Xref: utzoo soc.culture.japan:4835 comp.software-eng:3909 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 IV) Keywords: Japanese Software Industry Message-ID: <8698@flab.flab.fujitsu.co.jp> Date: 10 Jul 90 11:20:15 GMT Followup-To: soc.culture.japan Organization: Fujitsu Laboratories Ltd., Kawasaki, Japan Lines: 354 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. * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * $@!!!!(J RED PAPER$@!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!(J ARE WE ABANDONING OUR COMPUTER INDUSTRY TO JAPAN?$@!!!!!!!!!!!!!!(J $@!!!!!!!!(J Part IV$@!!!!!!!!(J SUICIDAL POLICY One consequence of the exorbitant per-unit royalty rates being charged by American computer software suppliers is that Japanese companies are not getting the high-quality, affordable software products they need to modernize their offices and increase the productivity of their office workers. But this is a temporary, short-term problem. Japan is a modern, resourceful nation. It perceives and will solve this problem. It already has begun. The real, long-term, permanent loser stands to be the American software industry. It seems to have a death wish. Until now, it has dominated the world's second largest market, Japan. But it now is abandoning this market. Surrendering. Abdicating. Here is how: 1. Most American software companies design their products strictly for the American market. They ignore the special needs of the Japanese market when designing their products. These "special" needs include supporting the written Japanese language, operating on the computers that are popular here, supporting Japanese business and social customs and conforming to Japanese laws. Most American software companies refuse to design their products to support these needs even when the needs, and the reasons why they are important, are explained thoroughly and repeatedly. 2. As a consequence, most American software products require substantial adaptation before they can be sold successfully in Japan. But most American software companies actually INHIBIT such adaptation of their products, in two ways: a. They refuse to allow their Japanese publisher do the adaptation. Some think they can do a better job themselves, but they rarely give it high priority or assign enough resources. Others simply do not trust their publishers. b. Second, the exorbitant per-unit royalty rates they demand make it financially impossible for the Japanese publisher to adapt the product properly even when the author permits that. 3. American software companies cannot seem to understand that Japanese consumers expect, demand and get a much higher level of quality in the products they buy than American consumers. This includes computer users. American computer software products tend to be too big and bulky, run too slowly and contain too many errors for Japanese tastes. And most American software suppliers inhibit their Japanese publishers from improving the quality of their products in the same ways they prevent their publishers from adapting the products to Japanese market needs: a. By not allowing it.$@!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!(J b. By charging such high per-unit royalty rates that the Japanese publisher cannot afford to invest in bringing the quality of the product up to Japanese standards.$@!!(J 4. Software products usually come with voluminous documentation explaining how to use them. From several hundred to several $@!!(Jthousand pages. This documentation all has to be rewritten in Japanese for the product to sell well here. This is unavoidable, but it also is expensive. Most Japanese publishers of American software products compromise here to save money, because the exorbitant per-unit royalties they pay to the American supplier do not leave them enough money to rewrite the documentation properly.$@!!!!!!!!!!!!!!!!!!(J 5. Most American software suppliers force their Japanese $@!!!!!!(Jpublishers to price the product much higher in Japan than it is priced in the United States. Anywhere from fifty percent to $@!!(Jseveral hundred percent higher. Some do this directly by $@!!!!!!(Jspecifying prices. Most do it indirectly by setting minimum $@!!(Jper-unit royalty amounts so high that the Japanese publisher is forced to charge high prices. 6. The exorbitant per-unit royalty rates American software $@!!!!(Jsuppliers charge prevent their Japanese publishers from promoting the products as aggressively as they should. These exorbitant royalty rates also preclude the Japanese publisher from using all the distribution channels they should use.$@!!!!!!!!!!!!!!!!!!!!!!!!!!!!(J The BIG LOSERS from all this are the American software $@!!!!(J suppliers. It is their products that do not fit the market well enough, that do not measure up to Japanese quality standards, $@!!(J that are not documented well enough, that are over-priced and $@!!(J that are neither promoted nor distributed as aggressively as they should be. It is their software products that Japanese users are rejecting in favor of custom-made software.$@!!(J Most American software suppliers should see this, because they are not as successful in Japan as the size of the market $@!!(J indicates they should be. They also should have the business acumen to see that $@!!!!(J MAXIMUM per-unit royalty rates are different from OPTIMUM royalty rates. If American software suppliers want to maximize their success in this market, they must negotiate royalty rates that do not stifle or choke-off the publication and distribution efforts necessary to such success. OPTIMUM royalty rates are those that facilitate the broadest distribution of a high-quality product at fair prices. Optimum royalty rates increase the revenues of author, publisher and distributor so that they want to continue working together. And they enhance the reputations of each so that customers will want to continue buying their products.