The Past, Present, and Future of Japanese Software
What has been the market legacy of Japan's customized software past? A glance at this month's "Soft Chart Report" (page 51) shows that 85% of the 20 top-selling software packages in Japan were localized versions of foreign programs.
by John Boyd
Why have Japanese software companies failed to make it on the world scene? Their counterparts in the computer game industry, after all, have been knocking out overseas hits since Pac-Man first gobbled its way through international markets in the late 1970s. The success of Japanese game vendors continues today, with the likes of Nintendo and Sega turning out blockbusters that sell in the millions around the globe.
In a less obvious way, Japan's successful electronics consumer manufacturers depend as much on smart software (often incorporating innovative fuzzy and neural network code) as they do on silicon chips to make their products go snap, crackle, and pop. And there's no questioning the international popularity of the appliances and innovative gadgets from Sony, Matsushita, Sharp, and a half-dozen more electronics makers that have become household names worldwide.
But software is different
"The Japanese make good hardware, but they lack the imagination or capability to write good software." This is a comforting old tale for foreign software vendors, but it belongs on the shelf with "Cinderella" and "Little Red Riding Hood." In his book The Japanese Software Factories (Oxford University Press, 1991), author and MIT lecturer Michael Cusumano showed this piece of Western hubris to be fiction. Cusumano's research found that major Japanese software companies, including Fujitsu, Hitachi, Toshiba, and NEC, successfully undertake large-scale software projects every bit as complex and sophisticated as those of IBM, AT&T, and Arthur Andersen -- while often achieving greater productivity and superior programming quality, to boot.No, the reason Japanese software has failed to make an impact on the international market has nothing to do with any innate lack of creativity among Japanese programmers. Critics of the country's regimented educational system, which stresses learning by rote memory, may have a point when they argue Japan's schools do little to foster creativity. But rather than dig that stony ground for evidence that Japanese programmers are incapable, it's much more revealing to look at how Japanese programming skills have been channeled to fit the needs of Japan's specialized market -- one that has relied heavily on customized rather than packaged software.
Cusumano notes that custom software accounted for "the largest single segment (61%) of all software sales in Japan in 1987. Combined with system-integration revenues, this accounted for 78% of the Japanese software market, compared to 39% in the United States." In the bubble economy of the '80s, the price paid for customization was not a great concern. "Costs were not important then," observes Junichi Saeki, director and analyst with market researcher IDC Japan. "The businesses environment was unnatural; the value of the yen was artificially low relative to the US dollar, so corporate activities didn't follow logic."
It should not be surprising, then -- since the collapse of the bubble at the beginning of this decade, and the subsequent long-drawn-out recession -- that there has been a much greater acceptance of packaged software in recent years. This trend has been further fueled by the recent rise in corporate PC sales.
The millstone of customization
Still, the concentration of effort spent on writing customized software during previous decades goes a long way in explaining why so few Japanese software packages have yet made their way abroad: There simply weren't that many available shrink-wrapped titles to make the journey.Demand for customized software was encouraged by Japan's fragmented hardware markets, which long shunned international standards. It was only about three years ago that the otherwise universally accepted MS-DOS operating system (OS) for PCs, and then Microsoft Windows, began making an impact in Japan. Prior to this, half-a-dozen incompatible variations of Microsoft's OS, customized for each local computer vendor's platform, competed for market share. And the situation was just as fragmented in the mid-range and mainframe markets, where no single manufacturer held anything like the dominant position IBM long had in these segments in the US and Europe.
"As well as different operating systems [in the mainframe market], you had companies like Mitsubishi Bank -- which not only had its own computer system, but its own computer language," points out Reinier Dobbelmann, technology analyst for SG Warburg Securities (Japan). "Companies like CSK [a major Japanese software developer and systems integrator] had to learn that language in order to service that client. And so you have in Japan a lot of relatively small software companies that service small groups of clients."
