Internet Explorer, and copying many of
Netscapes features onto it. (The chairman of Spyglass later complained that whenever you
license technology to Microsoft, you have to understand it can someday build it itself, drop
it into the operating system, and put you out of that business.) Unfortunately, when
Microsoft tried to sell its browser in 1995, users felt it was inferior to Netscape and sales
lagged.

Ethics in the Marketplace 257

Microsoft continued working on its browser, and its fourth version, Internet Explorer
4.0, released in late 1997, finally began to be compared favorably to Netscapes browser.
Still, few people were buying Internet Explorer. Microsoft then decided to use its operating
system monopoly to undercut Netscape. In February 1997, Christian Wildfeuer, a
Microsoft executive, suggested in an internal memo that it would be very hard to increase
browser share on the mer- its of Internet Explorer 4 alone. It will be more important to
leverage our Operating System asset to make people use Internet Explorer instead of
Netscapes Navigator. If Internet Explorer was bundled together with Windows, so that
when Windows was installed on a Computer Internet Explorer was also automatically
installed, then users would tend to use Internet Explorer rather than go through the expense
and trouble of purchasing and installing Netscape. Accordingly, Microsoft incorporated a
copy of Internet Explorer into Windows 95 that automatically installed itself when
Windows was installed. Windows 98 went farther by integrating Internet Explorer into the
operating system so that it was extremely difficult for a user even to remove Internet
Explorer. Moreover, when a user uninstalled Internet Explorer, it stayed in the Computer
and still appeared when Windows 98 was running certain commands. Although this integration made Windows 98 run more slowly and consumed resources on the users
Computer, it also made it much more ifficult and risky for users to try to replace Internet
Explorer with Netscape Navigator.
Microsoft did more than make users accept Internet Explorer when they purchased
Windows. According to the courts findings of fact, Microsoft required any Computer
maker that wanted Windows on its computers to agree that it would not remove Windows
Explorer and would not promote Netscapes browser. If a Computer maker also agreed to
not even give its customers a copy of Netscape, Microsoft discounted the price of
Windows. Because Microsofts monopoly meant that Computer manufacturers either had
to instali Windows on their computers or make them virtually useless, manufacturers had
no choice but to sign the agreements that shut Netscape out of the market. Although users
were still able to buy a copy of Netscape from a retailer, the number of users doing this
declined. Not only would purchasing a copy of Netscape require paying extra for Software
that would do much of what their installed Internet Explorer could already do, but it also
required that they perform the tricky task of remov- ing Internet Explorer from their
computers and installing Netscape in its place. Not surprisingly, Netscapes share of the
market rapidly dropped, and Internet Explorers rapidly rosea successful outcome of
Wildfeuers strategy to leverage our Operating System asset to make people use Internet
Explorer instead of Navigator.
Microsoft dealt with its Java threat by asking Sun Microsystems for the right to
license and distribute Java with its Windows system. Sun Microsystems gave Microsoft
that right, not knowing that Microsoft was planning to change

258 The Market and Business


Java. The version of Java that Microsoft distributed was a version that incorporated several
changes that would no longer allow regular Java programs to run on computers using
Microsofts Java. Thus, there were now two versions of Java, and the version that most
users were getting installed with their Windows computers was a version that was
incompatible with the regular version of Java and that Microsoft now owned. Microsoft had
apparently planned this move because an earlier internal Microsoft document stated that it
was a strategic objective for Microsoft to kill cross-platform Java by expanding the
polluted Java market a reference to Microsofts own polluted version of Java. Because
all Windows based computers now incorporated a copy of Microsofts Java, developers
began to write programs for Microsofts Java, not Suns. Microsoft encouraged these
developers by offering them special technical support and other inducements. In effect,
Microsoft had tumed Java into a part of Windows so that there was now little threat that
Windows would be rendered obsolete by Java.
But on May 18, 1998, the U.S. Department of Justice (DOJ) filed an antitrust suit
against Microsoft in Judge Jacksons court, claiming that the company had violated the
Sherman Antitrust Act by engaging in a pattem of anti- competitive practices designed to
thwart browser competition on the merits, to deprive customers of choice between
altemative browsers, and to exclude Microsofts Internet browser competitors, especially
Netscape and Java.3 The DOJ claimed that Microsoft had violated the antitrust act in four
ways: (a) Microsoft had forced Computer companies that used its Windows operating system to sign agreements that they would not license, distribute, or promote Software products
that competed with Microsofts own Software products; (b) Microsoft tied its own
browser, Internet Explorer, to its Windows operating system so that customers who
purchased Windows also had to get Internet Explorer, although these were separate products
and tying the two products together degraded the performance of Windows; (c) Microsoft
had attempted to gain a monopoly in the Internet browser market by forcing Computer
companies that used its Windows operating system to agree to leave Internet Explorer as the
default browser and to not preinstall or promote the browser of any other company; and (d)
Microsoft had a monopoly in the market for PC operating systems and had used
anticompetitive and predatory tactics to maintain its monopoly power.
On June 7, 2000, Judge Jackson found Microsoft guilty of Counts b, c and d, and
ordered that the company be broken up into two separate companies one to develop and
market operating systems and the other to develop and market all other Microsoft
programs. Although the judge could have sim- ply ordered Microsoft to cease engaging in
the illegal practices, he feared that policing such an order would require so much
govemment oversight that it was

Ethics in the Marketplace 259

simply not practical. The judge also ruled that the two new companies would not be
allowed to share any technical information with each other that they did not share with all
their other customers. Nor could Microsoft punish or threaten any Computer
manufacturers for distributing or promoting the products or services of its competitors.
Finally, Judge Jackson ordered that Microsoft had to let Computer manufacturers remove
any Microsoft applications from its Windows operating system.4 The Judge ruled,
however, that Microsoft would not have to implement his orders undi it had time to appeal
his decision.
In a defensive white paper, Microsoft stated:
Antitrust policy seeks to promote low prices, high output, and rapid innovaton. On all three
measures, the personal Computer Software industry generally and Microsoft in particular is a
model of competitiveness. Market share numbers do not reflect the highly dynamic nature of
the Software industry, where entire business segments can disappear virtually overnight as new
technologies are developed.