$@!!!!!!!!!!(J American software suppliers better wake up and see these $@!!(J things soon because, if they do not, it will be too late. They are on the verge of abdicating the Japanese computer software $@!!(J market to Japanese authors of software products. Right now, in 1990. $@!!!!!!!!(J $@!!!!!!!!!!(JJAPAN'S EMERGING SOFTWARE PRODUCTS INDUSTRY$@!!!!!!!!!!(J American software suppliers do not have much time left to heed the wake-up call and see the flashing amber and green $@!!(J lights, because Japan's software authors have begun to understand the situation and use it to their own advantage. $@!!(J $@!!!!!!!!!!!!!!!!!!(J Heretofore Japan's software authors found it difficult to get their software published, even in their own country, because American software was considered superior. But by offering their manuscripts at optimum royalty rates, they are getting published. A few have become best sellers. Each success has given that author and others more confidence and stimulated them to write and submit more software for publication. I am not talking only about teenage geniuses a la Steve Jobs and Steve Wozniak working in backyard garages. Mammoth, multi-billion dollar Japanese corporations are turning their minds and resources to this endeavor.$@!!!!!!!!!!!!!!!!(J Japanese individuals and companies have begun creating $@!!!!(J software products that are competitive with the best software $@!!(J products from the United States. And these Japanese software $@!!(J products are starting to beat American software products in $@!!!!(J Japan's market for the following reasons:$@!!!!!!!!!!!!!!!!!!!!!!(J 1. They are comparable in functional capability to the best $@!!(JAmerican products. Usually not better, just comparable. Usually workhorses rather than racehorses. But good enough.$@!!!!(J $@!!!!!!!!(J2. The Japanese products are built specifically to satisfy the needs of the Japanese market. They support the Japanese language, run on all computers that are popular in Japan and fit Japanese social and business customs and practices. Thus, the publisher does not have to spend time and money "Japanizing" them. $@!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!(J 3. They usually are of much higher quality than American software products. They are more compact, operate more efficiently, and contain practically no errors. These Japanese software products generally have the same kind of quality we have come to expect of Japanese manufactured goods. 4. The Japanese products come fully documented in the Japanese language, using terms and examples familiar to every Japanese person, so the publisher does not have to invest in translating and rewriting documents written in English for Americans.$@!!(J 5. Japanese computer software authors rely on their publishers and distributors to set prices and terms of sale for their products. Good software publishers and distributors are experts in determining the prices and terms of sale that will maximize returns for their authors and themselves. 6. And, as discussed above, Japanese software authors charge no more for their manuscripts than authors of books or music or movies. Five to ten percent of what the consumer pays for the published product. And they make more money, because the lower royalty rate enables the publisher and distributors to spend more money to package and sell their products. Each success with domestic software at these low royalty rates is convincing Japan's software publishers and distributors that they are foolish to pay royalty burdens of thirty to fifty percent for foreign, mostly American, software. American software suppliers were able to do business in Japan when there was no domestic competition, but they now are losing what market share they once enjoyed here. And you can bet that when the Japanese have secured the surrender of the Japan market, they will build truly exportable products -- high quality, competitively priced products built to fit their target markets. $@!!!!!!!!!!!!!!!!(JEVIDENCE$@!!!!!!!!!!!!!!!!!!(J I think our company provides excellent evidence of what is happening to American software suppliers in Japan. Since $@!!!!!!(J incorporating in 1972, we consistently have sold about half of the independent (of computer maker) software products sold in $@!!(J Japan. During our first sixteen years of business, all of our revenues came from importing American and European software $@!!!!(J products. In 1988, 99% of our revenues came from imports and 1% from selling Japanese products. In 1989, less than 95% of our revenues came from imports; more than 5% came from selling $@!!!!(J Japanese products. This year, we are forecasting that less than 80% of our revenues will come from imports and more than 20% will come from selling Japanese software products. This is a dramatic change over such a short (two year) time span!$@!!!!!!!!(J Why has our business changed so dramatically? Because we increasingly are finding in Japan better products, that fit our market better and that we can publish and distribute on better terms than we can find in the United States. An ominous trend for this piece of U.S. industry. Price, quality and market fitness. And soon, exportability. $@!!!!!!!!!!!!!!!!!!!!!!!!!!!!(JSUMMARY$@!!!!!!!!!!!!!!!!!!(J To summarize, we are seeing cataclysmic changes in Japan's economy. These changes are causing changes in Japan's market for computer products. American computer manufacturers and software suppliers heretofore have dominated Japan's market. But instead of responding to the changes now occurring, American computer manufacturers and software suppliers appear to be abandoning Japan's market. Surrendering. Abdicating. By doing so, they are creating a vacuum that Japanese must fill. And are filling. 