Xref: utzoo soc.culture.japan:4834 comp.software-eng:3908 Path: utzoo!utgpu!watserv1!watmath!att!rutgers!usc!zaphod.mps.ohio-state.edu!sol.ctr.columbia.edu!lll-winken!sun-barr!ccut!ascgw!fgw!flab!mojo From: mojo@flab.flab.fujitsu.co.jp (mojo) Newsgroups: soc.culture.japan,comp.software-eng Subject: Red Paper (Part III) Keywords: Japanese Software Industry Message-ID: <8697@flab.flab.fujitsu.co.jp> Date: 10 Jul 90 11:18:30 GMT Followup-To: soc.culture.japan Organization: Fujitsu Laboratories Ltd., Kawasaki, Japan Lines: 265 Recently, a document called the "Red Paper" has been making quite a hit in Tokyo on CompuServe, and on the Japanese PC Network, NiftyServe. The "Red Paper" was written by Bill Totten, the President of K.K. Ashisuto, the largest distributor of independent software products in Japan. It discusses his reasons for believing that US software companies are about to lose their competitiveness in the Japanese software market, and perhaps, eventually, in the world market. * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * RED PAPER ARE WE ABANDONING OUR COMPUTER INDUSTRY TO JAPAN? Part III Japan's computer users increasingly are moving from proprietary to standard or open computer systems. I believe most users in most other countries also will move from proprietary to standard or open computer systems. Japan's consumer electronics makers have committed themselves to providing standard or open computer systems. If America's leading computer makers continue to stress proprietary systems, they will increasingly lose their shares of the world's computer markets to Japanese electronics manufacturers. But it will not be Americans losing to Japanese. Rather it will be closed, proprietary systems losing to open, standard systems. Because the latter serve users better. American computer manufacturers can avoid defeat by moving aggressively to build and sell standard, open systems. If they do not, they should realize that they voluntarily surrendered their market shares. Their market shares were not "targeted" or taken from them. Many American software suppliers face this same danger. Those software companies whose strategy is to build and market software products tied to specific proprietary computer systems are tieing their own futures to the futures of those proprietary computer systems. If the proprietary computer systems do not survive, those software companies will not survive. JAPAN'S CRITICAL SOFTWARE SHORTAGE Japan's consumer electronics industry has begun supplying the computers needed to modernize Japan's offices and increase the productivity of its office workers. At affordable prices. They are supplying standard computers that run standard software. However, this has exposed another problem. A severe shortage of software. And computers are useless without software to instruct them to do useful work. (By analogy, stereos would not be much fun or very useful for what they do without an abundant supply of recorded music. Radios and televisions would be useless if there were no broadcasters. As would video players without video tapes.) The severity of Japan's software shortage is shown by the following figures. U.S. companies buy sixty percent of their software in the form of ready-made, off-the-shelf products. Only forty percent of the software they buy is custom-made for them. In Western Europe, the ratio is forty percent ready-made to sixty percent custom-made. But only ten percent of the software Japanese companies buy is ready-made; fully ninety percent is custom-made. This is a tremendous burden on Japan's computer users. Making anything from scratch is much more expensive and time- consuming than using ready-made products. Quantity is limited, quality is poor and the cost is high. And buying custom-made products is expensive. (An analogy to making software from scratch are the days when mom made the family's clothes and dad built the furniture. And rolled his own cigarettes and distilled his own whiskey. An analogy to buying custom-made software is to suppose ninety percent of your clothes, including underwear and shoes, had to be custom-made. Think of how much they would cost, how few you could afford and how little money you would have left to spend on things other than clothes.) Another indicator of the severity of Japan's software shortage comes from the Ministry of International Trade and Industry. "MITI" estimates that Japan needs 600,000 more software engineers than it now has, and that the shortage will reach one million software engineers by the year 2000. Japan cannot modernize its offices and increase the productivity of its office workers, as drastically and quickly as it must, unless it finds a solution to this software shortage. The reasons for this software shortage are easy to understand. Among other reasons, major Japanese corporations maintain a policy of "lifetime employment". They hire employees when they graduate from college and retain them until they reach retirement age. They tend not to hire and fire as the company's business goes through peaks and valleys. But they have peaks and valleys, and their need for personnel rises and falls accordingly. To cope with these fluctuations, Japan's major corporations use subcontractors to fill their temporary needs for personnel. Most of Japan's software companies were established to smooth major corporations' fluctuating needs for computer engineers. These software companies are capable of packaging their knowhow into ready-made, off-the-shelf software products. That is what their counterparts in the United States and Europe do. Making and selling software products should be much more profitable than custom-making software for each user. Recording and selling records is a much easier way for an established singer to make a living than doing dinner shows. But making products requires an investment. There also is the risk that the software product will not sell. And the current demand for custom-made software is so great in Japan that its software companies can make a good living without making those investments and incurring those risks. Japan, essentially, is in a vicious circle. Its software companies are so busy with custom work that they do not need to make the investments or incur the risks to build software products. So they don't. So few software products are available. So the demand for custom-made software is much greater than it would be if more products were available. And the circle continues. The result of this critical software shortage is that all of Japan's industries suffer. They are not getting enough of the software