Microsoft claimed that it was responsible for much of the innovation that characterized the
Software industry. In addition, it claimed that its actions, including its decision to give
Internet Exporer away for free with Windows and its decision to improve Java by
changing it, were all done to help consumers and give them more value for their money.
QUESTIONS

1. Identify the behaviors that you think are ethically questionable in the history of
Microsoft. Evaluate the ethics of these behaviors.
2. What characteristics of the Software industry do you think created the monopoly
market that Microsofts operating system enjoyed? Evaluate this market in terms
of utilitarianism, rights, and justice (your analysis should make use of the
textbooks discussion of the effects of monopoly markets on the utility of
participants in the market, on the moral rights of participants in the market, and on
the distribution of benefits and burdens among participants in the market), giving
explicit examples from the Software industry to illustrate your points.
3.
In your view, should the govemment have sued Microsoft for violation of the
antitrust laws? In your view, was the final penalty of Judge Jackson fair to
Microsoft? Explain your answers.
4.
Who, if anyone, is harmed by the kind of market that Microsofts operating
system enjoyed? Explain your answer. What kind of public policies, if any, should
we have to deal with industries like the operating system industry?

260 The Market and Business


NOTES

1.

This and the following information is based on Sandy McMurray, Why Microsoft
Lost in Court, The Toronto Sun, June 14, 2000, p. 73; Jared Sandberg, Bills Many
TrialsNewsweek, April 17, 2000, p. 48; Eun-Kyung Kim, Judge Rules Against
Microsoft, Associated Press, April 3, 2000; David Lawsky, Judge Finds Microsoft
Broke Antitrust Law, Reuters, April 3, 2000; James V. Grimaldi, Judge Says
Microsoft Broke Antitrust Law, Washingon Post, p. 1. For histories of Microsoft in
particular and the Software industry in general, see James Wallace and Jim Erickson,
Hard Drive: Bill Gates and the Making of the Microsoft Empire (New York: Harper
Collins, 1992); Michael A. Cusumano and Richard W. Selby, Microsoft Secrets: How
the Worlds Most Powerful Company Creates Technology\ Shapes Market s, and
Manages People (New York: Free Press, 1995); H. W. Brands, Masters of Enterprise
(New York: The Free Press, 1999).
2.
This and the following paragraphs are based on Thomas Penfield Jackson, United
States District Court for the District of Columbia, Findings of Fact, in United States
of America v. Microsoft Corporation, Civil Action No. 98-1232; posted on November 8,
1999 at http://www.seattletimesxom/microsoft/ruling.html.
3.
United States of America v. Microsoft Corporation, Civil Action No. 98-1232,
Complaint filed in the United States District Court for the District of Columbia, May
18, 1998; posted at http://www.usdoj.gov/atr.
Excerpts From Judges Order, Associated Press Online, June 7, 2000.
A Japanese Bribe

In July 1976, Kukeo Tanaka, former prime minister of Japan, was arrested on charges of
taking bribes ($1.8 million) from Lockheed Aircraft Company to secure the purchase of
several Lockheed jets. Tanakas secretary and several other govemment officials were
arrested with him. The Japanese public reacted with angry demands for a complete
disclosure of Tanakas dealings. By the end of the year, they had ousted Tanakas successor,
Takeo Miki, who was widely believed to have been trying to conceal Tanakas actions.
In Holland that same year, Prince Bemhard, husband of Queen Juliana, resigned
from 300 hundred positions he held in govemment, military, and pri- vate organizations.
The reason: He was alleged to have accepted $1.1 million in bribes from Lockheed in
connection with the sale of 138 F-104 Starfighter jets.
In Italy, Giovani Leone, president in 1970, and Aldo Moro and Mariano Rumor, both
prime ministers, were accused of accepting bribes from Lockheed in connection with the
purchase of $100 million worth of aircraft in the late 1960s. All were excluded from
govemment.
Scandinavia, South Africa, Turkey, Greece, and Nigeria were also among the 15
countries in which Lockheed admitted to having handed out payments and at least $202
million in commissions since 1970.

Ethics in the Marketplace 261

Lockheed Aircrafts involvement in the Japanese bribes was revealed to have begun
in 1958 when Lockheed and Grumman Aircraft (also an American firm) were competing
for a Japanese Air Force jet aircraft contract. According to the testimony of Mr. William
Findley, a partner in Arthur Young & Co. (auditors for Lockheed), in 1958 Lockheed
engaged the services of Yoshio Kodama, an ultra right-wing war criminal and reputed
underworld figure with strong political ties to officials in the ruling Liberal Democratic
Party. With Kodamas help, Lockheed secured the govemment contract. Seventeen years
later, it was revealed that the CIA had been informed at the time (by an American embassy
employee) that Lockheed had made several bribes while negotiating the contract.1
In 1972, Lockheed again hired Kodama as a consultant to help secure the sale of its
aircraft in Japan. Lockheed was desperate to sell planes to any major Japanese airline
because it was scrambling to recover from a series of financial disasters. Cost overruns on
a govemment contract had pushed Lockheed to the brink of bankruptcy in 1970. Only
through a controversial emergency govemment loan guarantee of $250 million in 1971 did
the company narrowly avert disaster. Mr. A. Cari Kotchian, president of Lockheed from
1967 to 1975, was especially anxious to make the sales because the company had been
unable to get as many contracts in other parts of the world as it had wanted.
This bleak situation all but dictated a strong push for sales in the biggest untapped
market left-Japan. This push, if successful, might well bring in revenues upwards
of $400 million. Such a cash inflow would go a long way towards helping to
restore Lockheed's fiscal health, and it would, of course, save the jobs of
thousands of the firm's employees. [Statement of Cari Kotchian]2
Kodama eventually succeeded in engineering a contract for Lockheed with AllNippon Airways, even beating out McDonnell Douglas, which was actively competing
with Lockheed for the same sales. To ensure the sale, Kodama asked for and received
from Lockheed about $9 million during the period from 1972 to 1975. Much of the money
allegedly went to then-prime minister Kukeo Tanaka and other govemment officials, who
were supposed to intercede with All-Nippon Airlines on behalf of Lockheed.
According to Mr. Cari Kotchian, I knew from the beginning that this money was
going to the office of the prime minister.3 He was, however, per- suaded that, by paying
the money, he was sure to get the contract from All- Nippon Airways. The negotiations
eventually netted over $1.3 billion in contracts for Lockheed.
In addition to Kodama, Lockheed had also been advised by Toshiharu Okubo, an
official of the private trading company, Marubeni, which acted as