Fragmented markets forced Japan's software players to spread their resources thinly. For example, JustSystems, Japan's leading PC software house and creator of Ichitaro -- Japan's venerable best-selling word processor -- has had to spend much of its history serving a disparate group of hardware vendors' requirements. JustSystems' applications were hardly different or elegant enough to warrant gambling the time and investment needed in translating and adapting them for overseas markets, especially given that competing US products are already entrenched there.
Meanwhile, Microsoft, Oracle, Sybase, Lotus, and other American software houses were able to cleverly and aggressively use the strength of US computer mass markets as a springboard to establish de facto world standards for their products. "Once you gain volume dominance in software, you have a tremendous advantage," says Dobbelmann. "You have a lot more units out there, you are making more profit, and you also get more feedback on how to improve your software."
Microsoft has been able to keep competitors everywhere under a constant price pressure by keenly exploiting its high sales volumes and high earnings. Microsoft is also able to utilize the unique knowledge that comes from creating and controlling its Windows 95 operating system, which now dominates even in Japan, to bring applications to market ahead of rivals.
Word for Windows, for instance, was released well ahead of the Windows version of JustSystems' Ichitaro, and is often priced significantly lower than competing packages through discounts and marketing campaigns. If you count sales of individual Word packages and the Word that comes bundled in Microsoft's Office package of applications, Word has succeeded in outselling Ichitaro in recent years.
What lies ahead?
All this helps sketch the past and current situations in Japan's software industry. But what of the future? Growth of the multimedia businesses is opening up new markets, and the phenomenon of the Internet has seen even mighty Microsoft shaken by upstarts like Netscape. Are there opportunities here for Japanese software companies to make a breakthrough into international markets?In terms of standard applications -- word processors, spreadsheets, operating systems, and databases -- most analysts suggest that these markets will continue to be dominated by established companies, such as Microsoft and Oracle. "Once you have an installed base, users have invested their time into learning that software and so don't want to bother learning something else -- besides being worried about incompatibility problems," says Warburg's Dobbelmann.
Japan missed out on the first wave of the Internet, which originally exploded in popularity in the US, but there may be opportunities down the road as the information highway takes shape. Dobbelmann believes that companies like Sony, Canon, Fujitsu, and NEC "are now hungry enough, and have the skilled engineers and financial resources, to bring innovation to market. Over the next two or three years, it's not a bad bet that they'll come up with something." He suggests looking out for new kinds of PDAs (personal digital assistants), telecom-based applications, and imaging applications (especially software aimed at the emerging digital camera market).
Such examples make sense given that they all play to Japanese industry's strengths in electronics miniaturization, telecommunications, and video -- just as Japan's talents in animation and graphics, and its love of comic books, help explain Japan's outstanding performance in the computer game industry. IDC Japan's Saeki also sees a home-grown software approach as being Japan's best chance of making an impact on international markets. He looks for such applications to arise out of the country's growing social problems, such as the rapid aging of Japan's population or the high cost of medical treatment.
"IT companies will be called on to solve these kinds of issues," says Saeki. "If they come up with good solutions, and if the government takes a role in leading the way, then such software applications could be also applied to outside markets." Before that happens, though, Japan will have to invest much more in computers. Perhaps the single most important factor in America's dominance of the international software market has been the speed and relish with which its businesses and society have computerized. The installation of computers in businesses, homes, and schools has far outpaced installations in either Europe or Japan.
This early and rapid acceptance of computers in all walks of life in the US has created mass market environments in which local software companies have been able to grow, innovate, and set world standards. Just as with American movies and music -- similar mass markets whose source of riches are intellectual properties that can be replicated for little cost -- American packaged software has gone on to dominate global markets.
Nevertheless, as Japan catches up in the race to computerize, its software industry can only grow in diversity and opportunities. This will ensure that, before too long, we will see software counterparts of film director Kurosawa and the Beatles emerge.