they need to modernize their offices and increase the productivity of their office workers. This is preventing them from making the transition, as quickly as they should, into an "information-intensive economy" that produces small quantities of a wide variety of goods. Solving this software shortage is a critical national problem that Japan must solve. Japanese industries must solve it to remain competitive. And Japan, as a nation, must correct it to maintain its prosperity. Japan will solve it. THE NEED FOR INEXPENSIVE SOFTWARE In addition to needing much more ready-made software than it now has, Japan needs that software at much lower prices than it now has to pay. Software products for mainframe computers usually are priced at least 50% higher in Japan than the same products sell for in the United States. And software products for personal computers usually cost several times more in Japan than in the United States. One reason why Japanese use more custom-made software and less ready-made software than Americans is that software products are priced so high here. The high prices being charged for software products in Japan went largely unnoticed until last year when Japanese electronics manufacturers begun shipping book-type personal computers. As pointed out above, these computers are now small and light enough to put on every Japanese office worker's desk. At around $1000, they are inexpensive enough. And light enough for office workers to carry around with them. Every major Japanese electronics manufacturer has announced or is about to announce a book-type personal computer. The intense competition is producing a steady stream of more capable and powerful machines that weigh and cost increasingly less. But the high prices being charged for software are inhibiting the spread of their use. Spreadsheets, wordprocessing packages and other office productivity software products each cost almost as much as a book-type computer. Software products have been so expensive that companies could not afford to buy them for all their office workers. Basic corporate integrity prevents them from stealing the software (read: copy without payment or permission). The social penalties and damage to their business reputation would be too costly. So they have refrained from buying personal computers for most of their office workers. In short, the high prices being charged for software products have been preventing the spread of computers. This, in turn, is inhibiting Japanese companies' efforts to increase office productivity so that they can convert from manufacturing large quantities of a small variety of products to manufacturing smaller quantities of a larger variety of products. Thus, the high prices being charged for software have become intolerable. Consequently, since Japan is a modern, resourceful nation, the problem is being addressed. People have begun analyzing WHY software prices are so high. And they are not limiting their analysis to the prices of software for small computers. They have begun to question the prices they are being charged for software products that run on large computers as well. Strange, but true, most American software houses are not facing the question. SOFTWARE IS A PUBLISHING BUSINESS This analysis shows that the software products business is a publishing and distribution business very similar to book and music and movie publishing and distribution. An AUTHOR writes the musical score or book manuscript or computer program. A PUBLISHER packages and promotes it. DISTRIBUTORS sell it. If the author or publisher or distributor charges too much for its contribution, one of three things must happen: 1. The product must be sold at a higher price, thus making it more difficult to sell. (More difficult than if that one party had not charged too much for its contribution.) This reduces the market for the product. 2. One of the other two parties must spend less on its contribution. (Spend less than it would have if that one party had not charged too much for its contribution.) This reduces the success of the product because something is not being done as well as it could have been. 3. One of the other two parties must take a loss on its contribution. (Make its full contribution but not receive sufficient compensation to the extent that one party charged too much for its contribution.) This limits the future of the business, because no sensible party will continue for long making its full contribution at a loss. Further analysis shows that Japan's computer software publishers have been paying authors too much. Far too much. Mostly to American authors and owners of computer software. Most software products sold in Japan to date have been imported from the United States. The American authors demand royalty burdens of from one-third to one-half the price Japanese customers pay for each unit of their software sold. And Japan's publishers of computer software have been paying such exorbitant per-unit royalties. But everyone is losing, for these reasons: 1. Since too much money is paid to authors or owners of computer software products for their manuscripts, too little money is left to publish and distribute that software at reasonable prices. 2. Quality is compromised because publishers cannot package the products as well as they should. Distribution is weak because distributors cannot promote the products as aggressively as they should, and cannot use all of the distribution channels they should use. And prices are much higher than in other markets. 3. As a consequence, use of custom-made software remains much higher in Japan than in other countries, and use of ready- made, off-the-shelf software products remains much lower than in other countries. By comparison, book and music and film publishers, in Japan or any other country, pay authors of manuscripts or scores only five to ten percent of the price consumers pay for the book, record, audio tape, compact disk or movie. Because book and music and movie publishers pay authors only five to ten percent for manuscripts or scores, they can afford to spend substantially more money packaging their manuscripts and scores into high- quality, attractive products than can the Japanese publisher of American computer software. The book or music or movie publisher can spend far more promoting the book or record or film than the Japanese computer software publisher can spend promoting its American product. And book and music and film distributors can spend dramatically more to sell their products than Japanese publishers can spend to sell American computer software products.