262 The Market and Business


Lockheeds official representative. Mr. A. Cari Kotchian later defended the pay- ments,
which he saw as one of many Japanese business practices that he had accepted on the
advice of his local consultants. The payments, the company was convinced, were in keeping
with local business practices.4
Further, as l've noted, such disbursements did not violate American laws. I should
also like to stress that my decision to make such payments stemmed from my
judgment that the (contracts) would provide Lockheed workers with jobs and thus
redound to the benefit of their dependents, their communities, and stockholders of
the Corporation. I should like to emphasize that the payments to the so called "high
Japanese govemment officials" were all requested by Okubo and were not brought
up from my side. When he told me "five hundred million yen is necessary for such
sales/' from a purely ethical and moral standpoint I would have declined such a
request. However, in that case, I would most certainly have sacrificed commercial
success IF Lockheed had not remained competitive by the rules of the game as then
played, we would not have sold [our planes]. ... I knew that if we wanted our
product to have a chance to win on its own merits, we had to follow the functioning
system. [Statement of A. Cari Kotchian]5
In August 1975, investigations by the U.S. govemment led Lockheed to admit it had
made $22 million in secret payoffs.6 Subsequent Senate investigations in February 1976
made Lockheeds involvement with Japanese govemment officials public.7 Japan
subsequently canceled their billion dollar contract with Lockheed.
In June 1979, Lockheed pleaded guilty to concealing the Japanese bribes from the
govemment by falsely writing them off as marketing costs 8 The Internal Revenue Code
states, in part, No deduction shall be allowed... for any payment made, directly or
indirectly, to an official or employee of any govemment ... if the payment constitutes an
illegal bribe or kickback.9 Lockheed was not charged specifically with bribery because the
U.S. law forbidding bribery was not enacted until 1978. Lockheed pleaded guilty to four
counts of fraud and four counts of making false statements to the govemment. Mr. Kotchian
was not indicted, but under pressure from the board of directors, he was forced to resign
from Lockheed. In Japan, Kodama was arrested along with Tanaka.

QUESTIONS

1.

Fully explain the effects that payments like those which Lockheed made to the Japanese
have on the structure of a market.

Ethics in the Marketplace 263


2.
3.

4.

In your view, were Lockheeds payments to the various Japanese parties bribes or
extortions? Explain your response fiilly.
In your judgment, did Mr. A. Cari Kotchian act rightly from a moral point of view?
(Your answer should take into account the effects of the payments on the welfare of
the societies affected, on the rights and duties of the various parties involved, and on
the distribution of benefits and burdens among the groups involved.) In your judgment, was Mr. Kotchian morally responsible for his actions? Was he, in the end,
treated fairly?
In its October 27, 1980, issue, Business Week argued that every Corporation has a
corporate culturethat is, values that set a pattem for its employees activities, opinions, and actions and that are instilled in succeeding generations of employees (pp.
148-60). Describe, if you can, the corporate culture of Lockheed and relate that culture to Mr. Kotchians actions. Describe some strategies for changing that culture in
ways that might make foreign payments less likely.
NOTES

1. James Post, Corporate Behavior and Social Change (Reston, VA: Reston Publishing Co.,
1978), p. 207.
2. A. Cari Kotchian, The Payoff: Lockheeds 70-Day Mission to Tokyo, Saturday Review, 9
July 1977, p. 8.
3.
Ibid.
4.
Lockheed Says It Paid $22 Million to Get Contracts, Wall Street Journal, 4 August 1975.
5.
Kotchian, The Payoff, p. 12.
6.
Wall Street Journal, op. cit.
7.
Payoffs: The Growing Seandal, Newsweek, 23 February 1976.
8.
Lockheed Pleads Guilty to Making Secret Payoffs, San Francisco Chronicle, 2 June
1979.
9.
Internal Revenue Code 1975, Section 162C.

