The 1997 computer year in review

by John Boyd

In stock market lingo, japan's year of the bull turned out to be the Year of the Bear for domestic semiconductor and PC manufacturers. Memory chip prices in 1997 continued their downward spiral, while PC shipments slipped after experiencing years of high growth.

It wasn't all gloomy news for the information technology (IT) industry, however. Networking technologies like the Internet and Windows NT continued to spur demand. Monopolists Intel and Microsoft continued to skim the cream off industry profits. And Japanese electronics manufacturers continued to launch bright new products, such as DVD-ROM and DVD-RAM drives, that opened users' eyes and ears (though not necessarily their wallets).

Chip makers get bagged
With hungry new Korean and Taiwanese semiconductor manufacturers frothing at the mouth, the price erosion in dynamic RAM memory chips that had begun in 1996 continued to eat its way through 1997. Popular 16-bit DRAM (dynamic random access memory) chips, which had cost more than $15 each in 1996, had fallen to $7.30 by the third quarter of '97. Meanwhile, 64M-bit DRAMs, which twelve months previous had sold for a premium $200 each, nose-dived to $40. And at less than $2 each, 4M-bit DRAM chips were cheaper than a can of the potato variety.

Yet there were still profits to be mined in other veins of silicon. Japan's largest semiconductor manufacturer, NEC, saw its income climb on strong sales of application-specific integrated circuit (ASIC) chips, RISC microprocessors, and certain types of 64M-bit DRAMs.

PC sales slump
PC sales that had exhibited growth rates as steep as 70% in recent years, suddenly angled downward (especially in the home market segment), forcing market researchers Dataquest Japan and IDC Japan to replot their annual shipment estimates in the same direction. For the April to September fiscal half-year period, the Japan Electronic Industry Development Association reported that PC shipments actually fell 1%, to 3.36 million units, from the same period in 1996. PC sales in the country's big three electronics districts - Tokyo's Akihabara, Osaka's Nipponbashi, and Nagoya's Osu - experienced a combined 21% year-on-year decline in the April-to-June quarter. According to a piece in The Japan Times, some 50 stores in Akihabara alone closed or were going bust in 1997, prompting a PC salesman there to wail, "There's no hope!"

One obvious reason for slumping PC sales was higher prices. The Japanese government raised the national consumption tax from 3% to 5% in April, putting a damper on all consumer buying. Not that a 2% bump is the whole story, given that PC prices had begun climbing before the tax hike occurred.

Recall that when Fujitsu belatedly dived into the DOS/V PC market several years ago, it resorted to a bloody price-cutting strategy to grab the No. 2 market position, behind perennial leader NEC. For whatever reasons - no doubt including falling profits for its DRAM memory chips and the rising howls of competitors alleging "dumping" - Fujitsu jacked up its PC prices with the introduction of new models in 1996. This took pressure off the industry, and PC prices overall began rising and stayed high through 1997, squelching demand in the process.

Foreign competition makes its mark
Fittingly, though, Compaq - the company that shocked Japan's PC industry out of its proprietary lethargy earlier this decade - once again moved to exploit the pricing issue. After introducing full-feature systems costing under $1,000 in the US, Compaq Japan launched similar models onto the Japanese market in September. A Cyrix-based 180-MHz system with monitor, 1.6GB hard disk, and 8X CD-ROM was priced here at less than ´140,000. And sales are going well, according to Compaq.

Another US PC vendor that's kept prices competitive is Dell Computer. Dell has refined the art of direct marketing to such a degree that it is impacting the entire industry with its business model. Dell takes PC orders over the phone, on the Internet (now over $2 million a day), and through its direct sales team. This keeps inventories lean and costs down, and allows customers to "build to order."

In a visit to Tokyo in September, founder Michael Dell said that the company had grown by 67% worldwide in the previous business quarter, and was doing equally well in Japan. Dell's success has spawned imitators in Gateway 2000 and Micron Electronics, which have also set up shop in Japan.

Now, Compaq and IBM are scrambling to work with their channel partners to emulate some of Dell's marketing ideas, while Apple recently established an online store where customers can build Macs to order. Given the impact of pricing in Japan, can domestic PC vendors afford not to make similar moves?

