Can The U.S. Stay Ahead in Software?
America Still Dominates the Market, But Foreign Rivals Threaten
Richard Brandt in San Francisco
With Evan I. Schwartz in New York, Neil Gross in Tokyo, and bureau reports
March 11, 1991
In early 1982, Philippe Kahn was living on the French Riviera, teaching mathematics by day and playing jazz saxophone by night. But a new passion was beginning to take over his life: the Apple II computer. He began spending hours creating programs for it and soon was hectoring his American-born saxophone teacher to translate articles from U. S. computer magazines. After months of watching Kahn's obsession grow, the teacher said: ''People like you don't live here. They live in California.'' By summer, Kahn had arrived in Silicon Valley--with his Apple and his sax--and was planning his own software startup, Borland International Inc. ''You have to be where the action is,'' he says. It was true then and is still true today: When it comes to computer software, the U. S. is unquestionably where the action is. While the U. S. has seen its lead in microchips, consumer electronics, and many kinds of computer hardware slip away, it has maintained a huge advantage in software.
American companies command nearly 60% of the world's $110 billion market for software and related services, according to International Data Corp. All told, more than 1.2 million programmers and software engineers work in the U. S., plus nearly 200,000 more people employed in related jobs at thousands of software companies, according to the U. S. Labor Dept.
The software lead does far more than create a vibrant domestic industry. High-quality software is key to running everything from personal computers to Patriot missiles. In automated factories, stock exchanges, banks, airlines, and just about every other business, America's software edge is helping. ''It's a bright spot for the U. S.,'' says Daniel F. Burton Jr., executive vice-president of the Council on Competitiveness, a think tank of chief executives from major U. S. corporations. ''Our strength in software is compensating for our weakness in other areas.'' That strength will be even more important as computers begin to administer the world's electronically linked economy.
Little wonder that wherever you go, from Japan to Germany, from Canada to Singapore, America's rivals are investing billions to build up their own software capabilities. Mostly, those efforts have been focused internally and haven't even slowed U. S. software exports. But there's no reason to be complacent, say industry experts, some of whom are beginning to sound the alarm: ''I'm becoming a fanatic on the topic,'' says Brad Cox, co-founder of Stepstone Corp., a Sandy Hook (Conn.) supplier of advanced software for workstations. ''The auto industry is gone, and the computer industry is almost gone. The only industry we have a leadership position in is software. And I think we're losing that like all the others.''
To many observers, that dire prediction is premature, perhaps by decades. Yet there are signs of weakness in the U. S. industry. For example, Japanese rivals see U. S. inattention to quality as a key opportunity. As they did in automobiles and electronics, they are pushing constantly to improve their software. Already, Japanese ''software factories'' churn out programs with half as many defects as comparable American products, according to a study by the Massachusetts Institute of Technology. And, in an effort to create a strong, pan-European software industry, members of the European Community are trying to build Japanese-style programming factories (page 104).
Another potential problem for the U. S. industry is the growing shortage of top-notch programmers. That has been a perennial headache for big corporations that write their own software. Now, with fewer college students training for the field (chart, page 105), American software expertise could begin to slip. Because of the dearth of programmers, many American businesses already farm out software work overseas.
In part, the U. S. lead may simply be fate: America was the first big computer market. The business of packaged software--prefabricated programs, rather than custom ones--got its start in 1968 when IBM was forced to stop providing software free with hardware. That gave American software entrepreneurs their start. The industry really took off with the advent of the PC, which created a mass market. ''The software business just got started in the U. S. sooner,'' says Roger Heinen,a vice-president at Apple Computer Inc. ''I don't think we ought to take that to the bank.''
Indeed, computers such as Apple's Macintosh and the IBM PC have made it far easier for the rest of the world to catch up. With a relatively tiny capital investment in personal computers and some knowhow, just about anybody can set up shop as a software maker. ''Software can be done anywhere there is an individual with electricity and a computer,'' says David W. Smith, engineering vice-president at Beaverton (Ore.) software startup Analogy Inc.
All over the world, starry-eyed entrepreneurs dream of duplicating Philippe Kahn's success. Starting with a personal loan, he began selling programming language packages for PCs. Today, Borland International is a $190 million company with spreadsheets, data bases, and word processing programs. Even William H. Gates III, the billionaire chairman of Microsoft Corp. and arguably the most influential figure in the computer industry, was once just a college dropout with a knack for Basic, the simplest of programming languages.