372 Business and Its Extemal Exchanges


153-70; for an informal discussion of the issue, see Jules Backman, Is Advertising
Wasteful? Journal ofMarketing (January 1968): 2-8.
60. Phillip Nelson, The Economic Value of Advertising in Yale Brozen, Advertising and
Society (New York: New York University Press, 1974), pp. 43-66.
61. Richard Caves* American Industry: Structure, Conduct, Performance (Englewood
Cliffs, NJ: Prentice-Hall, Inc., 1972), p. 101.
62. David M. Blank, Some Comments on the Role of Advertising in the American
Economy-A Plea for Reevaluation, in L. George Smith, ed., Reflections on Pro gres s
in Marketing (Chicago: American Marketing Association, 1964), p. 151.
63. See the discussion in Thomas M. Garrett, An Introduction to Some Ethical Problems of
Modem American Advertising (Rome: The Gregorian University Press, 1961), pp. 12530.
64. Ibid., p. 177.
65. See E. F. Schumacher, Small Is Beautiful (London: Blond and Briggs, Ltd., 1973); and
Herman E. Daly, ed-., Toward a Steady-State Economy (San Francisco: W. H. Freeman,
1979), Introduction.
66. Nicholas H. Kaldor, The Economic Aspects of Advertising, The Review of Economic
Studies, vol. 18 (1950-51): 1-27; see also William S. Comanor and Thomas Wilson,
Advertising and Market Power (Cambridge: Harvard University Press, 1975). A
readable review of the economic literature on this issue can be found in Albion and
Farris, The Advertising Controversy, pp. 45- 68.
67. See L.G. Telser, Some Aspects of the Economics of Advertising, Journal of Business
(April 1968), pp. 166-73; for a survey of studies on this issue, see James M. Ferguson,
Advertising and Competition: Theory Measurement and Fact (Cambridge, MA:
Ballinger Publishing Company, 1974), ch. 5.
68. See John Kenneth Galbraith, The Ajfluent Society (Boston: Houghton Mifflin Company,
1958).
69. John Kenneth Galbraith, The New Industrial State (New York: New American Library,
1967), p. 211.
70. Ibid., p. 215.
71. See the discussion of manipulation in advertising in Tom L. Beauchamp, Manipulative
Advertising, Business & Professional Ethics Journal, vol. 3, nos. 3 & 4
(Spring/Summer 1984): 1-22; see also in the same volume the critical response of R.
M. Hare, Commentary, pp. 23-28.
72. See George Katova, The Mass Consumption Society (New York: McGraw-Hill Book
Company, 1964), pp. 54-61.
73. F. A. von Hayek, The Non Sequitur of the Dependence Effect, Southern Economic
Journal (April 1961).
74. Vance Packard, Subliminal Messages: They Work; Are They Ethical? San Francisco
Examiner, 11 August, 1985; see also W. B. Key, Media Sexploitation (Englewood
Cliffs, NJ, Prentice-Hall, 1976).
75. Ads Aimed at Kids Get Tough NAD Review, Advertising Age, 17 June 1985.
76. Cynthia Kooi, War Toy Invasion Grows Despite Boycott, Advertising Age, vol. 3
(March 1986).
77. Howard LaFranchi, Boom in War Toys Linked to TV, Christian Science Monitor, vol.
7 (January 1986). LaFranchi notes that the average child watches 800 ads for war toys
and 250 war-toy television segments in a year, or the equivalent of 22 days

The Ethics of Consumer Production and Marketing 373


in the classroom. See also Glenn Collins, Debate on Toys and TV Violence, New York
Times, 12 December 1985.
78. See the discussion of manipulation in advertising in Tom L. Beauchamp,
Manipulative Advertising, Business & Professional Ethics Journal, vol. 3, nos. 3 &
4 (Spring/Summer 1984): 122; and in the same volume the critical response of R.
M. Hare, Commentary, pp. 23-28; see also Alan Goldman, Ethical Issues in
Advertising, pp. 253-60; and Robert L. Arrington, Advertising and Behavior
Control, pp. 312, in Journal of Business Ethics vol. 1, no. 1 (February 1982).
79. A critical discussion of several definitions of deception in advertising is found in
Thomas L. Carson, Richard E. Wokutch, and James E. Cox, An Ethical Analysis of
Deception in Advertising. Journal of Business Ethics, vol. 4 (1985): 93-104.
80. Greg Hadfield and Mark Skipworth, Firms Keep Dirty Data on Sex Lives of
Staff, Sunday Times (London), July 25, 1993; quoted in John Weckert and Douglas
Adeney, Computer and Information Ethics (Westport, CT: Greenwood Press, 1997),
p. 75.
Jeffrey Rothfeder, Privacy for Sale (New York: Simon & Schuster,
1992).
Richard A. Spinello, Case Studies in Information and Computer
Ethics (Upper
Saddle River, NJ: Prentice-Hall, 1997), pp. 108-9.
83. See Charles Fried, An Anatomy ofValues: Problems of Personal and Social Choice
(Cambridge: Harvard University Press, 1970), p. 141.
84. See Garrett, Business Ethics, pp. 47-49, who distinguishes these two types of privacy
(as well as a third kind, social privacy).
85. The analyses in this paragraph and the following are drawn from Fried, Anatomy of
Values, pp. 137-52; Richard A. Wasserstrom, Privacy in Richard A. Wasserstrom,
ed., Today's Moral Problems, 2nd ed. (New York: Macmillan, Inc., 1979); Jeffrey
H. Reiman, Privacy, Intimacy and Personhood, Philosophy and Public Affairs, vol. 6,
no. 1 (1976): 26-44; and James Rachels, Why Privacy
Is
Important, Philosophy and Public Affairs, vol. 4, no. 4 (1975): 295-333.

CASES

FOR

DISCUSSION

AIDS and Needles*

Becton Dickinson, one of the largest manufacturers of medical supplies, domi- nates the
market in disposable syringes and needles. In 1992, a nurse, Maryann Rockwood (a
fictional name), used a Becton Dickinson 5 cc syringe and needle to draw blood from a
patient known to be infected with AIDS. Ms. Rockwood worked in a clinic that served
AIDS patients, and she drew blood from these patients several times a day. After drawing
the blood on this particular day, she transferred the AIDS-contaminated blood to a sterile
test tube called a Vacutainer tube by sticking the needle through the rubber stopper of the
test
Copyright 2000 by Manuel Velasquez

