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10/11/94

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Reasons U.S. not Japan dominates world software market

STANFORD -- A pop quiz for computer users:

Q: What is your favorite Japanese software package?

A: None.

The reason for the answer is that, other than video games, the Japanese have virtually no presence in the U.S. or world software markets. By contrast, American software dominates not only domestically but also worldwide, making up nearly 75 percent of global package software sales.

Through a series of more than 60 in-depth industry interviews in Japan and the United States, Stanford researchers have identified the key factors that have contributed to the U.S. success in this large and growing market, as well as those that have hindered the Japanese.

The study is part of the Computer Industry Project, a multidisciplinary research effort funded by the Alfred P. Sloan Foundation. Edward A. Feigenbaum, the Stanford professor of computer science who heads the software study, reported on its latest findings last month at the World Economic Forum.

"It is very interesting that the Japanese, who have been so effective in consumer electronics, laptop computers and computer memory, among others, have virtually no presence in the $100 billion to $120 billion U.S. software market," Feigenbaum says.

The software market is important for the future, researchers point out. As computer hardware increasingly becomes a mass-market commodity, profit margins are shrinking. Software production, however, has remained a high value-added area with large profit margins.

"Increasingly, the hardware is just the box that the software comes in, and the box is not limited just to computers. These days software is in everything from microwave ovens to telephones to jet aircraft," says Avron Barr, who directs the study jointly with Shirley Tessler.

According to the researchers, a number of economic, organizational and cultural factors have made it possible for the U.S. software products industry to thrive during the period of rapid change that it has experienced in the last 15 years:

  • The U.S. government has taken a number of effective actions to foster competition in the software industry. Arguably the most important was the threat of antitrust action against IBM that in 1968 led to the company's agreement to price and sell software separately from hardware. This action created an independent software market nearly 30 years ago. By contrast, Japanese computer manufacturers continue to bundle software programs with their machines, making it difficult for independent software makers to compete.
  • For the past 30 years, the U.S. government has actively funded basic research in computer science. This provided a number of new ideas, such as the Internet computer network. In addition, a number of important startups came from university labs. A recent example is Mosaic Communications, which formed around a group of young engineers and graduate students who helped develop an Internet browser called Mosaic.

"It was not the funding itself, but the independence of the research that was important,² says Barr. ³The fact that the U.S. government hasn't had any grand plan but has supported a diversity of research projects has actually been an advantage. By contrast, the Japanese have taken a top- down approach, as in their Fifth Generation Project, that hasn't been nearly as successful.²

In addition, the Japanese government provided only limited support for basic software research until 1983.

  • Software companies in the United States have been fostered by venture capitalists. By demanding enough capital in each company so that they can make a profit even if only one company in 10 succeeds, venture capitalists have provided an important way to support diverse and competitive startup companies. There is nothing comparable to the venture capital sector in Japan, so it is much more difficult for small companies to attract necessary capital to grow.
  • Piracy is not a major problem in the United States, but it is in Japan and a number of other countries around the world. Because it is possible to make high quality copies of programs and manuals for a few dollars apiece, software piracy can be highly lucrative. Rampant duplication of programs makes it much more difficult for software companies to make a profit.

Despite multi-billion-dollar estimates of economic losses published periodically by industry associations, the researchers have found that executives in U.S. software companies generally admit that piracy is not hurting their business. Japanese software vendors, on the other hand, list it as their greatest concern.

Part of this difference is due to the fact that the U.S. government has established more effective methods to protect authors¹ intellectual property rights. In Japan, the government is one of the major duplicators of software, because departments are given a budget for purchasing hardware but not software, the researchers discovered.

But the reasons for piracy in Japan go far deeper, the researchers have concluded. Because software is largely intangible, the Japanese do not consider it to be real in the same way as a computer or television or automobile. That is one reason why the Japanese government's efforts to stop computer companies from including software with their computers has been ineffective and many Japanese see nothing wrong with copying it freely.

  • In the United States, software authorship carries high prestige. Not only do programmers tend to be highly paid, software entrepreneurs like Microsoft founder Bill Gates are folk heroes. Consequently, many of the brightest students go into the field.

In Japan, by contrast, software programming is considered a relatively low-status job, even though companies have increased the pay for such positions in recent years. According to the researchers, the fact that Japanese consider software to be insubstantial reflects negatively on the status of its authors.

  • Entrepreneurship is looked on far more favorably in the United States than in Japan and a number of other countries, where being a part of a big company is considered more prestigious. Such risk taking is more highly valued in the United States in part because there is a greater social acceptance of failure. A person who has tried to start up two businesses, both of which have failed, can get backing to try a third time in this country, but not in many others.
  • Americans are more willing to make trade-offs between quality and time to market. In many other countries it is not suitable to put out a product before it is as good as you can make it. But in the fast-moving software industry, where the lifetime of given product may be only a year or two, getting products quickly to market is critical. By contrast, after a piece of software is written in Japan, the period for testing and quality assurance is typically one year. By that time the product is likely to be completely out of date.
  • The positive attitude toward youth in America is yet another contributing factor, the researchers say. The U.S. university system provides up-to-date technical training for its students. When they graduate and move into industry, they are generally appreciated and given positions of considerable responsibility early in their careers. They see that the latest technical developments are incorporated into their companies¹ products. In tenure-based corporate hierarchies, like those that predominate in Japan, all the major decisions are made by senior members of the firm. As a result, new developments are incorporated more slowly, the researchers argue.

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