+----------------------------------+ | U.S. Industrial Outlook, 1994 -- | iocsn | Computer Software and Networking | +----------------------------------+ (This information is excerpted from a report furnished by the US Department of Commerce.) Summary: Revenues of the U.S. software industry should continue to grow strongly in current dollars in 1994. U.S. suppliers benefitted from their leading position in the world market and the continuing demand from users to harness the power of their computer systems more effectively. The computer software and networking sectors include three industries: computer programming services (Standard Industrial Classification 7371), prepackaged software (SIC 7372), and computer-integrated systems design (SIC 7373). Employment in the U.S. software industry rose in 1993, as it has in each year since 1988, the first year in which employment data were available. The Bureau of Labor Statistics reported that the software industry employed nearly 435,000 people in June 1993, up 9 percent from June 1992. While each of the three major segments of the industry posted gains, growth varied among them during this period. Employment in the computer programming services industry (SIC 7371) increased the most -- 10 percent. Employment in both the prepackaged software (SIC 7372) and computer-integrated systems design (SIC 7373) industries increased 8 percent. In June 1993, there were more than 182,000 employees in computer programming services; 142,500 in prepackaged software; and 110,000 in computer-integrated systems design. In spite of the weak worldwide economy, U.S. computer-software and networking industries fared relatively well in 1993, and are expected to continue to do so in 1994 and the next several years. In general, these industries are young, competitive, innovative, and entrepreneurial, and face good opportunities for increased sales worldwide. The United States is extremely competitive in computer software and networking, although Japanese and European suppliers are making advances in some areas. PACKAGED SOFTWARE ----------------- The U.S. packaged software industry remained one of the fastest-growing sectors of the U.S. economy in 1993. According to International Data Corp. (IDC), the U.S. packaged-software market -- comprised of application tools, application solutions, and systems software -- increased 12.6 percent to 32 billion USD in 1993. Application tools, which include data access and retrieval, data management, data manipulation, and program design and development software, was the fastest-growing category, increasing 15.4 percent to 8.5 billion USD in 1993. Application solutions, defined as programs that perform specific industry or business functions, is the largest segment of the U.S. market, and grew 11.8 percent to 12.4 billion USD. Systems software, which includes operating systems, operating system enhancements, and data-center management software, increased 11.4 percent to 11.2 billion USD. The U.S. software industry posted strong financial results in 1993. According to Business Week, sales of 19 major software and services firms (ASK Group, Cabletron Systems, Ceridian, Cisco Systems, Comdisco, Computer Associates, Computer Sciences, Electronic Data Systems (EDS), EMC, First Data, Gtech Holdings, Lotus, Microsoft, Novell, Oracle, Safeguard Scientifics, Shared Medical Systems, SynOptics Communications, and Western Digital) increased 15 percent between the second quaretr of 1992 and the second quarter of 1993, reaching 8 billion USD. Profits also were up, rising 44 percent to 827 million USD during this 12-month period. PC Software ----------- According to the Software Publishers Association (SPA), sales of PC applications software in the United States and Canada totalled more than 3 billion USD in the first half of 1993, up approximately 19 percent from the same period a year earlier (Table 1). These figures are based on a survey of SPA members, and exclude sales of operating systems (for PCs and networks) and video-game cartridges; they are not comparable to IDC data cited earlier. Other productivity software, which includes communications, personal and business productivity, and project-management software, was the largest of 14 categories, accounting for 27 percent of total PC application sales in the first half of 1993. Word processors were next, with a 15 percent share, followed by spreadsheets, databases, and finance programs. Each of the remaining categories accounted for less than 6 percent of the market. Table 1. PC Software Sales in the United States and Canada, for the first half of 1993, in millions of dollars (Source: Software Publishers Association) Item DOS Windows Macintosh Other Total ---- --- ------- --------- ----- ----- Total 1,052.5 1,437.0 513.0 108.9 3,111.4 Other productivity 309.9 339.9 136.7 41.3 827.8 (see Note 1) Word processors 134.9 267.3 47.9 10.6 460.7 Spreadsheets 82.8 253.6 34.4 10.7 381.7 Databases 96.8 131.5 34.0 (Note 2) 262.3 Finance 104.6 39.8 22.2 (Note 2) 166.6 Utilities 71.9 54.8 27.8 (Note 2) 154.5 Presentation graphics 25.4 94.2 26.1 2.7 148.4 Entertainment 116.7 6.7 12.9 2.6 138.9 Languages and tools 19.4 67.3 12.6 34.4 133.7 Drawing and painting (Note 2) 56.4 64.8 1.7 122.9 Other graphics 27.4 37.6 39.7 1.2 105.9 Home education 43.1 16.4 13.1 (Note 2) 74.8 Desktop publishing 1.2 47.9 19.8 (Note 2) 68.9 Integrated 18.4 23.4 21.0 1.5 64.3 Note 1: Includes communications, personal and business productivity, and project-management software. Note 2: Sales of less than 1 million USD, or inadequate reporting. Growth varied considerably among the different types of applications. Home-education software increased the most, rising approximately 75 percent between the first half of 1992 and the first half of 1993. Databases and other productivity software also posted strong gains, rising more than 65 percent and 45 percent, respectively. Sales declined in desktop publishing, spreadsheets, and other graphics software. Sales of Windows applications increased 75 percent in the first half of 1993, to approximately 1.4 billion USD, while sales of DOS applications decreased 13 percent, to approximately 1.1 billion. In all, Windows applications outsold DOS applications in 10 of the 14 categories, including the top four (other productivity, word processors, spreadsheets, and databases). DOS maintained the lead in finance programs, entertainment software, utilities, and home-education software. Macintosh applications accounted for 16 percent of the PC market, while applications for other platforms, including the UNIX and OS/2 operating systems and the Apple II, Commodore 64, Atari, and Amiga systems, accounted for 4 percent. Price wars continued in the PC software market over the last 12 months. Price competition was particularly fierce in the Windows-based applications market, where vendors, including Microsoft, Lotus, and Borland, are fighting to increase market share. Vendors are using a variety of pricing strategies to woo new customers: low introductory prices, special upgrade deals, and suite pricing, in which several packages are sold together for a fraction of their individual costs. Industry analysts expect PC software prices to continue to fall over the next few years. The lower margins that result may cause the market to consolidate and encourage software vendors to reevaluate their business strategies. Product News ------------ Operating systems for 32-bit processors continued to gain prominence in 1993. In May, IBM introduce OS/2 2.1, an updated version of its earlier 32-bit operating system. In August, Microsoft released Windows NT (New Technology), a 32-bit multitasking operating system that runs on several hardware platforms. These systems will compete with UNIX and other products for high-end corporate, scientific, and engineering users. Dataquest, Inc. estimates that 397,500 units of Windows NT and 1.1 million units of OS/2 were shipped in the United States in 1993. To