374 Business and Its Extemal Exchanges


tube, which she was holding with her other hand. She accidently pricked her fin- ger with the
contaminated needle. She is now HIV positive.
A few years earlier, in 1986, Becton Dickinson had acquired exclusive rights to a
patent for a new syringe invented by Charles B. Mitchell that had a moveable protective
sleeve around it. The plastic tube around the syringe could slide down to safely cover the
needle. The Becton Dickinson 5 cc syringe used by Maryann Rockwood in 1992, however,
did not yet have such a protective guard built into it.
The AIDS epidemic has posed peculiarly acute dilemmas for health work- ers,
including doctors and nurses. Doctors performing surgery on AIDS patients can easily prick
their fingers with a scalpel, needle, sharp instrument, or even bone fragment and can
become infected with the virus. The greatest risk is to nurses, who, after routinely removing
an intravenous system, drawing blood, or delivering an injection to an AIDS patient, can
easily stick themselves with the needle they were using. Rarely a day goes by in any large
hospital where a needlestick incident is not reported.1 In fact, needlestick injuries account
for about 80 percent of reported occupational exposures to the AIDS virus among health
care workers. 2 It was conservatively estimated in 1991 that about 64 health care workers
were then being infected with the AIDS virus each year as a result of needlestick injuries.3
Although the fear of AIDS had heightened concems over needlestick injuries, AIDS
was not the only risk posed by needlestick injuries. Hepatitis B can also be contracted
through an accidental needlestick. In 1990, the Centers for Disease Control (CDC)
estimated, on the basis of hospital reports, that each year at least 12,000 health care workers
are exposed to blood contaminated with the Hepatitis B virus, and of these 250 die as a
consequence.4 Due to underre- porting, however, the actual numbers may be higher. In
addition to Hepatitis B, needlestick injuries can also transmit numerous other viral,
bacterial, fungal, and parasitic infections, as well as toxic drugs or other agents that are
delivered through a syringe and needle.
The total statistics on needlestick injuries in 1992 are disturbing, although the exact
incidence of contamination is unclear. It was estimated that each year, in the United States
alone, between 800,000 and 1 million needlestick injuries occurred in hospitals Of these,
between 60,000 and 300,000 resulted in Hepatitis B. By one estimate, the risk of
contracting HIV (the virus that causes AIDS) from a known contaminated needle could be
as high as 1 in 1000, and the risk of contracting Hepatitis B, a serious and often lifethreatening condition, could be as high as 1 in 6. These estimates would imply that as many
as 600 to 1000 health care workers were at risk of contracting HTV and as many as 100,000
were at risk of contracting Hepatitis B. Another estimate suggested that as many as 6000
needle sticks had resulted in HIV infection by 1992. The cost of all such injuries is
estimated at $400 million to $1 billion a year.5

The Ethics of Consumer Production and Marketing 375

Several agencies stepped in to set guidelines for nurses, including the American
Nursing Association, the CDC, the Environmental Protection Agency (EPA), and the Food
and Drug Administration (FAD),who all developed such guidelines. The most
comprehensive guidelines were issued by the Occupational Safety and Health
Administration (OSHA), who on December 6, 1991, required hospitals and other
employers of health workers to (a) make sharps containers (safe needle containers)
accessible to workers, (b) prohibit the practice of recap- ping needles by holding the cap in
one hand and inserting the needle with the other, and (c) provide information and training
on needlestick prevention to employees.6
The usefulness of these guidelines was controversial. 7 Nurses work in high-stress
emergency situations requiring quick action, and they are often pressed for time both
because of the large number of patients they must care for and the highly variable needs
and demands of these patients. In such workplace environments, it Is difficult to adhere to
the guidelines recommended by the agencies. For example, a high risk source of needle
sticks is the technique of replacing the cap on a needle (after it has been used) by holding
the cap in one hand and inserting the needle into the cap with the other hand. OSHA
guidelines wamed against this two-handed technique of recapping and recommended
instead that the cap be placed on a surface and the nurse use a one-handed spear- ing
technique to replace the cap. However, nurses were often pressed for time and, believing
(correctly) that carrying an exposed contaminated needle is extremely dangerous, yet
seeing no ready surface on which to place the needle cap, they will recap the needle using
the two-handed technique.
Several analysts suggested that the peculiar features of the nurses work
environment made it unlikely that needlesticks would be prevented through mere
guidelines: The problem was not the worker, but the design of the needle and syringe. Dr.
Janine Jaegger, an expert on needlestick injuries, argued that, Trying to teach health care
workers to use a hazardous device safely is the equivalent of trying to teach someone how
to drive a defective automobile safely.... Until now the focus has been on the health care
worker, with finger wagging at mistakes, rather than focusing on the hazardous product
design. . . . We need a whole new array of devices in which safety is an integral part of the
design.8 In 1987, the Department of Labor and Department of Health and Human
Services in a joint advisory issued that, Whenever possible, engineering Controls should
be used as the primary method to reduce worker exposure to harmful substances. The preferred approach . . . is to use, to the fiillest extent feasible, intrinsically safe substances,
procedures, or devices.9 The manufacturer of needles and syringes, it was urged, must
provide the health care worker with devices in which safety is an integral part of the
design.
The risks of contracting life-threatening diseases by the use of needles and syringes
in health care settings have been well documented since the early 1980s.

376 Business and Its Extemal Exchanges


Articles in medical jouraals in 1980 and 1981, for example, reported on the problem of
needlestick and puncture wounds among health care workers. 10 Several articles in 1983
reported on the growing risk of injuries hospital workers were sus- taining from needles and
sharp objects.11 Articles in 1984 and 1985 were sound- ing alarms on exposure to Hepatitis
B and AIDS resulting from needlesticks.12
Well over half of all the needles and syringes used by U.S. health care workers since
1980 were being manufactured by Becton Dickinson. Despite the emerging crisis, however,
Becton Dickinson decided not to modify its syringes, although it did include in each box of
needled syringes an insert waming of the danger of needlesticks and of the dangers of twohanded recapping.
ICU Medical Inc., also a major supplier of medical devices, however, responded to
the growing needlestick crisis by marketing a needle in the early 1980s that sat on a long
strawlike sheath that could be raised to cover the needle after use. However, ICUs device
was extremely awkward to use because the long sheath effectively doubled the length of the
needle, making the needle somewhat wobbly and difficult to control during insertion.
On December 23, 1986, the U.S. Patent office issued patent number 4,631,057 to
Charles B. Mitchell for a syringe with a tube surrounding the body of the syringe that could
be pulled down to cover and protect the needle on the syringe. At the time, at least four
other patents for needle-shielding devices existed. As Mitchell noted in his patent
application, those devices all suffered from serious drawbacks. One of them would not lock
the protective cover over the exposed needle, one was extremely complex, another was
much longer than a Standard syringe and difficult to use, and a fourth was designed
primarily for use on animals.13 It was Mitchells assessment that his invention was the only
effective, easily usable, and easily manufactured device capable of protecting users from
needlesticks, par- ticularly in emergency periods or other times of high stress. Unlike
other syringe designs, Mitchells was shaped and sized like a Standard syringe so nurses
already familiar with Standard syringe design would have no difficulty adapting to it.
Shortly after Mitchell patented his syringe, Becton Dickinson purchased from him an
exclusive license to manufacture it. A few months later, Becton Dickinson began field tests
of early models of the syringe using a 3 cc model. Nurses and hospital personnel were
enthusiastic when shown the product. However, they wamed that if the company priced the
product too high, hospitals, with pressures on their budgets rising, could not buy the safety
syringes. With concems about AIDS rising fast, the company decided to market the product.
In 1988, with the field tests completed, Becton Dickinson had to decide which
syringes would be marketed with the protective sleeves. Sleeves could be put cm all of the
major syringe sizes, including 1 cc, 3 cc, 5 cc, and 10 cc syringes. However, the company
decided to market only a 3 cc version of the protective sleeve. The 3 cc syringes account for
about half of all syringes used,

