1996 Japan Computer Year Roundup

by John Boyd

In astrological terms, 1996 was the Year of the Rat in this part of the world. But for computer users in Japan -- as well as almost every other place on the planet -- there was only one shining star that needed divining in 1996: The Internet.

In '96, the Internet surpassed even the much-hyped and long-anticipated Windows 95 to become the fastest growing technology base in the industry. The Net transcended even its own hype as corporations -- first in the US, then in Japan and Europe -- moved in droves to exploit the ease-of-use, openness, and global reach of Internet technologies like TCP/IP communications protocols, HTML programming, and browser interfaces to construct their own "internal Internets," in the process spawning a new (and, for some, still confusing) term: "intranets."

A true paradigm shift

The significance of this extension of the Internet into everyday corporate life, including marketing, human resources, and administration, cannot be over-emphasized: It underscores a major computing shift -- one actually worthy of being tagged with that much abused term "new computing paradigm."

Old computer hands in Japan, who have lived through the rise of the mainframe, ofucon (office computers: Japan's turnkey packaged version of minicomputers), PC, and workstations and networks, all agree: The Internet as a computing phenomenon has outshone all technologies preceding it in speed and growth of acceptance, in user and nonuser interest, and particularly in engendering worldwide awe and media hype.

The Net even took on something of a mystic quality when mighty Microsoft genuflected before its power and pervasiveness. The software giant, including its Japanese subsidiary -- in what can only be characterized as a full 180-degree turnaround -- announced that it had totally reengineered itself and its products to become "Internet ready." So rapid and emphatic was the belated Microsoft conversion that the gleeful anti-Microsoft industry chatter that had been building up to a screech over the previous 12 months was abruptly halted. Industry pundits who had proclaimed in magazine articles that Microsoft was "missing the paradigm shift," or "losing out to newcomers" (like Internet-phenomenon Netscape Communications), or "failing to wake up and smell the Java" (from Internet-aware Sun Microsystems) were forced to eat their words.

To demonstrate that the change was hard core and heart felt, Microsoft cofounder and chairman Bill Gates refocused the corporate cross hairs (permanently embedded in his large spectacles) on Netscape. He then proceeded to strike the cocky startup at its technological center: Netscape Navigator was the Web browser of choice in Japan and worldwide, with an estimated market share at one point topping 90%. Such an extraordinary market lead demanded an extraordinary response, and Microsoft came up with one by bundling its new Internet Explorer browser free with Windows 95 and making it otherwise freely available. This triggered the "browser wars," with the two leaders working feverishly to develop "new and improved" versions.

When Gates announced, during his keynote speech at IDG's Windows World Expo/Tokyo '96, that he would incorporate the next version of Explorer as an interface for Windows 95, market appreciation for Microsoft soared, while Netscape's share prices tumbled. This dazzling strategic move on Microsoft's part is one that could easily be the telling shot in the browser wars. Even more than undermining Netscape's potential to end Redmond's solitary reign over the software industry, it threatens Netscape's chances of becoming a major industry player.

Microsoft's willingness to confront its lack of foresight by reinventing itself in double-quick time only adds to Gates' stature as being the most competitive (some might say ruthless) information technology business leader since the Watsons led IBM to dominance in earlier decades. Whether you loathe him or love him, Gates -- just 41 in 1996 -- will go down as the most successful business leader of the decade, if not the century, should he succeed in guiding Microsoft through the ongoing Internet revolution unscathed and enter the next decade with its power intact.

The outcome of the current industry upheaval is hardly a foregone conclusion, however. Netscape has teamed up with Oracle and Sun in developing scaled-down network computers (often called "Webtops" or "NCs") that let the server do most of the work. This offers some intriguing possibilities for corporations that are finding the cost of staff-wide PC ownership a troubling expense, and gives Netscape some powerful allies.

Hardware makers have high hopes

Meanwhile, Japanese corporations and end users, rightly perceived as generally trailing their US computing counterparts, accelerated the pace of catch-up. Market researchers Dataquest Japan and IDC Japan both forecast PC shipments of over 8 million units for 1996. IDC Japan's forecast of 8.4 million units represents a 47% increase over 1995's record year of over 5.7 million units shipped (which was itself a nearly 70% growth).

While PC vendor rankings and market share for 1996 were still being compiled at press time, IDC Japan data for the first three quarters of 1996 shows that the only change in the top five players was Apple Japan dropping one place, to fourth spot, where it now trails IBM Japan, Fujitsu, and perennial market leader NEC.

The Apple Japan subsidiary's parent in Cupertino, California, underwent a series of travails in 1996. Not the least of these was an accumulated three-quarter-billion dollar loss, and the squeezing out of company president Mike Spindler early in the year, when Sun Microsystems seemed about to swallow the beleaguered Apple. While the parent company moved quickly to install one of its directors, Gilbert Amelio, as the new president, Apple Japan took more than a year to finally appoint a replacement for its departed head, Seiji "Frank" Sanda, who left back in 1995. The new skipper is Tetsuya Shiga, formerly with Digital Equipment Japan, who first came on board as Apple Japan's director of sales.