Trying for a comeback
Meanwhile, NEC surprised the pundits when it introduced a new line of industry standard personal computers. The PC98-NX series (not to be confused with the proprietary and long-lived NEC PC98 series) is based on next-generation 32-bit Wintel architecture, not yet otherwise generally available. It requires Microsoft's delayed Windows 98 operating system (OS), now due out in the middle of this year, to show what it can do.

NEC will continue to market its venerable PC98 series, which has dominated the Japanese personal computer scene since the early 1980s - with a magnificent record of virtually unchallenged superiority until quite recently. But with the PC having become the strategic IT technology, competition is inevitably mounting, and NEC is seeing its huge lead in market share steadily shrink before an aggressive Fujitsu.

Another company experiencing eroding share is Apple. The US parent and its Japanese subsidiary have been plagued by managerial problems since their founding. Now Apple has returned to its core, inviting cofounder Steve Jobs to "temporarily" take over the reigns after booting out yet another CEO, Gil Amelio, following a series of mostly spiraling losses.

Many fans of the Macintosh, Japanese included, thought Jobs, himself, was the best man for the head honcho job - that is, until he scandalized them by jumping into bed with Bill Gates for a cheap $150 million and a promise. While the fanatics shouted "Betrayal!" the industry and the stock market made much of the symbolic value of the affair. It helped stop the hemorrhaging and even put a shine on the company's lowly share price.

More practically, the Apple-Microsoft romance ended the long-standing litigation between the two over alleged OS infringements by Apple. And now Microsoft promises to continue supporting the Mac with software, while Apple will offer Microsoft's Internet Explorer (IE) as its de facto Web browser.

- Days of auld not-so-lang syne - It's easy to forget just how much Japan's IT market has evolved in the past half-decade. In 1993, for example, NEC (with its proprietary 9801 series) accounted for 53% of the 2.5 million PCs shipped in Japan. Apple was firmly ensconced in 2nd place with a 14% market share, double the 7% share for No. 3 Fujitsu (which also relied on its own proprietary architecture in those days). On the software side, Windows 3.0J (finally released in May 1993) was widely accounted a disappointment in speed and functionality. DOS, in its myriad (NEC, Fujitsu, Hitachi, and IBM) proprietary flavors, remained king; today's IBM-compatible DOS/V standard was only beginning to make its mark on the market. As an overview of how the domestic IT market has progressed since then, I've selected some excerpts from our previous "year in review" features.-Ed. From "The Computer Year 1994" (Jan. 1995, p. 30) In 1994, PC shipments in Japan will top the three million mark for the first time ever [with forecasts of] a beefy 27% increase in PC sales. Growth has been the common trait for all the major segments of the PC industry in 1994.... Even many of those pesky foreign computer companies put on weight as they solidified their position here. In 1994, DOS/V entered the mainstream, competing with Apple Japan's Macintosh and NEC's 9801 and 9821 in legitimacy, and in ever growing numbers. Almost 2.5 million copies of Windows 3.1 were shipped during 1994.... US software developers have taken advantage of the Windows boom to speed ahead of their Japanese competitors. A new wrinkle appeared in multimedia hardware at the May 1994 Business Show: a number of vendors unveiled computers with TV capability. Deregulation was... the name of the game in the cellular phone market in 1994. In April, a series of changes ushered in new digital services, new companies, and an end to such costly restrictions as the rent-only handset rule.... The competition is doing wonders, not only for bringing down prices, but also for boosting the number of subscribers... [to] as high as 1.5 million. From "The Computer Year 1995" (Jan. 1996, p. 33) DOS/V vendors, as a combined force, have now developed the muscle to challenge the market hegemony that NEC has so industriously built up for itself over the past decade.... In 1995, NEC's market share slipped below 50% for the first time in a decade. The major event of the year... was Microsoft's release of the long-anticipated, long-delayed Windows 95 operating system. The loudness of the PC boom in Japan surprised almost everyone. IDC Japan... had forecast in March that the industry would ship 4.4 million units, a hefty 30% increase over 1994.... Just six months later, however, IDC jacked those figures up to 5.5 million units to be shipped - a big, fat 63% increase. The cause was, in part, an unforeseen buying binge by home users. Apple Japan announced that it shipped 752,000 units during its 1995 business year, a big 45% increase over 1994. Japan may have come late to the Internet, but it is catching up fast. From "Japan Computer Year Roundup, 1996" (Jan. 1997, p. 24) The Internet as a computing phenomenon has outshone all technologies preceding it in speed and growth of acceptance, in user and non-user interest, and particularly in engendering... awe and media hype. Japanese corporations and end users, rightly perceived as generally trailing their US counterparts, accelerated the pace of catch-up.... IDC Japan's forecast of 8.4 million units represents a 47% increase over 1995's record year of 5.7 million units shipped. A big event in [the consumer market] arena that carries implications for PC users was the launch of DVD players in November by Toshiba and Matsushita Electric. In mid-range computing, Windows NT came into its own with the introduction of version 4.0 for the Japanese market in November. 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.