The Ethics of Consumer Production and Marketing 377

although the larger sizes 5 cc and 10 cc syringes are preferred by nurses when drawing
blood.
This 3 cc syringe was marketed in 1988 under the trademarked name Safety Lok
Syringe. It was promoted as a device that virtually eliminates needlesticks. The 3 cc
safety syringe with the protective sleeve was sold in 1988 to hospitals and doctors offices
for between 50 and 75 cents. By 1991, the company had dropped the price to 26 cents a
unit. At the time, a regular syringe with- out any protective device was priced at 8 cents a
unit and cost 4 cents to make. Information about the cost of manufacturing the new safety
syringe is propri- etary, but an educated guess would put the costs of manufacturing each
Safety- Lok syringe in 1991 at perhaps 13 to 20 cents.14
The difference between the price of a Standard syringe and the price of the safety
syringe was an obstacle for customers. To switch to the new safety syringe would increase
the hospitals costs for 3 cc syringes by a factor of three to seven. An equally important
impediment to adoption was the fact that the syringe was available in only one 3 cc size,
and so, as one study suggested, it had limited applications 15 Hospitals are reluctant to
adopt and adapt to a product that is not available for the whole range of applications the
hospital must confront. In par- ticular, hospitals often needed the larger 5 cc and 10 cc
sizes to draw blood, and Becton Dickinson had not made these available with a sleeve.
For 5 years, Becton Dickinson manufactured only 3 cc safety syringes. During that
period, Becton Dickinson did not license its new safety syringe tech- nology to another
manufacturer that might have produced a full range of syringe sizes. Most hospitals and
clinics, including the medical facility where Maryann Rockwood worked at drawing blood
from many patients with Hepatitis B or AIDS, did not stock the Becton Dickinson safety
syringe. Most nurses in the United States continued to use unprotected syringes.
Maryann Rockwood sued Becton Dickinson, alleging that, because it alone had an
exclusive right to Mitchells patented design, the company had a duty to provide the safety
syringe in all its sizes, and that by withholding other sizes from the market it had
contributed to her injury. The case was settled out of court.
In 1993, a major competitor of Becton Dickinson announced that it was planning to
market a safety syringe based on a new patent that was remarkably like Becton
Dickinsons. Unlike Becton Dickinson, however, the competitor indicated that it would
market its safety device in all sizes and that it would be priced well below what Becton
Dickinson had been charging. Shortly after the announcement, Becton Dickinson declared
that it, too, had decided to provide its Safety-Lok syringe in the full range of common
syringe sizes. Becton Dickinson also announced that it was lowering its prices. The new
prices made the devices more affordable to hospitals.

378 Business and Its Extemal Exchanges


QUESTIONS

1.
2.

3.
4.

In your judgment, did Becton Dickinson have an obligation to provide the safety
syringe in all its sizes? Explain your position using the materials from this chapter and
the principles of utilitarianism, rights, justice, and caring.
Assume that when Maryann Rockwood sued Becton Dickinson, the case had gone to
trial and that Maryann Rockwood had won. What would this imply for the duties that
other manufacturers would then have? Do you think that such an outcome would be
desirable? Explain.
Should manufacturers be held liable for failing to market all the products for which
they hold exclusive patents when someones injury would have been avoided if they
had marketed those products? Explain your answer.
In your judgment, who was morally responsible for Maryann Rockwoods acciden- tal
needlestick: Maryann Rockwood? The clinic that employed her? The govemment
agencies that merely issued guidelines? Becton Dickinson?

NOTES

1.

j. R. Roberts, Accidental Needle Stick, EM & ACM, May 1987, pp. 6-7.
R. Marcus, Surveillance of Health Care Workers Exposed to Blood from Patients
Infected with the Human Immunodeficiency Virus, N. Eng. J. Med., vol. 319, no. 17
(October 1988): 1118-23
3.
Special Report and Product Review; Needlestick-Prevention Devices, Health
Devices, vol. 20, no. 5 (May 1991): 155
4.
Special Report, Health Devices, 1991: p. 155.
5.
Kathy Sullivan and Diana Schnell, Needleless Systems, Infusion, October 1994, pp.
17-19.
6.
Rules and Regulations, Federal Register, vol. 58, no. 235 (December 6, 1991):
64175-64182.
7.
Needlestick Injuries Tied to Poor Design, Internal Medicine, December 1, 1987.
8.
Ibid.
9.
Quoted in Health Devices, p. 154.
10. J.S. Reed et al., Needlestick and Puncture Wounds: Definition of the Problem, Am.
J. Infect. Control, 1980, 8:101-6; RD McCormick et al., Epidemiology of Needlestick
Injuries in hospital personnel, Am J. Med., 1981, 70:928-32.
11. J.T. Jacobson et al., Injuries of Hospital Employees from Needles and Sharp Objects,
Infectious Control, 1983, 4:100-2; E L. Reuben et al., Epidemiology of Accidental
Needle Puncture Wounds in Hospital Workers, American J. Med. Sci., 1983; 286(1):
26-30.
12. B. Kirkman-Liff et al., Hepatitis BWhat Price Exposure? Am J. Nurs, August
1984, pp. 988-990; S.H. Weiss et al., HTLV-IH Infection Among Health Care
Workers: Association with Needle-Stick Injuries, JAMA, 1985; 254(15): 2089-93.
13. U.S. Patent 4,631,057, Mitchell.
2.