counter the threat from Windows NT, and to respond to consumer demands, several UNIX suppliers have agreed to adopt, and hope to implement by the end of 1993, a common interface, making it easier to write applications for the different variants of UNIX. Alliance members plan to use existing standards for graphics, multimedia, and programming tools. Members of the alliance include Sun Microsystems, Novell, Santa Cruz Operation, IBM, and Hewlett-Packard. Although still in its early stages, the pen computing market also began to accelerate in 1993. According to IDC, 79,000 pen operating systems for notebooks and small-form-factor products were shipped in the United States in 1993, nearly twice as many units as in 1992. Intellectual Property Rights ---------------------------- Several provisions in the 1993 Omnibus Budget Reconciliation Act affect the software industry. For example, the act lengthens the amortization period for software obtained in the acquisition of another business from 5 to 15 years. The longer amortization period for acquired software and other intangible assets may hurt the U.S. software industry, because it increases the after-tax cost of acquired technology and gives foreign firms an advantage in acquiring advanced U.S. technology. The 1993 Budget Act also extends the 20 percent research and development tax credit to 30 June 1995. On a related issue, the House of Representatives passed the National Competitiveness Act in 1993, authorizing 1.5 billion USD over the next two years to help improve the development and transfer of manufacturing technology to the U.S. private sector. Among other things, this legislation would establish a national technology outreach program to help U.S. manufacturers upgrade their technology base, establish and expand advanced manufacturing technology development programs, and increase the availability of long-term investment capital for advanced technology products. The Senate version of the bill awaits consideration. To maintain the competitiveness of U.S. high-technology firms, the Clinton Administration plans to invest in a National Information Infrastructure (NII). Designed to create a national "information superhighway", this initiative seeks to create a partnership between government and industry in which the private sector builds, operates, and improves the infrastructure, and the government creates an efficient legal and regulatory environment and funds specific interconnection projects. Specifically, the NII incorporates five initiatives: implementing the high-performance computing and communications program established in 1991; creating a task force on information infrastructure to implement policy changes related to the NII; creating a program to help industry develop advanced computing and networking technology in manufacturing, health care, life-long learning, and libraries; providing funds for pilot networking projects; and promoting dissemination of federal information. Computer software and network technologies are a key element of the NII. Indeed, the administration advocates widespread use of the Internet network, and intends to create an interagency task force to establish software and communications standards for education and training, to coordinate the development of critical software elements, to support innovative software packages, and to standardize the format of information resources so that they are more available to schools and other teaching centers. Many products released in the next few years will embody new technologies. Several vendors, for example, will soon have object-oriented software ready for market. Taligent, IBM's and Apple's joint venture, is expected to introduce its first object-oriented operating system in 1994 or 1995. This operating system will run both OS/2 and Macintosh programs, and represents the next generation in computer software. WordPerfect and Novell are among the firms that have agreed to write programs for Taligent's operating system. Microsoft plans to release its own object-oriented operating system, Cairo, in 1994 or 1995. By reusing previously programmed code, or "objects", object-oriented software can be developed faster, will be easier to maintain and update, and should contain fewer errors. Pen computing should also take off in the next few years, as prices decline, handwriting recognition and screen resolution improve, and pen-based hardware and applications increase. IDC estimates that shipments of portable, pen-operating systems in the United States will increase approximately 45 percent between 1993 and 1997, reaching nearly 350,000 units. Multimedia ---------- Multimedia is another emerging market. Designed to combine video, animation, still pictures, voice, music, graphics, and text into a single system, multimedia products blur the lines between several formerly distinct products and industries: computers, software, consumer electronics, communications, publishing, and entertainment. Although the market for multimedia products (such as interactive TVs and personal communicators) is not expected to take off until the late 1990s, some products are already available, or will be released in the next few years. Dataquest classifies today's multimedia products and services into five general categories: content development tools, interactive products, simulation products, video on demand, and enhanced productivity tools. Most current multimedia products are targeted at the consumer-entertainment sector, rather than the business market. Whereas consumer multimedia applications generally run on computers, TVs, or other entertainment devices, business applications generally run only on specially equipped computers, from workstations to PCs. Alliances, particularly among large firms, dominate the nascent multimedia industry for several reasons -- they reduce risks, spread costs, and allow firms to acquire expertise in the different elements of multimedia quickly. Computer, communications, and entertainment companies that have joined efforts in the last 24 months include Time Warner and US West; IBM, NBC television, and NuMedia Corp.; IBM, Apple, and Toshiba; and Time Warner and Tele-Communications Inc. (TCI). In addition, 11 firms (Apple, Bellcore, Bieber-Taki Associates, Corning, Eastman Kodak, Kaleida, North American Phillips, Southwestern Bell Corp., Sutter Bay Associates, and US West) have formed a consortium, First Cities, to develop interactive multimedia for home use. Microsoft plans to become an investor in many multimedia ventures, and has developed a number of multimedia alliances, including one with Intel and General Instruments on a new TV digital set-top box. Two aspects of these alliances are worth noting. First, as expected, the alliances cut across industry lines. This diversity suggests that member companies will perform different roles within the alliances. Entertainment firms, for example, could provide the content of the digital transmissions, telephone or cable companies the ability to deliver the information, and computer hardware and software firms the ways to use the data. Second, many alliances are international, signalling that the production of multimedia products will be global from the start. Several issues, however, must be resolved before multimedia can reach its full potential. One obstacle is the current lack of standard software, which slows the development of applications and compatible products. The installed base of CD-ROM drives is also relatively small. The worldwide installed base of CD-ROMs was only 5.6 million units in 1993, according to IDC, well below the installed base of computers. Other obstacles include the cost of multimedia equipment, access to copyrighted material, and uncertain consumer demand. Over the next several years, multimedia applications could become more commonplace in business, engineering, medicine, real estate, tourism, and other fields. According to Dataquest, worldwide multimedia shipments -- comprised of multimedia products, system upgrades, and peripherals -- are expected to increase nearly 27 percent annually between 1993 and 1996, reaching 21 million units (Table 2). Peripherals, which include video and sound boards and CD-ROM drives, will be the fastest-growing category, with shipments increasing nearly one-third annually to exceed 13 million units. Shipments of multimedia products, defined as authoring software, multimedia PCs/workstations, and networks, should grow 25 percent annually. The number of upgrades shipped, in contrast, is predicted to drop an average of approximately 5 percent in each year during this period. Table 2. Worldwide Multimedia Market, 1992-1996, in thousands of units shipped except as noted (Source: Dataquest, Inc.) Percent Change (1992-1996) ------------------ Estimated (Note 1) Item 1992 1993 1992-93 1993-96 ---- ---- --------- ------- -------- Total 4,815.4 10,315.1 114.2 26.9 Multimedia products 1,065.4 3,465.6 225.3 25.1 Authoring software 728.9 1,726.1 136.8 16.2 Multimedia PCs and 325.0 1,690.5 420.2 31.2 Workstations Networks 11.6 49.0 322.4 72.2 Upgrade Kits 675.0 1,109.5 64.4 - 4.7 Peripherals 3,075.0 5,740.0 86.7 32.5 CD-ROM drives 825.0 1,720.0 108.5 27.6 Sound boards 1,800.0 3,200.0 77.8 28.6 Video boards 450.0 820.0 82.2 53.9 Note 1: Forecast of annual compound rate of change. Virtual Reality --------------- Virtual reality (VR) programs, which allow users to interact with three- dimensional, computer-generated environments, may also be more widely used by the end of the decade. NewMedia divides VR systems into four categories, in ascending order of complexity: desktop, partial immersion, full immersion, and environmental systems: o Desktop-VR systems allow users to navigate through a three- dimensional environment using a computer monitor. Examples include Microsoft's Flight Simulator, three-dimensional financial applications, and simulated architectural and design models. Desktop systems are the most likely VR systems to be used in the workplace. o Partial-immersion systems use a monitor and other accessories, such as gloves and headgear, to enhance a user's sight, touch, and hearing. With these systems, users may manipulate objects in the VR world. o Full-immersion systems use headgear, gloves, and bodysuits that permit users to move through virtual space. They are increasingly found in video arcades. o Environmental-VR systems permit users to move and interact with three-dimensional space with few, if any, physical constraints. Here, the virtual world responds to the user's actions. Most available VR applications are entertainment-related. Many more applications -- for science, medicine, business, architecture, and education -- should be available in the next few years, as systems and accessory prices decline, computing power increases, and the accuracy of computer-generated worlds improves. Analysts estimate that elementary VR systems will be available for home use in two years, partial-immersion systems in five years, and full-immersion VR systems in ten years. In addition to military researchers and universities that work on virtual reality, the Virtual Reality Market Place 1993, published by the Meckler Corp., lists more than 130 VR companies. Nineteen companies have formed the Virtual Worlds Consortium to develop VR systems for business. Foreign vendors, including the Japanese, are also active in VR development. France's Thompson CSF became a major VR player when it gained the rights to the patents of VPL Research, a leading U.S. virtual reality firm, in 1992. International Competitiveness ----------------------------- The United States remained by far the largest single-country market for packaged software in 1993, and its share of the world market increased slightly, from 44.3 percent to 44.7 percent (Table 3). Japan, with a nearly 7 billion USD market was second, followed by Germany, United Kingdom, and France. The market in 13 Western European countries was worth 25.7 billion USD, or 36 percent of the world market, in 1993. Table 3. Packaged Software Markets, 1991-1997, in millions of dollars except as noted (Source: International Data Corp.) Percent Change (1991-1997) --------------------------- Estimated (Note 1) (Note 1) 1991 1992 1993 1991-92 1992-93 1993-97 ------ ------ --------- ------- -------- -------- World 57,022 64,313 71,864 12.8 11.5 12.8 United States 25,330 28,460 32,040 12.4 12.6 12.7 Western Europe 21,091 23,850 25,699 13.1 7.8 10.3 Japan 5,270 5,967 6,938 13.2 16.3 18.7 Canada 1,078 1,188 1,374 10.2 15.7 10.4 Australia 941 980 1,094 4.1 11.6 13.3 Latin America 1,054 1,242 1,471 17.8 18.4 18.0 Asia 584 780 974 33.6 24.9 21.4 Other 1,674 1,846 2,094 10.3 13.4 14.9 Western Europe consists of Austria, Belgium, Denmark, Finland, France, Germany, Italy, Netherlands, Norway, Spain, Sweden, Switzerland, and United Kingdom. Latin America consists of Argentina, Brazil, Chile, Mexico, and Venezuela. Asia consists of China, Hong Kong, India, Malaysia, Singapore, South Korea, Taiwan, and Thailand. U.S. packaged software suppliers also continued to be world leaders. According to IDC, the worldwide revenues of U.S. vendors increased 11 percent to 47.6 billion USD in 1992. As a result, U.S. vendors supplied 74 percent of the world packaged-software market. Application solutions accounted for more than 31 percent of these revenues, systems software 38 percent, and application tools 30 percent. While U.S. vendors supplied more than 50 percent of four regional packaged software markets in 1992, U.S. vendors' strength varied among regions. Internationally, U.S. packaged-software vendors held the largest market share in countries outside Western Europe and Japan, supplying more than 73 percent of these markets. The strong U.S. position in these countries (generally in Asia and Latin America) reflects both the high quality of, and receptivity to, U.S. software, as well as the relatively small international presence of European and Japanese software vendors. U.S. vendors supplied 60 percent of the packaged software markets in Western Europe and Japan, regions where domestic vendors hold stronger positions. To encourage international software sales and minimize piracy, the U.S. Government, through a variety of multilateral and bilateral fora, pursues violations of intellectual property rights (IPR) worldwide. One forum is the U.S. Trade Representative's (USTR's) annual Special 301 review of the IPR policies and IPR-related, market-access practices of U.S. trading partners. Designed to strengthen the administration's ability to negotiate improvements in foreign IPR regimes, these reviews are authorized by the 1974 Trade Act, as amended by the Special 301 provisions of the 1988 Omnibus Trade and Competitiveness Act. Under these provisions, the administration must identify "foreign countries that deny adequate and effective protection of intellectual property rights, or deny fair and equitable market access to United States persons that rely upon intellectual property protection". As a result of these reviews, countries may be designated "priority foreign countries" or be placed on the USTR's "priority watch" or "watch" lists. Priority foreign countries have the most onerous or egregious practices that have the greatest adverse impact (actual or potential) on U.S. products, and are not making significant progress in bilateral or multilateral IPR negotiations. The priority watch and watch lists identify countries that have serious IPR deficiencies, but do not meet all of the statutory criteria for designation as priority foreign countries. In 1993, for the third time in the five-year history of these reviews, priority foreign countries were designated (Table 4). Nine trading countries and one regional grouping were placed on the priority watch list. Australia and the EC were named to this list primarily for restrictions on U.S. audiovisual exports. The remaining countries on the priority watch