1. Japan's leaders recognize that their nation's post-war "economic miracle" came from its ability to excel in mass production. They also recognize that mass production will be taken over by lower-wage economies. To maintain its economic prosperity, Japan must convert itself into a producer of smaller quantities of a wider variety of products.$@!!!!!!!!!!!!!!!!!!(J 2. This is an information-intensive economy. To succeed, Japan must modernize its offices and increase the productivity of its office workers. Drastically. Quickly. This is an imperative, not a wish. 3. This requires widespread use of computers. Another imperative. 4. The oligopolistic, American-dominated computer industry has not provided good enough computers at low enough prices to enable Japan's companies to modernize their offices, increase the productivity of their office workers and make the transition to an information-intensive economy. This industry's "proprietary" products seem to maximize its suppliers' profits much more effectively than they satisfy its customers' needs. $@!!(J 5. So Japan's powerful consumer-electronics industry has begun to supply the computers that Japan's companies need to modernize their offices. At prices they can afford. It is doing so by offering "open" computer systems that use standard software. Like stereos that play standard records, cassette tapes and CDs. 6. As a result, Japan is now getting from Japanese companies the computers it needs to modernize its offices. At affordable prices. And American purveyors of "proprietary" computer systems rapidly are losing market share in this, the world's second largest, market. A market they once dominated.$@!!(J 7. Solution of the computer problem has focused attention on software. Japan has not had enough good software at affordable enough prices to utilize computers effectively. For two reasons: a. Its domestic software companies found such great demand for custom-made software that they could not justify the investments and risks required to produce less expensive (to users) and potentially more profitable (to themselves) software products. $@!!!!!!!!!!!!!!(J b. Foreign suppliers charged such high prices for their software products that Japanese companies could not afford to use them widely. And those foreign, mostly American, products often have not fit the needs of Japan's market adequately.$@!!!!!!(J 8. Meanwhile, Japanese have come to recognize that the software products industry is a publishing and distribution $@!!!!(J industry quite similar in concept to publishing and distributing books, records, films and other forms of intellectual property. Japanese with the talent to create good computer software have found that they can maximize their own incomes by creating $@!!!!(J publishable manuscripts and offering them at royalty rates $@!!!!(J similar to those received by authors of book, music and movie $@!!(J manuscripts. Royalty rates designed to optimize revenue and $@!!(J market share for themselves and their publishers and distributors. $@!!!!!!!!!!!!!!(J 9. And Japanese software publishers and distributors are, increasingly, finding software written by domestic authors profitable to publish and distribute. Much more profitable than lower-quality software written by Americans, which does not fit Japanese market needs and is burdened by self-defeating pricing and royalty structures. 10. So Japan now also is getting the software it needs to modernize its offices. From Japanese companies. At affordable prices. And America's software industry is abandoning the world's second largest market. A market they pioneered and have dominated until now. Surrendering. Silently. Perhaps without even perceiving there was a contest or other contestants. 11. In short, Japan is taming the computer industry and training it to satisfy the needs of its society. It is getting this industry to supply the computers and software it needs to modernize its offices, increase the productivity of its office and manufacturing workers and decision-makers, and complete the transition to an information-intensive economy. So it can $@!!!!(J compete stronger at home and overseas and, thereby, maintain its prosperity. 12. A side effect of this seems to be that American computer manufacturers and software suppliers are losing their shares of this Japanese market they once dominated. Not because they were "targeted" or pushed out, but because they were not interested in serving the market. Servicing, perhaps, but not serving. $@!!!!!!!!!!!!!!!!(J WARNING$@!!!!!!!!!!!!!!!!!!(J American computer manufacturers and computer software $@!!!!(J suppliers have dominated the world's markets to date. They have dominated Japan's market along with the others. They have faced only slight competition from Japanese companies within Japan and almost no competition from Japanese companies outside Japan. $@!!(J They have been as entrenched in Japan as any Japanese company in any line of commerce.$@!!!!!!(J But they have satisfied neither the critical needs of $@!!!!(J Japan's society and economy nor those of its corporations and $@!!(J individual consumers. They have not provided the products needed at affordable prices. Hence the Japanese search for alternate sources for the computers and software they need. They have found domestic electronics manufacturers ready and willing to supply the computers they need at prices they can afford. And they have found domestic authors ready and willing to supply the software they need at affordable prices.$@!!!!!!!!!!(J $@!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!(J