Japan's Changing Software Distribution Industry

Noriko Takezaki

As a result of intense price competition, and the mounting challenge of new, "direct from the manufacturer" distribution methods, Japan's software distributors are facing tough times. Even a cursory examination of the software distribution industry reveals the precarious state of affairs. In late October 1996, faced with a burgeoning JPY12 billion debt, Software Japan (the nation's second-largest software distributor) sold its business to Catena (Japan's third-largest distributor). This, however, was just the tip of the structural-weakness iceberg that threatens the industry. Other small- and medium-sized software distributors (such as Seiwa Systems) have gone bankrupt within the past year.

The immediate cause of Software Japan's failure was poor management, particularly insufficient inventory control. It is said that the company had not adequately verified its product inventories for years. And last spring, after the company introduced a workstation-based inventory management method, a system failure brought the entire warehouse operation to a halt. This caused an erosion of confidence among both retailers and manufacturers, with several manufacturers drastically decreasing the volume of software they entrusted to Software Japan.

The root cause of Software Japan's failure, say industry insiders, was that the company remained too narrowly focused. It continued to rely on its software distribution business, despite the fact that fierce competition has cut software street prices and slashed profit margins to the bone.

"The software distribution business has very little profit margin now," says Tadashi Shimada, a floor manager at Laox, The Computer Kan (a large Akihabara computer retail store). "It is no longer possible to survive as a pure software distributor; you have to do other things to make profits."

The software distribution business itself has a "gray" and outdated image. The net price of the same software products varies among distributors, based on individual negotiations with manufacturers. And Japan's distributors still use a handwritten form for order placement, rather than a computerized system.

Well aware of the limitations of traditional channels, some distributors have diversified their operations, entering such businesses as software development, production, and publishing. In 1994, both Softbank (Japan's largest software distributor, with a nearly 50% market share) and Software Japan attempted to distribute CD-ROM-based software products via bookstores. Programs were to be stored in encoded form on CD-ROMs, and could be decoded and used only with encryption "keys" given separately after an order was placed.

In the face of strong opposition from software retailers, though, both distributors dropped their attempts. Software Japan canceled its Order Express project soon after it was announced. The Softbank plan was to sell a CD-ROM software library called "On Hand," but only promotional introductory versions were released. Even now, Softbank has no plans to release a commercial version. "Taking retailers' opinions into consideration, we have decided not to release the commercial version for the time being," explains a Softbank spokesman. "I wouldn't say that we had 'pressure' from retailers; we just considered thoroughly which [distribution] methods are best."

Manufacturers, meanwhile, are showing strong interest in supplementing traditional routes and reaching users directly via new software distribution methods. The system currently gaining most attention is distribution over the Internet.

Justsystem plans to inaugurate online sales of some software products (and other information) on the Internet this spring. The service, Just DigiTrade, was developed by using NTT's Infoket network security technology to protect the copyright of products to be distributed over Net. It also will employ Visa International's VisaNet account settlement network so that purchasers can use Visa and other credit cards for payment.

Fujitsu also intends to launch an Internet-based software distribution service. This expansion of its Media Shuttle service (started in 1995) will distribute trial versions of software on CD-ROM and enable users to download a key that unlocks the commercial version (stored on the same CD-ROM in encrypted format) of their favorites either via the Internet or from the Fujitsu-related online communications service, NIFTY-Serve. Fujitsu has entered a tie-up with UC Card (a Japanese credit card company) for settling payments over the Internet.

IBM Japan, meanwhile, has upgraded its "book-style" software sales business. CD Showcase CD-ROMs, each with 50 to 80 trial and encrypted commercial programs, have been sold quarterly through bookstores and to subscribers since 1994. Users call or send a fax to the IBM Japan's operations center to request a 20-digit decryption key, and can pay by credit card.

In the face of such new challenges, what will happen in Japan's software distribution business? Retailers say that they still need distributors to deal with troublesome tasks, such as stocking a wide range of products and returning defective merchandise to manufacturers. If online trials of software sales prove successful, however, software distributors and retail stores are likely to face a drastic erosion of their business.