list were cited for inadequate IPR protection. Seventeen countries were placed on the 1993 watch list, down from 22 in 1992. Table 4. Review of Intellectual Property Rights (IPR) Practices, 1993 (Source: Office of the U.S. Trade Representative) Priority Countries: Watch List: Brazil Chile India China Thailand (Note 1) Colombia Cyprus (Note 2) Priority Watch List: Ecuador Argentina (Note 2) El Salvador Australia Greece Egypt (Note 2) Guatemala European Community Indonesia Hungary (Notes 3, 4) Italy (Note 2) Poland (Note 2) Japan Saudi Arabia Pakistan (Note 2) South Korea (Note 2) Peru Taiwan (Note 3) Philippines Turkey (Note 2) Spain (Note 2) United Arab Emirates Venezuela (Note 2) Note 1: In September 1993, USTR revoked the identification of Thailand as a priority foreign country, and placed Thailand on the priority watch list. Note 2: Subject of an "out-of-cycle" review. Note 3: Subject of an "immediate action plan". Note 4: In September 1993, Hungary was removed from the priority watch list. To encourage continual progress on IPR issues, the administration implemented two new enforcement measures in 1993: "immediate action plans" and "out-of-cycle" reviews. As a result of these measures, Hungary signed a competitive intellectual property agreement with the United States, and was removed from the priority watch list in September; Thailand submitted a new copyright law to its legislature, and was removed from the most serious category; and Taiwan approved and signed a bilateral copyright agreement. The United States eased restrictions on exports of certain types of general-purpose cryptographic equipment and software. Under the new regulations, many types of software and equipment used for banking or money transactions, such as automatic teller machines, self-service printers, or point-of-sale terminals, may be exported under a general license to most countries. Previously, this type of equipment and software had usually required a validated license. Western Europe -------------- According to IDC, the packaged software market in 13 Western European countries, including eight members of the European Community, increased almost 8 percent in 1993 to approximately 26 billion USD, or slightly less than the U.S. market. Application solutions, the largest and fastest-growing segment, increased 9 percent to almost 11 billion USD in 1993. Application tools increased almost 9 percent to 8 billion USD, and systems software increased almost 5 percent to nearly 7 billion USD. Over the next four years, the Western European packaged software market is expected to grow just 10 percent annually, the slowest growth among major regional markets. This rate reflects the maturity of the market and sluggish economic conditions. On a country-by-country basis, the top four packaged software markets in Western Europe are Germany, 6 billion USD; the United Kingdom, 4.5 billion USD; France, 4 billion USD; and Italy, 3 billion USD. Collectively, they accounted for 69 percent of the overall Western Europe packaged software market in 1993. While these four markets will retain their rankings over the next four years, IDC expects Switzerland, Germany, Spain, and Austria to be the fastest-growing European markets between 1993 and 1997. None, however, is projected to grow faster than the world average of almost 13 percent. By 1997, eight of the 13 European markets should be worth more than 1 billion USD. Many trends taking place in the U.S. software market are also evident in Europe. Microsoft's Windows program, for example, has caught on quickly in Europe. UNIX is also popular in western Europe. Although packaged software is more common, custom software remains an important part of the European software market. According to IDC, the European custom-software market was worth 10.9 billion USD in 1991, or 51 percent of the packaged software market. Between 1994 and 1997, Europe's custom software market is expected to grow 10 percent annually, to 20.7 billion USD. Custom software solutions and services are the strengths of the top European software suppliers. As a result, European software vendors, such as Datev of Germany and Olivetti Information Systems and Finsiel of Italy, earn the bulk of their revenues in one country, their home market. Indeed, IDC estimates that European vendors as a whole earn most of their revenues in Europe. On 1 January 1993, the European Community began implementing a broad range of provisions aimed at creating a single continental market. One measure affecting the software industry is the EC software directive, officially called the Directive on the Legal Protection of Computer Programs. This directive protects computer programs as literary works for the life of the author plus 50 years; gives copyright holders reproduction, translation, adaptation, arrangement, distribution, and rental rights; and allows decompilation only to determine interoperability. Although this directive came into effect on 1 January 1993, only six EC member states (Denmark, Germany, Greece, Ireland, Italy, and the United Kingdom) had implemented it into national law as of September 1993. Non-EC nations that have implemented the EC software directive include Austria, Norway, and Sweden. The ISO 9000 quality standards are another marketing issue in the EC and elsewhere. Published in 1987, the ISO 9000 series of five generic standards (ISO 9000-4) enables a company to ensure (through internal and external audits) that its production process will meet published quality standards for its products or services. ISO 9000-3 provides guidance on the application of the ISO 9001 standard to the development, supply, and maintenance of software. While ISO 9000 registration is not a legal requirement for access to the EC market, quality-minded customers are increasingly requiring that their suppliers be registered as being in compliance with an ISO standard. Compliance with an ISO standard can give manufacturers a decisive competitive advantage, particularly for high-technology products and other items with safety or liability concerns. This is particularly true in the United Kingdom, where the Consumer Protection Act of 1988 holds software producers liable for any injury, death, or damage to personal property resulting from faulty software. To date, many more European than U.S. firms have obtained ISO registration. Japan ----- Japan is the second-largest packaged software market in the world. IDC estimates that the Japanese packaged-software market was worth nearly 7 billion USD, or almost 22 percent of the U.S. market, in 1993. Application solutions was the largest category, rising more than 22 percent to nearly 3.5 billion USD in 1993. Application tools increased more than 27 percent to 1.7 billion, and systems software fell 1.5 percent to 1.8 billion USD. Between 1993 and 1997, Japan's packaged software market is expected to grow almost 19 percent annually, fueled by strong growth in application tools and solutions. This would make the fast-growing Japanese packaged-software market worth more than 13 billion USD. Several industry trends, such as downsizing, the use of packaged software, open systems, and local-area networks, have caught on more slowly in Japan than in other major markets. This is due, in part, to Japan's fragmented PC market (incompatible proprietary architectures and operating systems are still the norm) and traditional preference for custom software. These factors, however, may diminish over the next few years. In the PC area, for example, several operating systems, DOS/V and Windows 3.1, are vying to become the industry standard. A survey conducted by the Japan Personal Computer Software Technology Laboratory in 1992 estimated that PCs with DOS/V, the Japanese version of DOS introduced by IBM in 1991, would account for 14 percent of the Japanese PC market in 1993, second only to NEC. Significantly, market leader NEC has decided to make its popular PC-9801 series DOS-compatible. The