Browsing the competition
This latter move is a bitter blow for the competing Navigator browser from Netscape Communications, which is witnessing its market-share lead shrivel under a massive Microsoft marketing onslaught. Leveraging its OS monopoly muscle, Microsoft had already strong-armed PC vendors into bundling IE with their machines. Roping in the maverick Apple completes the noose around Netscape's neck. And with Microsoft blending IE into its Windows OS, the noose is tightening by the day.

The outcome is that Netscape Navigator's market share, once over 80%, had dropped below 60% by September. So stark has been the reversal that the US Justice Department stepped in and accused Microsoft of "undermining consumer choice," while threatening to fine the company a record $1 million a day for breaking a 1995 consent decree to behave itself in such matters.

More recently the US Senate Judiciary Committee, looking into Internet competition, has also begun probing Microsoft's "efforts to exercise its monopoly power." And to really rub it in, Japan's Fair Trade Commission sheepishly announced that it, too, is investigating Microsoft's monopolistic activities.

Two decades ago, IBM experienced similar government antitrust action when it virtually controlled the world's mainframe business - Japan being the single exception. The investigations caused Big Blue to tread so softly that it lost market momentum. Not so Big Bill, who thrives on adversity. Instead, he and his pugnacious first lieutenant, Steve Ballmer, continue to whip Microsofties forward in every which way, including enterprise computing, WebTV, broadcasting, Internet content, online services, and electronic banking. Yet not quite everything Bill touches turns into billions. Microsoft's online service, the Microsoft Network (MSN), has gone through several upheavals, incurring in the process a shabby reputation among many of its 2 million users, here and abroad. According to the Wall Street Journal, MSN, among other expensive gaffs, was responsible for $200 million in lost billing charges.

The growth problems of MSN's major competitor, America Online (AOL), appear minor by comparison. AOL, having bought out rival CompuServe, and after starting up in Japan, now counts more than 10 million customers worldwide.

An eNTerprise OS
Still, one flawed diamond in Microsoft's bulging bag of precious stones can be overlooked when the rest sparkle so brightly with profit and promise. The latest Microsoft gem is Windows NT, which has taken the ascendancy over Novell's NetWare OS in the low-end file-and-print PC network market. NT has made particularly great gains in Japan, where it is taking commercial markets by storm.

NT's success here has been helped by the fact that, compared with the US and Europe, neither NetWare nor Unix have been as widely used for commercial applications. Unix, for instance, has been largely confined to the technical workstation market and some high-end corporate computing applications.

Now NT, with the help of Intel's powerful Pentium II chips, aims to make headway in enterprise computing, where Unix reigns as king, albeit a threatened one. Still, with a white knight like Sun Microsystems doing battle daily with Microsoft's Evil Empire, Unix is not about to abdicate. Yet the venerable OS is going to face further pressure soon when Microsoft releases NT 5.0, featuring a fleshed-out clustering technology that can combine the power of up to 64 NT servers to produce mainframe-like performance.

No surprise, then, that the various government antitrust investigations into Microsoft have the full support of Sun, which refuses to back NT any which way. Sun has the most to lose from Microsoft's growing reach into the enterprise and the Internet.