The Ethics of Consumer Production and Marketing 379


14.

In 1991, the device carried a published list price of 26 cents; see Health Devices, p.
170; assuming an extremely conservative 20 percent margin, this would imply a
manufacturing cost of about 20 cents; assuming a margin similar to its regular
syringes of 50 percent would imply a manufacturing cost of about 12 cents.
15. Health Devices, p. 170.
Toy Wars1

Early in 1986, Tom Daner, president of the advertising company Daner Associates, was
contacted by Mike Teal, the sales manager of Crako Industries. Crako Industries is a
family-owned company that manufactures childrens toys and had long been a favorite
and important client of Daner Associates. The sales manager of Crako Industries explained
that the company had just developed a new toy helicopter. The toy was modeled on the
military helicopters that had been used in Vietnam and that had appeared in the Rambo
movies. Mike Teal explained that the toy was developed in response to the craze for
military toys that had been sweeping the nation in the wake of the Rambo movies. The
family owned toy company had initially resisted moving into military toys because
members of the family objected to the violence associated with such toys. However, as
segments of the toy market were increasingly taken over by military toys, the family came
to feel that entry into the military toy market was crucial for their business. Consequently,
they approved development of a line of military toys, hoping that they were not entering
the market too late. Mike Teal now wanted Daner Associates to develop a television
advertising campaign for the toy.
The toy helicopter Crako designers had developed was about one and one- half feet
long, battery operated, and made of plastic and Steel. Mounted to the sides were
detachable replicas of machine guns and a detachable stretcher modeled on the stretchers
used to lift wounded soldiers from a battlefield. Mike Teal of Crako explained that they
were trying to develop a toy that had to be perceived as more macho than the top selling
G.I. Joe line of toys. If the company were to compete successfully in todays toy market,
according to the sales manager, it would have to adopt an advertising approach that was
even meaner and tougher than what other companies were doing. Consequently, he
continued, the advertising elips developed by Daner Associates would have to be mean
and macho. Television advertisements for the toy, he suggested, might show the
helicopter swooping over buildings and blowing them up. The more violence and mayhem
the ads suggested, the better. Crako Industries was relying heavily on sales from the new
toy, and some Crako managers felt that the companys future might depend on the success
of this toy.
Tom Daner was unwilling to have his company develop television advertisements
that would increase what he already felt was too much violence in

380 Business and Its Extemal Exchanges


television aimed at children. In particular, he recalled a television ad for a tricycle with a
replica machine gun mounted on the handle bars. The commercial showed the tricycle being
pedaled through the woods by a small boy as he chased several other boys fleeing before
him over a dirt path. At one point, the camera closed in over the shoulder of the boy,
focused through the gunsight, and showed the gunsight apparently trying to aim at the backs
of the boys as they fled before the tricycles machine gun. Ads of that sort had disturbed
Tom Daner and had led him to think that advertisers should find other ways of promoting
these toys. Therefore, he suggested that instead of promoting the Crako helicopter through
violence it should be presented in some other manner. When Teal asked what he had in
mind, Tom was forced to reply that he didnt know. At any rate, Tom pointed out, the three
television networks would not accept a violent commercial aimed at children. All three
networks adhered to an advertising code that prohibited violent, intense, or unrealistic
advertisements aimed at children.
This seemed no real obstacle to Teal, however. Although the networks might tum
down childrens ads when they were too violent, local television stations were not as
squeamish. Local television stations around the country regularly accepted ads aimed at
children that the networks had rejected as too violent. The local stations inserted the ads as
spots on their non network programming, thereby circumventing the advertising codes of
the three national networks. Daner Associates would simply have to place the ads they
developed for the Crako helicopter through local television stations around the country.
Mike Teal was firm: If Daner Associates would not develop a mean and tough ad
campaign, the toy company would move their account to an advertiser that would.
Reluctantly, Tom Daner agreed to develop the advertising campaign. Crako Industries
accounted for $1 million of Daners total revenues.
Like Crako Industries, Daner Associates was also a family-owned busi- ness. Started
by his father almost 50 years ago, the advertising firm that Tom Daner now ran had grown
dramatically under his leadership. In 1975, the busi- ness had grossed $3 million; 10 years
later, it had revenues of $25 million and provided a full line of advertising services. The
company was divided into three departments (Creative, media, and account executive),
each of which had about 12 employees. Tom Daner credited much of the companys
success to the many new people he had hired, especially a group with MBAs who had
developed new marketing strategies based on more thorough market and consumer
analyses. Most decisions, however, were made by a five-person executive committee consisting of Tom Daner, the senior accountant, and the three department heads. As ownerpresident, Toms views tended to color most decisions, producing what one member of the
committee called a benevolent dictatorship. Tom was an enthusiastic, congenial,
intelligent, and well-read person. During college he had considered becoming a missionary
priest, but had changed his mind and was