Japanese version of Windows 3.1, introduced in May 1993, is also expected to sell well. The use of software packages should also increase in the years ahead, as prices decline, interoperability increases, and the Japanese programmer shortage continues. Multimedia products have caught on quickly in Japan. The Japanese newspaper Nikkan Kogyo reports that 270 CD-ROM software titles are currently available for NEC's PC-9821 multimedia PC, which was introduced in October 1992. NEC planned to increase the number of multimedia applications to about 600 by September 1993. To facilitate the conversion to digital media, Japan's Ministry of International Trade and Industry (MITI) is reviewing intellectual property rights issues and the laws relating to multimedia software. New rules for dealing with copyright issues in the fields of music, photography, video broadcasting, art, and entertainment are expected to be implemented in fiscal 1994. In addition, in April 1993, MITI established a certification system for multimedia software programmers, featuring curricula developed by the Multimedia Software Development Association, a MITI affiliate. Although three Japanese firms are among the world's top ten software vendors, Japanese software suppliers have little presence outside of Japan. For the most part, Japanese software firms are aligned with major Japanese hardware vendors and specialize in developing customized software for domestic use. To increase Japan's competitiveness in software and networking, the Japanese government and private-sector organizations plan to create a research center for these technologies in Tochigi prefecture, north of Tokyo. This center, which will cover 2,500 square meters, seeks to create an optimal environment for software development. According to the Japan Personal Computer Software Association, it will be open to U.S. and other overseas vendors trying to enter the Japanese market. Selected portions of the research center are expected to open in late 1994. Asia ---- The packaged software market in eight other countries in Asia is small, but growing quickly. According to IDC, the packaged software market in Asia increased 25 percent to 1 billion USD in 1993. Application tools was the fastest-growing category, rising 31 percent to 335 million USD. Application solutions was next, growing 27 percent to 321 million USD. Systems software, the largest segment, grew 18 percent to 319 million USD. Over the next few years, Asia will be the fastest-growing region for packaged software, rising 21 percent annually to 2 billion USD in 1997. This growth reflects both the market potential and small size of these markets. The top five markets in Asia, excluding Japan, are Taiwan, 168 million USD; South Korea, 168 million USD; Malaysia, 132 million USD; Singapore, 112 million USD; and Hong Kong, 103 million USD. Collectively, they accounted for 70 percent of the non-Japanese Asian market in 1993. Several countries in Asia, including South Korea and Singapore, have national information technology plans. As a result, these countries are bypassing older, larger systems in favor of PCs, local-area networks, and open systems such as UNIX. Intellectual property rights (IPR) protection remains a major concern in many Asian markets. The U.S. Trade Representative has designated India as a priority foreign country (the most serious category) in its annual review of IPR policies and IPR-related, market-access practices of U.S. trading partners in each year since 1991. China and Taiwan have been working to improve their IPR regimes since they were designated priority foreign countries. China joined the Berne Convention in October 1992. Taiwan has signed a new bilateral copyright agreement and implemented an export control program. Latin America ------------- The packaged-software market in five Latin American countries is also growing quickly, rising almost 18.5 percent to 1.5 billion USD in 1993, according to IDC. Application tools, the largest and fastest-growing category, increased almost 18.5 percent to 555 million USD in 1993. Systems software increased 14 percent to 499 million USD, and application solutions increased 24 percent to 417 million USD. Over the next four years, the Latin American packaged-software market is expected to increase 18 percent annually. This rate makes Latin America the third fastest-growing regional market for packaged software during this period. Brazil is by far the largest packaged-software market in Latin America. Worth 829 million USD, Brazil accounted for 56 percent of the total regional packaged-software market in 1993. Over the last few years, Brazil has implemented several measures to open its computer hardware and software markets. In October 1992, for example, Brazil lifted its market reserve on computer hardware, and reduced tariffs. The Brazilian government has also eliminated in practice the "law of similars", which has kept non-Brazilian software out of the market if "similar" Brazilian software existed. New legislation, which would permit foreign companies to distribute software directly in Brazil and make registration voluntary, is pending. Despite these measures, certain trade barriers persist: tariffs remain relatively high, domestic vendors receive favorable tax treatment in certain cases, and intellectual property rights protection is a concern. (After four years on the USTR's Special 301 "priority watch list", Brazil was designated a priority foreign country -- the most serious category -- in 1993.) Mexico, the second-largest packaged software market in Latin America, is expected to be the fastest-growing market in the region, and one of the fastest-growing in the world over the next few years. IDC estimates that the Mexican packaged-software market will increase 25 percent annually between 1993 and 1997, from 395 million USD to 968 million USD. This growth reflects the recent opening of Mexico's computer hardware and software markets to foreign suppliers, and the enactment of stringent new intellectual-property legislation in 1991. In recognition of its efforts to improve IPR protection, Mexico has not been named to any of the USTR's Special 301 lists since 1989. The North American Free Trade Agreement (NAFTA) could provide new opportunities and facilitate market access to Mexico and Canada. This agreement, which would create the world's largest free-trade area, would phase out all tariffs on goods originating in Canada, Mexico, and the United States, and would provide a higher level of IPR protection than any other bilateral or multilateral agreement. In the area of copyrights, for example, NAFTA protects computer programs as literary works, and databases as compilations, for a minimum of 50 years; provides rental rights for computer programs and sound recordings; and contains extensive provisions on IPR enforcement. At the time of this writing, NAFTA must still be approved by the governments of the United States, Mexico, and Canada. The earliest NAFTA could take effect is January 1994. Eastern Europe and the former Soviet Union ------------------------------------------ Eastern Europe and the new republics of the former Soviet Union are emerging markets that have long-term potential. Although market data is scarce and economic conditions remain challenging, several factors suggest that these markets are becoming more accessible to U.S. computer and software firms. First, U.S. restrictions on computer exports to Eastern Europe and the former USSR have greatly diminished over the last few years. Hungary was classified a "Free World" country in 1992. Second, many countries in this region are working to improve IPR protection. U.S. computer and software firms already active in Eastern Europe and the new republics include Microsoft, Sun Microsystems, and Digital Equipment Corp. Africa ------ Hindered by weak infrastructure, financial constraints, and a small installed base, the software market in many African countries