Such entrepreneurs have kept the U. S. far ahead. With a penchant for risk-taking and access to venture capital, they have nurtured the creative spark that leads to advancement in technology. At dozens of small companies and at the research labs of large ones, programmers continue to dream up new software for evolving computer hardware. These days, they're targeting ''multimedia'' computers, networks, and palm-top PCs that ''read'' handwriting.
To get the most creative software, industry executives say, programmers have to be free to work as they please, beyond the confines of normal business routines. And individuals or small teams, rather than big organizations, seem to get the best results. ''Software today is best practiced slightly out of control,'' says Eric E. Schmidt, president of Sun Microsystems' new software subsidiary, Sun Technology Enterprises Inc.
But there are signs that a stronger hand may be needed in the future. As desktop computers get more and more powerful, and as they are linked together in networks with larger machines, software becomes far more complex. Creating a program that handles multiple media and works with hundreds of other PCs requires disciplined efforts by programmers. ''As the packaged software organizations start building larger and more complex programs, they start running into the problems that the big defense contractors and systems integrators have had for 15 years,'' says Peter D. Gross, vice-president for advanced technology at Computer Sciences Corp., an El Segundo (Calif.) company that helps design complex government computer systems. ''That's why recent products have come out late and not of the quality expected.''
There's no shortage of horror stories. When Lotus Development Corp. set out a few years ago to create a major upgrade of its 1-2-3 spreadsheet, for example, it missed its original completion target by a year, and even then some new features had to be left out. At one point, more than 100 programmers were assigned to the job, making it a nightmare to manage. Data-base maker Ashton-Tate still hasn't recovered fully from the disastrous delay of its dBase IV data-base program. The first version was riddled with bugs. And Oracle Corp.'s accounting software for minicomputers had so many flaws that some customers refused to pay for it. Even the biggest names in computers have problems completing big software projects. IBM's ambitious OfficeVision office-automation package, for example, is running more than a year behind schedule.
Quality could be the Achilles' heel of the U. S. software industry--and industry executives know it. ''In the U. S., we have a history of shipping the product and getting the details right later,'' concedes David Reed, chief scientist at Lotus. ''The Japanese seem focused on getting every detail right.''
Japan's quality push has ominous implications for U. S. software makers, concludes Watts S. Humphrey, director of the Software Process Program at Carnegie-Mellon University's Software Engineering Institute. He believes that techniques such as statistical quality control, which helped Japanese companies score in other industries, can make the difference in software as well. ''Exactly the same things apply to software as to semiconductors,'' he says.
For more than a decade, electronics giants such as Fujitsu Ltd. and Hitachi Ltd. have been practicing quality-manufacturing techniques in their software factories. While software-development laboratories in the U. S. stress individual creativity, the Japanese software factory is like an auto plant. ''The process is fixed. You put your requirement on a sheet of paper. You put the instruction on the page, and you hand it to people,'' says Kaoru Hayashi, manager of the software engineering laboratory at Software Research Associates, Inc., a Japanese software maker. ''People writing the code don't even know what they're working on.'' The result, he notes, may be short on creative genius, but it's free of bugs, on time, and within budget.
The proof of Japan's software prowess so far has been in its high-quality exports. Its cars, VCRs, and telecommunications equipment all come fitted with bug-free software. Glitzy video games that America's children play on Nintendo Entertainment Systems mostly come from Japan, too. ''The reason the U. S. is ahead is not because the Japanese can't write good software,'' says Microsoft's Gates, who includes several Japanese in his list of the world's top programmers.
Still, Japanese programmers have had almost no impact on the commercial software business itself. Europe's software makers have also done little in packaged software. But as big corporations reorient themselves for global operations, European suppliers may become far more competitive with U. S. software makers. SAP in Walldorf, Germany, for example, has grown into one of Europe's biggest packaged software companies, with $350 million in sales, because it appeals to such multinational customers. Its accounting and manufacturing software offers a choice of seven languages, handles numerous currencies, and observes accounting rules for various nations.
Many European software makers are making the U. S. market their top priority. Micro Focus Group PLC, which sells programming ''tools'' for software writers, now gets half of its $85 million in annual sales from the U. S. The British company did this by moving many of its senior executives to the U. S. ''The only way to build a successful software company is to immerse yourself in the U. S.,'' says Chairman Paul A. O'Grady, who owns homes on both continents.