The Ethics of Consumer Production and Marketing 381

now married and the father of three daughters. His personal heroes included Thomas
Merton, Albert Schweitzer, and Tom Doley.
When Tom Daner presented the Crako deal to his executive committee, he found
that they did not share his misgivings. The other committee members felt that Daner
Associates should give Crako exactly the kind of ad Crako wanted: one with a heavy
content of violence. Moreover, the writers and artists in the Creative department were
enthused with the prospect of letting their imaginations loose on the project, several
feeling that they could easily produce an attention- grabbing ad by out violencing
current television programming. The Creative department, in fact, quickly produced a
copy script that called for videos showing the helicopter flying out of the sky with
machine-guns blazing at a jungle village below. This kind of ad, they felt, was exactly
what they were being asked to produce by their client.
After viewing the copy, Tom Daner refused to use it. They should produce an ad, he
insisted, that would meet their clients needs but that would also meet the guidelines of the
national networks. The ad should not glorify violence and war, but should somehow
support cooperation and family values. Disappointed and somewhat frustrated, the
Creative department went back to work. A few days later, they presented a second
proposal: an ad that would show the toy helicopter flying through the family room of a
home as a little boy plays with it; then the scene shifts to show the boy on a rock rising
from the floor of the family room; the helicopter swoops down and picks up the boy as if
rescuing him from the rock where he had been stranded. Although the Creative department
was mildly pleased with their attempt, they felt it was too tame. Tom liked it, however,
and a version of the ad was filmed.
A few weeks later, Tom Daner met with Mike Teal and his team and showed them
the film. The viewing was not a success. Teal tumed down the ad. Referring to the
network regulations that other toy advertisements were break- ing as frequently as
motorists broke the 55-mile-per-hour speed law, he said, That commercial is going only
55 miles an hour when I want one that goes 75. If the next version was not tougher and
meaner, Crako Industries would be forced to look elsewhere.
Disappointed, Tom Daner retumed to the people in his Creative department and told
them to go ahead with designing the kind of ad they had originally wanted: I dont have
any idea what else to do. In a short time, the Creative department had an ad proposal on
his desk that called for scenes showing the helicopter blowing up villages. Shortly
afterwards, a small set was constructed depicting a jungle village sitting next to a bridge
stretching over a river. The ad was filmed using the jungle set as a background.
When Tom saw the result, he was not happy. He decided to meet with his Creative
department and air his feelings. The issue here, he said, is basically the issue of
violence. Do we really want to present toys as instruments for beating

-'382 Business and Its Extemal Exchanges


up people? This ad is going to promote aggression and violence. It will glorify dominance
and do it with kids who are tenifically impressionable. Do we really want to do this? The
members of the Creative department, however, responded that they were merely giving their
client what the client wanted. That chent, moreover, was an important account. The client
wanted an aggressive macho ad, and that was what they were providing. The ad might
violate the regulations of the television networks, but there were ways to get around the networks. Moreover, they said, every other advertising firm in the business was breaking the
limits against violence set by the networks. Tom made one last try: Why not market the toy
as an adventure and fantasy toy? Film the ad again, he suggested, using the same jungle
backdrop. But instead of showing the helicopter shooting at a buming village, show it flying
in to rescue people from the burning village. Create an ad that shows excitement, adventure,
and fantasy, but no aggression. I was trying, he said later, to figure out a new way of
approaching this kind of advertising. We have to follow the market or we can go out of
business trying to moralize to the market. But why not try a new approach? Why not
promote toys as instruments that expand the childs imagination in a way that is positive and
that promotes cooperative values instead of violence and aggression?
A new film version of the ad was made, now showing the helicopter flying over the
jungle set. Quick shots and heightened background music give the impression of excitement
and danger. The helicopter flies dramatically through the jungle and over a river and bridge
to rescue a boy from a flaming village. As lights flash and shoot haphazardly through the
scene, the helicopter rises and escapes into the sky. The final ad was clearly exciting and
intense. It promoted the saving of a life instead of violence against life.
It was clear when the final version was shot, however, that it would not clear the
network censors. Network guidelines require that sets in childrens ads must depict things
that are within the reach of most children so that they do not create unrealistic expectations.
Clearly the elaborate jungle set (which cost $25,000 to construct) was not within the reach
of most children, and consequently most children would not be able to re-create the scene
of the ad by buy- ing the toy. Moreover, network regulations stipulate that in childrens ads
scenes must be filmed with normal lighting that does not create undue intensity. Again
clearly the helicopter ad, which created excitement by using quick changes of light and fast
cuts, did not fail within these guidelines.
After reviewing the film, Tom Daner reflected on some last-minute instruc- tions
Crakos sales manager had given him when he had been shown the first version of the ad:
The television ad should show things being blown up by the guns of the little helicopter and
perhaps even some blood on the fuselage of the toy; the ad had to be violent. Now Tom had
to make a decision. Should he risk the account by submitting only the rescue mission ad?
Or should he let Teal also see

The Ethics ofConsumer Production and Marketing 333

the ad that showed the helicopter shooting up the village, knowing that he would probably
prefer that version if he saw it? Was the rescue mission ad really that much different from
the ad that showed the shooting of the village? Did it mat- ter that the rescue mission ad
still violated some of the network regulations? What if he offered Teal only the rescue
mission ad and Teal accepted the rescue approach, but demanded he make it more violent.
Should he give in? Should Tom risk launching an ad campaign that was based on this new
untested approach? What if the ad failed to sell the Crako toy? Was it right to experiment
with a clients product, especially a product that was so important to the future of the
clients business? Tom was unsure what he should do. He wanted to show Teal only the
rescue mission commercial, but he felt he first had to resolve these questions in his own
mind.
QUESTIONS

1.
2.

From a moral point of view, what, in your judgment, should Tom Daners final decision be? Justify your answer. What should Tom do if he is asked to make the final ad
more violent than the rescue ad he had filmed?
Answer the questions Tom Daner asked himself. Was the rescue mission ad really
that much different from the ad that showed the shooting of the village? Did it matter
that the rescue mission ad still violated some of the network regulations? Was it right
to experiment with a clients product, especially a product that was so important to
the future of the clients business?

NOTES

1.

Copyright, 1986, by Manuel Velasquez. Although the events described in this case are
real, all names of the individuals and the companies involved are fictitious; in
addition, several details have been altered to disguise the identity of participants.