has been largely untapped. The packaged-software market in South Africa, the largest on the continent, was worth almost 500 million USD in 1993, according to IDC. It is expected to grow more than 15 percent annually between 1993 and 1997. Outlook for 1994 ---------------- The worldwide, packaged-software market should continue to grow more than 10 percent in 1994, making packaged software one of the fastest-growing information technology sectors. Because growth in many international markets will exceed that in the United States, international sales will be an increasingly important factor in sustaining U.S. software vendors' revenues. Ongoing price wars and new products should also spur sales nationwide. Competition in the operating systems area will likely intensify in 1994. Windows NT and OS/2 will continue to compete head-to-head, and new operating systems will join the fray. Microsoft, for example, is expected to release the next version of Windows in 1994, nicknamed "Chicago". Long-Term Prospects ------------------- Fueled by stronger economic growth, new product introductions, and ongoing price wars, the U.S. packaged-software market should continue to post double-digit gains in the next few years. Many current trends should continue, including downsizing, the movement toward increased interoperability, and the growing importance of international markets. Over the next decade, several emerging technologies, including pen computers, multimedia and virtual products, and object-oriented software should develop into sizeable markets. IDC estimates that the U.S. packaged-software market will increase almost 13 percent annually between 1994 and 1997, reaching nearly 52 billion USD, or almost 45 percent of the world market. Application tools and solutions will remain the fastest-growing categories. Application solutions, the largest segment, is expected to increase more than 12 percent annually between 1994 and 1997 to almost 20 billion USD. Application tools and systems software are expected to post annual increases of more than 15 and 11 pe4cent, respectively, during this period. -- written by Mary Smolenski, Office of Computers and Business Equipment, 1-202-482-0551, September 1993. NETWORKING ---------- In 1993, corporations continued the trend exhibited in past years of downsizing from centralized mainframe computing platforms to personal computer (PC) local-area networks (LANs). Networking products continue to evolve to create increasingly heterogeneous, multivendor, and multiprotocol computing environments capable of rapid expansion and reconfiguration in response to the ever-changing needs of the modern corporation. In 1993, 39 percent of PCs worldwide were connected to networks, up from 33 percent in 1992. Worldwide revenues for LAN hardware products were estimated by International Data Corporation (IDC) at 8.3 billion USD in 1993, a 23 percent increase from 1992. This figure includes four product categories: network interface cards (NICs), internetworking devices, intelligent wiring centers or hubs, and terminal servers. Revenues for products featuring fiber-distributed data interface (FDDI) technology (which can be NICs, internetworking devices, and wiring centers) are integrated into the figures for the product segments above. Areas experiencing major growth in 1993 included internetworking devices and intelligent hubs. The PC LAN network operating software (NOS) market grew considerably in 1993. The total value of NOS licenses shipped worldwide grew 26 percent to 2.8 billion USD. The number of licenses installed increased 25 percent to 2.9 billion. Dataquest determined that revenues generated in the U.S. NOS market exceeded 1 billion USD. Small user group operating systems (1 to 10 users) was the segment of the U.S. NOS market that expanded most dramatically, with a 64 percent increase in both shipments and revenues from 1992. Globally, the major NOS product continued to be Novell's NetWare, with approximately 70 percent of the world market. Microsoft's LAN Manager accounted for 6 percent of the world market, while IBM's LAN Server, Banyan Vines, and AppleShare each accounted for approximately 5 percent. There is a long-term trend away from specialized, proprietary operating systems toward multitasking, "open" operating systems like UNIX and OS/2. In 1993, Novell formed alliances with 25 leading UNIX vendors and purchased UNIX System Labs. Novell has developed an OS/2 version of NetWare in cooperation with IBM. Banyan Vines already runs on UNIX, yet the company has taken steps to move away from its proprietary UNIX by striking deals with the Santa Cruz Operation (the leading vendor of UNIX for the Intel platform), IBM, Hewlett-Packard, and Sun Microsystems. NICs continued to become more "commodity-like" (high-volume, price-sensitive) products in 1993 as industry consolidation continued and prices decreased. The average end-user NIC price in the United States in 1993 was 211 USD, a decrease of 12 percent from 1992 and 47 percent from 1989. Worldwide NIC revenues rose marginally in 1993 to 3.4 billion USD, while shipments rose 27 percent to almost 16 million units. PC NICs accounted for almost 95 percent of total NIC revenues. Growth in PC NIC revenues and shipments in foreign markets in 1993 exceeded that in the United States. PC NIC shipments to the United States grew by 22 percent, compared with 35 percent for Europe and 37 percent for the rest of the world. Ethernet NICs continued to dominate the market over token-ring products. Sixty-eight percent of all U.S. shipments were Ethernet, compared wtih 25 percent token-ring. According to Dataquest, 1993 token-ring revenues increased by 24 percent and shipments grew by 38 percent. Ethernet revenues grew by 9 percent and shipments by 32 percent. The FDDI NIC market in the United States expanded, though not nearly as dramatically as in 1992. There were 27,000 shipments amounting to 118 percent unit growth. Revenues grew 37 percent to 57 million USD. The evolution of LANs from simple workgroup and departmental systems into local platforms for enterprise networking is the driving force behind the continued expansion of the internetwork market in 1993. Internetworking device companies faced extremely competitive conditions as some 60 vendors competed for a worldwide market which grew 38 percent in 1993 to almost 2 billion USD (this includes bridges, routers, and specialized PC LAN equipment). The U.S. share of world revenues declined slightly from 52 to 51 percent, but U.S. FDDI internetworking equipment revenues increased 67 percent to 156 million USD. Routers, which selectively forward data from different protocols, were among the most successful networking products. Worldwide revenues grew 62 percent to 1.5 billion USD. Polarization is taking place, with activity at both the low and high ends of this segment. At the high end, vendors are positioning their products as the focal point of the network, while at the low end, they are targeting the right price/performance mix and solutions for ease of use and installation. Routers continue to displace remote bridges, because most routers now have integrated bridging functionality, enabling them to bridge protocols they do not support. In 1993, worldwide remote bridge sales decreased by 25 percent to less than 150 million USD in revenues. In contrast, local bridge revenues increased by 7 percent. The worldwide market for intelligent wiring centers grew 37 percent to 2.3 billion USD, according to IDC. Hubs or concentrators are the primary building blocks of networks, combining different topologies (configurations) and media into one concentrator. An intelligent hub or wiring center is the focal point for network management, handling such multiple access methods as Ethernet, token-ring, and FDDI under a common systems of management and control. FDDI wiring center shipments to the United States increased 29 percent, while revenues fell 10 percent to 31 million