As the year wore on, a bruised Apple showed signs of a turnaround. It even chalked up a $25 million profit in its fourth quarter -- which shocked the doomsayers -- though shipments compared with the previous year still declined. Apple Japan, meanwhile, increased shipments in fiscal 1996 (ending September) by 19%, to 893 million units. Though respectable, this trails significantly behind the industry-average growth.

In Japan, Apple, with its venerable and much-loved Macintosh, is virtually odd-man-out in an industry now totally enamored of Microsoft's Windows 95 operating system (OS). Though the Macintosh still has the edge in setup and plug-and-play over Windows 95, the latter is now firmly ensconced as the industry standard in Japan. This is a major change when you recall that just a few short years ago, Japan's market was a mishmash of proprietary architectures that kept prices artificially high and use of PCs low, and which kept Japanese end users in the backwaters while the rest of the unified PC world advanced with mainstream developments.

Japan eyes the US market

Even market leader NEC has bowed to the inevitable and fully supports the Microsoft standard on its dominant (though still proprietary) PC98 architecture. And, in a strategically significant move, NEC bought out Packard Bell, the leading US home computer vendor, merging it into its overseas PC operations to form Packard Bell-NEC. A cash crunch in privately-owned Packard Bell -- a company long operating on the bleeding edge of a profit-thin US consumer market -- opened the way for the NEC takeover. The deal clearly gives NEC a strong base in the US, and it enables NEC to import Packard Bell PCs for installations in Japan that require the industry standard (thereby allowing NEC to sidestep its stated refusal to manufacture DOS/V-compatible PCs for the Japanese market).

At the same time, though, the acquisition will severely test NEC's managerial skills. The company has to work hard and smart to successfully square up its own established US operation and products, not only with those of Packard Bell, but also with those of PC notebook vendor Zenith Data Systems, a late takeover by Packard Bell using an NEC capital infusion. Lining up these disparate parts, products, and cultures will require an extraordinary feat of juggling that may take NEC some time to get down pat. No surprise, then, that IDC's third-quarter shipment data on US PC vendors showed that while Packard Bell-NEC retained the No. 2 position (behind Compaq), its market share dropped year-on-year from 14.9% to 10.5%.

NEC is not the only Japanese PC vendor to eye the large US market. In June, Sony introduced its long-awaited, feature-laden multimedia PCs in the US. While their impact seems to have been less than anticipated, Sony has had outstanding success with its PlayStation game computer in the US, Europe, and Japan, having shipped a total of 9 million units as of October 1996. Now, however, it faces stiff competition from Nintendo's new 64-bit home game machine, which features outstanding 3D animation (although a dearth of software has created many fence-sitters).

Hitachi and Fujitsu have also started up PC operations in the US, and began notebook PC shipments during 1996. Electronic miniaturization has long been a strong point with Japanese manufacturers, and given that Japan totally rules the LCD (liquid crystal display) market, establishing a bridgehead with a notebook strategy makes a lot of practical sense.

Just look at laptop king Toshiba, which until now has pinned its entire PC hopes on a portable PC strategy -- and done regally well as a result. Toshiba, a virtual nonentity in the desktop market, offers a full complement of portables, from the diminutive Libretto palmtop released in 1996 (which is able to run Windows 95) to full-featured laptops with CD-ROM drives. Toshiba hovers around the No. 5 position in Japan's overall PC market on the strength of its laptop sales, and in the US portable market it commanded a 25% market share in mid-1996 -- more than the combined total of the next several vendors. Hoping to leverage off its success in portables, Toshiba chose the US market to first unveil a new line of consumer-oriented PCs that incorporate small LCD panels with buttons for easy switching of functions.

New storage media

Speaking of the consumer market, a big event in this arena that carries implications for PC users was the launch of DVD (digital versatile disc) players in November by Toshiba and Matsushita Electric. Last-minute software bugs and a lingering uncertainty over software copyright issues saw to it that few DVD software packages were available on the first day. When the kinks are worked out, though, the market potential is enormous.

DVD is a next-generation optical storage technology, backwards compatible with CD-ROM. Its capacity of 4.7GB or 8.5GB on a single side (depending on whether one or two data layers are used) gives it about 7 to 13 times the storage capacity of a CD-ROM disc. Just a single DVD layer provides enough storage to play back more than two hours of high-resolution movies in MPEG-2 compressed video format.

The introduction of DVD players into the market was almost immediately followed by announcements from Fujitsu, then Matsushita, that they would ship the world's first DVD-ROM (read-only) PCs in December. Toshiba, meanwhile, planned to begin a DVD-ROM upgrade service in December for some of its newest desktop models. The idea is that you send in your PC to Toshiba, which will outfit it with a DVD drive, MPEG-2 add-in board, and extra memory, then ship it back to you -- for a price tag of JPY175,000.