Where the Europeans stand out is in custom programming and professional services. Several companies, including Britain's Logica PLC and France's CAP Gemini Sogeti, are trying to become global competitors in systems integration, the business of putting together complete computer systems for, say, a bank. These setups typically include many kinds of computers and a great deal of custom software. ''Europeans are as good at systems integration as anyone in the world,'' says Michael G. Borrus, co-director of the Berkeley Roundtable on the International Economy. And systems integration is increasingly important in the U. S., where corporations are struggling to link different systems and software into networks. Developing nations are pushing their own software agendas. In India, the government has lowered import duties on foreign hardware and encouraged schools and universities to train more programmers. The country now has about 100,000 software professionals. The result is a burgeoning local industry, including a substantial business in contract programming. U. S. banks such as Citicorp and computer makers including Digital Equipment and Hewlett-Packard are shipping work to India, where programmers earn 30% to 60% of what American programmers are paid. ''There is an almost limitless supply of people getting trained in computer science there,'' says Edward J. Selleck, DEC's India export development manager. Singapore's government is trying to establish similar setups. Its National Computer Board (NCB) provides research and development grants and low-cost office space to software startups. Software is an attractive business for countries that have a well-educated work force but lack funds or have limited natural resources. ''That is the beauty of software work,'' says Lim Joo-Hong, deputy directory of research at Singapore's NCB. ''Software only needs people. There is little need for a lot of other resources.''
If the U. S. can't increase the productivity of its programmers, it could begin to feel serious competitive pressure from such countries in the 1990s. ''In China, a programmer will cost one-third per man-year of the cost in the U. S. for equivalent talent,'' says Luis Rodriguez, director of manufacturing and business development at IBM's China-Hong Kong subsidiary. Competing with that could be an increasingly serious challenge for U. S. software makers. The Labor Dept. expects the demand for software professionals to double by the year 2000. But interest in software-related careers at American colleges is waning. ''It's part of the overall decline in the sciences,'' says Kenneth C. Green, a senior research associate at the University of Southern California.
As wages continue to rise in the U. S. and as programming skills continue to improve overseas, some observers see a dangerous trend. Cheap labor abroad could begin to make low-level programming jobs in the U. S. obsolete, warns Edward Yourdon, publisher of the monthly newsletter American Programmer in New York. ''The only thing that has prevented it from being a crisis so far is that the software industry is growing so fast that we haven't seen many jobs being taken away.'' Without such entry-level jobs, the U. S. won't be able to employ large numbers of computer-science graduates, further discouraging careers in the field.
American software developers are working on solutions to these long-term problems. American companies continue to lead the world in creating so-called programming tools, special programs that make software-writing less tedious. For years, the industry bet on computer-aided software engineering (CASE) tools to automate development. But a recent survey by CASE Research Corp. shows that fewer than 35% of CASE customers say such tools have improved programmer productivity or quality. ''There are a lot of people who haven't made it work yet,'' concedes Mike Waters, general manager of Texas Instruments Inc.'s CASE division.
These days, a technique called object-oriented programming is getting more attention. Instead of writing each program from scratch every time, software can be pieced together like building blocks from preprogrammed chunks of code called objects. Since bugs tend to show up mostly in new code, building programs out of pre-tested objects may improve quality. And by recycling tried-and-true computer code, more software can be written by fewer programmers.
But most software experts warn against relying too heavily on such ''silver bullet'' technologies. ''Programming will always be a human and intellectually intensive job, regardless of progress in tools,'' says Abraham Peled, an IBM vice-president and director of computer science research at the Thomas J. Watson Research Center. Peled runs IBM's 70-employee Experimental Software Development Center. Its mission is to explore new ways for Big Blue to produce high-quality software faster.
IBM's approach is to get high-level software engineers to work closely with ordinary programmers. Traditionally, the engineers have created the designs, the specifications that describe exactly what a program should do. Then, the actual writing would be doled out to the programmers. ''That doesn't work because software is just too complex,'' says Peled. Instead of designing the whole thing and then building the whole thing, it may be better to do both concurrently, as if architects were handed hammers and nails. ''This way, everybody programs,'' says Peled. He reports that early results look encouraging, and if IBM deems the project a success, the new technique may be adopted throughout the company.