USD. This drop in revenues was a result of the drop in end-user prices, a reflection of the maturation of FDDI technology. FDDI wiring center per-port prices have dropped by almost 50 percent since 1990 to 1,260 USD in 1993. The stratification of high- and low-end hub products continued in 1993. A trend toward integration of router and other network equipment functionality into the hub was evident. Worldwide terminal server market revenues, estimated at 590 million USD, were down 7 percent from 1992. Unit shipments for this product category increased 5 percent in 1993 to 3.4 million. Terminal servers are intelligent communications processors that connect not only terminals, but also personal computers, peripherals, and other synchronous resources to a network by implementing the appropriate network protocol and packaging data for transmission. Growth in this product area has slowed considerably over the past three years, as clusters of terminals and simple PCs requiring a terminal server for network access are replaced by more sophisticated configurations of intelligent hubs and high-powered PCs and workstations capable of direct network access. Other types of servers are computers that are networked and provide specific functions to "client" computer systems, which can include supercomputers, mainframes, midrange systems, workstations, and personal computers. These servers fall into several categories -- compute, print, file, and database servers. In 1993, worldwide factory revenues for all servers (excluding terminal servers) increased 20 percent to 14 billion USD. File servers had a 33 percent share of revenues, followed by database servers (25 percent) and compute servers (23 percent). Top vendors included IBM, DEC, Sun Microsystems, Hewlett-Packard, and Compaq. Worldwide sales of client/server software and related services were 4.7 million USD in 1993, according to Forrester Research, Inc. Database Software and related programming tools account for 43 percent of the client/server software market. Applications programs -- accounting packages and the like -- are the latest growth area, representing 21 percent of all client/server software. FDDI LAN products continue to be a favorable deployment choice for the LAN backbone in 1993. FDDI technology offers the benefits of a data-transfer rate of 100 megabits per second, low noise level, and advanced network-management capabilities. Barriers to widespread market acceptance of FDDI have begun to fall; prices for PC network interface cards are in the 1,000 USD range -- down from the 2,000 USD range in 1992; effective performance is increasing; and a large number of vendors are supplying competitively priced products. Revenues of FDDI product sold in the United States in 1993 were 244 million USD; although this represents a 40 percent increase, it does not approach the 1992 increase of 112 percent. The decline in revenues is a reflection of the steady decline in prices for FDDI products over the past three years. The acceptance of a new standard for FDDI over unshielded twisted pair (UTP) cabling is anticipated for early 1994. FDDI over UTP will reduce the cost of FDDI products by an average of 50 percent and make them more accessible to users such as client/server work groups. The implementation of alternative media-based products for FDDI became more widespread in 1993. According to Dataquest, in 1992, 90 percent of FDDI products sold were based in fiber, while 10 percent were based in alternative media. In 1993, only 70 percent of FDDI products sold were fiber-based. Newer alternative high-speed technologies began to emerge in 1993, such as asynchronous transfer mode (ATM), a high-speed, cell-switching technology originally developed for wide-area networks; Fiber Channel; and 100-Mbps Ethernet. Dataquest predicts that these technologies will coexist with FDDI rather than replace it. FDDI has a competitive advantage over these emerging technologies, for the time being, because it is a mature, proven, and interoperable standard. International Competitiveness ----------------------------- The International LAN market continued to expand in 1993. From 1992 to 1993, LAN connectivity for PCs in the United States increased from 47 percent to 56 percent; in Europe, from 36 percent to 44 percent; and for the rest of the world, from 12 percent to 15 percent. Dataquest has noted that the market has evolved to the point that it is largely a logistics business. If a manufacturer cannot fulfill the demand of a distributor abroad, the distributor can find an alternate supplier, because most LAN products are based on well-defined standards. Hence, most LAN companies have the capability to manufacture products in several locations around the world. While this helps to improve regional delivery time scales and offset currency fluctuations, it has resulted in many of the LAN manufacturers moving into other technology areas. Dataquest estimates European LAN market revenues (including NICs, internetworking devices, hubs, NOS, but not including terminal servers) to have grown 20 percent in 1993. IDC estimates that the Western European LAN hardware market accounts for approximately 31 percent of worldwide LAN hardware revenues. The top three manufacturers were Novell, IBM, and 3Com, with 15.6 percent, 12.6 percent, and 7.3 percent, respectively, of total European LAN market revenues. Germany was again the leading LAN market in Europe in 1993, with 24 percent share of revenue. The United Kingdom, France, Italy, and Sweden followed with 20 percent, 15 percent, 6 percent, and 6 percent shares, respectively. These figures exclude FDDI revenue, which was not partitioned by country. The Eastern European market showed some promise in 1993. Although many small U.S. firms hesitated to enter these countries, larger companies such as IBM, DEC and H-P committed resources. Government relaxation of export control restrictions eased computer equipment sales. Eastern European users are eager to network their equipment, but often find LAN prices prohibitive. Since users are price-conscious, many firms believe the greatest potential lies at the low end of the product range. Among the product categories, NOS, internetworking devices, and intelligent hubs exhibited the highest revenue growth rates in Europe, according to Dataquest. The expansion of the market for internetworking devices was reflected in the dramatic 55 percent increase in router sales from 1992 to 1993. In Europe, the routing industry is concentrated on connecting regional offices and headquarter offices. Sixty-eight percent of router shipments were in the midrange (multiple port) segment in 1992, compared to 20.8 percent for the low end (1 or 2 ports). Dataquest predicts that, by 1997, low-end routers will account for nearly half of the routers shipped in Europe. In other parts of the world, network infrastructures are less developed than those in the United States and Europe. IDC estimates that, in 1993, about 16 percent of the worldwide LAN hardware revenues were earned outside of the United States and Europe (excluding non-PC NICs). For NOS, 14 percent of new licenses installed worldwide were in countries outside of the United States and Western Europe. In some countries, a high potential for rapid market growth exists. The Japanese market for PC networking products, for example, is embryonic but growing. Dataquest estimates that only 6 percent of all PCs in Japan are networked. Taiwan and South Korea are smaller but steadily growing LAN markets. In contrast, Australia is the largest LAN market in the Pacific Rim, with 228,000 nodes in 1992. A mature LAN market, Australia will have 60 percent of its computer systems connected to LANs within four years. According to IDC, revenues for internetworking equipment in the Pacific Rim increased 40 percent in 1993 to 33 million USD. This gain surpassed the 36 percent increase to almost 16 billion USD for internetworking equipment in countries