The Java jive
Sun is also the creator of the Java Internet programming language, which it is attempting to morph into an industry-wide "write-once, run-anywhere" application platform. This move is aimed to undermine Microsoft's market monopoly with Windows. But to succeed, the plan requires the rest of the industry to follow Sun's guidelines on keeping Java "pure." Sun knows it must not let Java become the object of a "flavors war" - something that has greatly hampered the acceptance of Unix over the years.

Microsoft argues that the industry already has what Java hopes to accomplish. Microsoft controls about 90% of the world's desktop computers via its Windows 95 and NT operating systems, which incorporate a Java-comparable technology called ActiveX. Not about to assist its would-be nemesis, Microsoft has been tweaking Java in order to make it sparkle on Windows. In response, Sun is crying foul; it, too, has hauled Microsoft off to the courts.

Networking potential
Such squabbling over Java has not deterred Japanese PC vendors from moving forward to test its wider potential. At the fall Com Japan, Fujitsu demonstrated a JavaOS-based Network Computer (NC) aimed at banks, cooperatives, and other organizations looking for a user-friendly terminal to conduct online transactions. Toshiba, too, unveiled desktop and mobile NCs, as well as in-depth middleware to support sophisticated network administration and reduce the "total cost of ownership" (an issue that is troubling corporate IT managers around the globe). These and other Japanese NC introductions will be watched with interest.

Western IT folk have long looked down their noses at Japanese industry's tardiness in installing PCs and networks. But now, that tardiness is allowing firms here to skip over older, expensive technologies that US and European companies are saddled with. And given that Japan still has millions of dumb terminals keeping mainframes company throughout the archipelago, it could surprise the world by becoming the leading market for NC computing. Stay tuned.

Spotlight on data storage
An area where Japanese electronics manufacturers already lead is in optical storage technologies. Companies like Matsushita, Toshiba, and Sony dominate the CD-ROM market, and Fujitsu is a pace setter in MO (magneto-optical) storage. Ironically, though, it is the quite ancient magnetic storage technologies from Iomega, revitalized in the forms of its best-selling Zip and Jaz drives, that have grabbed mind share for additional PC storage around the globe, including among users in Japan.

But in a multimedia world of memory-hungry image files, video clips, video conferencing, and 3D games with surround sound, the 600MB capacity of a CD-ROM disc, or even the 1GB capacity of a Jaz disk, suddenly appear constrained. Enter DVD, the digital versatile disk. Although the same size as a CD-ROM disc, a DVD disk boasts a 4.7GB capacity, seven times larger. That's enough storage to play a 2-hour MPEG2 movie of a picture quality higher than that seen on a laser disk - and with enough room left over to provide half-a-dozen foreign language dubbings for added value.

One day DVD may replace grainy VHS movie tapes. But for that to happen, much more compelling software is going to be needed than the 400 or so titles expected to be available by the time you read this. Until that day arrives, DVD makers such as Matsushita, Toshiba, Hitachi, and Pioneer are going after the PC market. PCs incorporating DVD-ROM drives appeared in early 1997, though again, lack of exciting software and high prices have been a purchasing deterrent to all but the "mania" crowd. Now the same manufacturers wonder if they will have more luck with emerging DVD-RAM drives.

Along with a nifty portable DVD player and a notebook PC incorporating a DVD-ROM, Matsushita tentatively demonstrated a rewritable DVD drive at the Japan Electronics Show in October. A product could be available by the time you read this. DVD-RAM specs call for 2.7GB, a standard supported by the DVD Consortium.

Splitting with that long-troubled Consortium, however, Sony and Philips have opted to go their own way. With the help of Hewlett-Packard, they will develop a much higher capacity rewritable optical disk, based on incompatible technology - a move likely to further hamper the early acceptance of DVD.

Collision course!
Looking ahead in 1998, questions concerning such matters as Microsoft's monopolistic activities and DVD's future are likely to take a back seat with many IT managers. For now, they must tackle what has been described as the most momentous issue to ever face the industry: the Year 2000 Problem, or Y2K as it's often called.

Given Japanese industry's significant dependence on mainframes and other large legacy systems, which are especially prone to Y2K problems, Japanese corporations may be particularly vulnerable. If such systems are to be maintained, then code has to be rewritten to accommodate dates in the new millennium, if chaos is not to ensue.

Time is now running out.

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