Without compelling software titles, however, most PC users will likely stick with CD-ROMs for the time being. Let's face it: There are precious-few compelling titles out there, and just filling up the larger DVD space with more junk, or movies we've already seen, is hardly a compelling reason to buy.

DVD continued to make news when Toshiba President Taizo Nishimuro told the press that his company aims to ship a DVD-RAM (writable) PC in 1997, possibly as early as autumn. Matsushita was quick to make a similar declaration, though there is considerable industry skepticism that this timetable can be met.

Sources inside and close to the DVD Consortium -- a group of 10 Japanese and European electronics manufacturers and Time Warner from the US -- complain of delaying tactics by Sony and Phillips, which have a different agenda to most of the other members. Sony denies such allegations, responding it is simply putting forward technology proposals along with other members. But DVD-RAM also faces hurdles with software content providers, particularly the Hollywood studios whose movies are expected to be the big draw when available on DVD discs.

The problem is that it will become a cinch to attach a DVD player to a PC, then proceed to make exact digital copies of movies (or anything else) via the DVD-RAM drive. This naturally has many content companies fearing that they face illegal copying of their intellectual properties on an unprecedented scale. Given all the obstacles still facing DVD-RAM, one source monitoring the DVD Consortium says we shouldn't expect to see DVD-RAM PCs until sometime in 1998.

DVD, meanwhile, faces increasing competition from established technologies. In December, Toshiba was to begin sampling 15X CD-ROM drives (in a market estimated to have grown by 25% in 1996), while Korea's LG Electronics planned a December shipment of a 16X drive. Owners of CD-ROMs produced by small companies that do not follow the industry Red Book standard, however, will likely find that their discs won't run on the faster drives, where precise compliance with standard specifications is critical to smooth play. So, caveat emptor.

Matushita's PD drive, a removable optical technology capable of storing 650MB and which, like DVD, is backwards compatible with CD-ROM, also gained support in 1996. NEC and IBM joined Compaq, Seiko Epson, Nihon Unisys, and Mitsubishi's Apricot computers in shipping some PC models that incorporate a PD drive. Matsushita claims that it, and its OEM firms, had shipped a total of 700,000 drives worldwide as of November.

There are other competitors as well. Fujitsu slogs on at the head of a dwindling group pushing the 3.5-inch MO (magneto-optical) drive. MO disks now sport a top capacity of 640MB and have direct overwrite capabilities, meaning writing can be done in one pass rather than two, as was previously the case. And, of course, there are the tremendously popular and low-cost overstuffed floppy Zip (100MB) and Jaz (1GB) drives from Iomega, which have filled the shelves of Akihabara's PC stores throughout the year. The emerging LS-120 floppy disk standard is also poised to gain market acceptance.

Other events of note

In mid-range computing, Windows NT came into its own with the introduction of version 4.0 for the Japanese market in November. IDC Japan forecasts shipments of 250,000 packages in just a six-week period (through December 1996), and anticipates NT's installed based will exceed 2 million by the end of 1997. The demand for NT is coming from corporations scrambling to get on the Internet and set up internal intranets. This huge shift to NT can only hurt the growth of the competing NetWare and Unix OSes -- though Sun Microsystems, which has consistently led the Unix workstation rankings in Japan with a 30% market share, will likely continue to do well at the high end of the mid-range computing business.

In supercomputers, a row broke out between NEC and supercomputer pioneer Cray Research Inc. (now owned by Silicon Graphics), which was backed by the US Commerce Department. Cray accused NEC of dumping (selling below cost) when the Japanese manufacturer won a contract to install one of its SX-4 supercomputers at the University Consortium for Atmospheric Research. NEC responded by charging that the US market is closed, and filed a complaint with the Court of International Trade in New York. Japan's Foreign Ministry also stepped in with criticism of the affair so far, calling on the US government "to conduct the investigation using fair, transparent procedures."

In a quick rundown of other significant events, the affordable PHS (personal handyphone system) came into its own at mid-year, after a very shaky start. The installed base as of year-end had surpassed 4 million users. Manufacturers improved service by boosting the number of PHS base stations throughout the greater Tokyo area, and began giving away older handset models as a way to sign up subscribers and collect monthly fees. The strategy worked: millions did sign on (and now plague the rest of us at close quarters with their disruptive conversations).

When Microsoft shipped its Windows CE in November -- a sort of "Windows 95 Lite" for small, portable computing devices -- NEC, Casio, and Hitachi (along with Compaq) were quick to announce handheld computers in the US priced in the $500 to $600 range. A Japanese-language version of this "lite OS" may have become available before year-end.

These new devices will do battle with Apple's revitalized and souped-up Newtons, which now boast 160-MHz StrongArm chips, as well as Sharp's Zaurus, which led the pack in 1996. Sharp strengthened its reputation as the master of the PDA (personal digital assistant) concept when it introduced a sparkling color Zaurus that's Internet-ready. You can even plug in a tiny camera and store pictures or transmit them over the Internet, a marvel of miniature engineering.

All-in-all, it has been a fast-paced, event-filled year for the Japanese IT industry. Can 1997 measure up?