While they work on long-term solutions to programming and quality problems, U. S. software makers are pushing overseas. That's producing double-digit revenue growth and helping preempt the rise of offshore competition. Microsoft now gets 60% of its revenues from outside the U. S., Lotus gets 49%, and Borland, 34%. Of the top 50 suppliers of commercial software and services in Europe, 13 are U. S. companies. After France, which has 16 companies in the top 50, ''the most Europeanized are the Americans,'' says Morgan David, an analyst at IDC in Paris.
The drive into Japan has been more difficult. About 50 U. S. software makers have offices there, but it is difficult to get proper distribution and costly to have programs rewritten to handle the cumbersome kanji characters. Recently, the Commerce Dept. has started to support the U. S. software marketing effort in Japan. In March, 1990, Commerce Secretary Robert A. Mosbacher signed an agreement known as the Joint Trade Expansion Program with Japan's Ministry of International Trade & Industry (MITI).
It's a relatively minor trade agreement, but it offers a framework forgetting Japan to import more American software packages. Under it, Commerce sponsors an annual trade show in Tokyo for U. S. software makers to demonstrate their wares. Although Japanese businesses tend to rely on custom programs, such packages should have more appeal in the mid-1990s. By 1995, estimates MITI, Japan will have 1 million fewer programmers than it will need. That should create demand for packaged software.
For a different set of reasons, Japanese suppliers have also found the U. S. market nearly impenetrable. ''We can't ship our product to the U. S. because software is culture,'' says Kazuhiko Nishi, president of ASCII Corp., Japan's biggest PC software maker and Microsoft's former marketing agent in Japan. ''Our only choice is to take a stake in established companies. ''Last year, ASCII bought a 10% stake in Informix Software Inc., a maker of data-base packages in Menlo Park, Calif.
It's all part of a growing trend. Companies such as CSK Corp., Japan's largest software and services firm, are buying all or part of U. S. packaged-software companies. ''If you wait, you'll see some very good Japanese products,'' says Junkyo Fujieda, managing director for global business at CSK. But to get into the U. S. market now, he adds, ''I decided it was better to do mergers and acquisitions.'' Last year, CSK bought Micrognosis, a Control Data Corp. subsidiary that makes software for financial trading, and took an equity stake in Wavefront Technologies Inc., makers of graphics software.
It will take years for such investments to pay off. But Japanese companies are patient, and they understand that software is essential. ''American software capability is outstanding,'' notes Tadahiro Sekimoto, president of NEC Corp. ''Companies like NEC have to catch up.''
To some, such remarks serve as an early warning. William E. Stackhouse, a U. S. Air Force colonel, last year convened the Critical Software Meeting, a gathering of U. S. business, government, and academic leaders to assess foreign competition in software. The conclusion: ''Whatever lead we may have is rapidly eroding,'' says Stackhouse. It's time, he says, for the U. S. to begin paying careful attention to how it invests in software technology and education. If not, the Silicon Valley and other American high-tech havens won't remain the places to be if you're hip to software.
OTHERS 6% $6.6 BILLION Other countries in Europe and Asia together supply 6% of the world's software. India is a low-cost programming site. Asian governments help fund startups CANADA 3% $3.3 BILLION Canadian software makers benefit from proximity to the huge U.S. market. Startups can get government funding in return for future product royalties JAPAN 13% $14.3 BILLION Remains weak in packaged programs, such as those used in personal computers. But Japan's computer giants are streamlining development in high-quality ''software factories'' U.S. 57% $62.7 BILLION The software industry grew up in the U.S., the world's largest single market, in part because American companies set the key standards. But will its huge lead be challenged? BRITAIN 6% $6.6 BILLION Programming in English has made it easier for British companies to crack the U.S. market. Britain is also strong in Unix and other ''open systems'' software FRANCE 8% $8.8 BILLION Especially strong in professional services, such as developing custom programs. Through aggressive acquisitions, CAP Gemini Sogeti has become one of the world's largest in that field GERMANY 7% $7.7 BILLION Germans are especially strong in large mainframe programs for accounting and data management. They also are poised to tap a potentially large market in what was East Germany
Photograph: CSK'S FUJIEDA: ACQUISITIONS ARE JUST A HOLDING ACTION PHOTOGRAPH BY STEVE WINTER Photograph: WHERE IT'S AT: PHILIPPE KAHN LEFT A TEACHING JOB IN FRANCE, PACKED HIS SAX, AND BUILT A SUCCESSFUL SOFTWARE COMPANY IN CALIFORNIA ANDY FREEBERG
Copyright 1991 McGraw-Hill, Inc.