outside of the United States, Europe, and the Pacific Rim. Outlook for 1994 ---------------- Total worldwide LAN hardware revenues (including those from NICs, internetworking devices, wiring centers, and terminal servers) are expected to grow 11 percent to 9.2 billion USD in 1994, according to IDC. Sales of internetworking devices should grow by 18 percent, to 2.4 billion USD. World revenues for intelligent hubs are slated to increase 17 percent, to 2.7 billion USD. Sales of NICs are likely to increase only 5 percent, to 3.6 billion USD. The terminal server market will decline to 545 million USD. Dollar shipments of PC NOS are expected to increase 15 percent to 3.3 billion USD worldwide. The installed base of licenses will grow 20 percent to almost 3.5 billion units. Dataquest predicts that LAN revenues (including NICs, internetworking devices, intelligent hubs, NOS, but not including terminal servers) in Europe will grow by 14 percent in 1994. The strongest revenue growth will continue to be exhibited by NOS (21 percent), routers (37 percent), and intelligent hubs (22 percent). U.S. LAN market revenues (not including terminal servers) will grow slightly more rapidly, by 15 percent. The most dramatically expanding segments of the U.S. market will be NOS at 30.2 percent and internetworking devices at 21.3 percent. FDDI equipment (NICs, internetwork, hubs) revenues and unit shipments will expand significantly in the United States -- 130 percent for shipments and 55 percent for revenues. Sales of FDDI products (NICs, internetworking devices, and intelligent hubs) in the United States are expected to expand by about 55 percent, to 378 million USD. Long-Term Prospects ------------------- During the past several years, the trend has been toward downsizing from centralized mainframe systems to distributed networks which integrate minicomputers, workstations, and PCs into an organization's computing environment. This trend will continue in the next five years and expand to spur dramatic changes at the departmental level. More users will require increased networking capability and bandwidth at the desktop as well as in geographically dispersed sites. Dataquest estimates suggest that the potential for growth in remote connectivity has not been exploited. Not all manufacturers will be able to compete in the mainstream LAN business in the years to come. Vendors will need to focus on specific product areas, technologies, or even niche markets within a given LAN segment. Throughout all segments of the LAN market, prices will continue to fall, and while significant volumes will be attained, revenue growth will continue to be moderate. Only the introduction of new technologies, such as 100-Mbits Ethernet and asynchronous transfer mode (ATM), may help stem this trend. The movement of the market toward more commoditized products will force manufacturers to deliver more value-added products and high-end solutions to maintain their profitability. Vendors seeking greater revenues will continue to expand the capabilities of hubs. New routing modules, FDDI, ATM, and other technologies will protect the higher prices of high-end hubs. Low-end hubs will compete in an increasingly commodity-like marketplace. The percentage of hubs connected to NICs, bridges, routers, and other devices will rise. Mobile computing and communications will boost client (a portable computer) to client (the portable user's desktop machine) to server computing, and expand the NOS market. Worldwide wireless PC LAN connectivity revenues, which grew almost 20 percent in 1993 to 16 million USD, will soar to 1.2 billion USD by 1997. Kenneth W. Taylor & Associates predicts that the number of wireless LAN terminal units in operation in the United States will grow from 400,000 in 1993 to 11.9 million in 1998. -- written by Mary Davin, Office of Computers and Business Equipment, 1-202-482-0568, September 1993. This report will conclude in next month's PSP Developer Support News.
+----------------------------------+ | U.S. Industrial Outlook, 1994 -- | iocsn | Computer Software and Networking | +----------------------------------+ (This information is excerpted from a report furnished by the US Department of Commerce. Part 1 of this report appeared in last month's DSNEWS.) ARTIFICIAL INTELLIGENCE ----------------------- The United States remained the leader in the artificial intelligence (AI) software market, with estimated worldwide revenues of 325 million USD, compared to total worldwide sales of AI products of 391 million USD in 1993, according to International Data Corp. (IDC). This increase over the 1992 revenues of 185 million USD is a significant one, since slow economic growth continued to affect the market and cut sales for many AI companies. The AI market has four main segments: knowledge-based systems (KBS), natural-language processors, neural networks, and fuzzy systems. Expert systems, which make up the majority of KBS, continued to be the dominant segment of the AI market in 1993. KBS are computer programs which use inference capabilities and substantial knowledge of a specific area of expertise to solve problems in that field. Expert systems, the most sophisticated of these, approach the performance level of human experts when solving complex problems in their specializations. Expert-systems applications are varied. Banks and brokerage houses have used them for financial forecasts, manufacturers for product specification and design, and airlines for scheduling. The U.S. Government has also begun to use AI technologies. The Internal Revenue Service has a number of systems, the largest of which is the Actuarial Advisor. In operation since 1989, the system performs actuarial valuations of pension plans, and is credited with assessing taxes of an additional 100 million USD in its first year alone. The Federal Bureau of Investigation has two expert systems: one automates ballistics analyses, and the other helps to detect serial crimes. In 1993, AI experienced an "image crisis". Expert-systems tools vendors, in particular, began to distance themselves from AI by marketing their products as object-oriented, computer-aided, software-engineering, and client/server products. Expert-systems tools are the software programs which simplify the work of building expert systems. Vendors will likely continue to identify with non-AI products in the coming years, and this will further confuse the market, making it difficult to define. According to Intelligent Software Strategies, an industry newsletter, the number of tool-software packages marketed for PCs dropped from 45 in 1992 to 23 in 1993. This decline is attributable to the introductory status of the majority of these tools, the need for which has decreased. The number of workstation-based tools remained steady at 14, and mainframe-based tools remained steady at 3. As LISP tools declined, so did available LISP-based products. This trend is expected to continue for LISP, one of the most popular AI languages. The number of problem- and domain-specific tools, on the other hand, will grow, adding to the 37 programs currently available. The demand for case-based reasoning tools, which reason and learn using analogy, remained strong, but will decline as a result of the new interest in object-oriented and client/server support. Natural-language processing, another branch of AI, is a technology which understands the natural language of the user, whether typed as text, in electronic form, or spoken. It includes such technologies as machine-translation systems, database interfaces, and voice-input devices. This segment of the industry was among the fastest-growing for U.S. companies. According to IDC, U.S. vendors' worldwide sales increased 45 percent in 1993, from 57 million USD to 80 million USD, and should continue to increase at a similar rate in the coming years. Applications in natural-language processing have been developed for manufacturing, energy, banking, and insurance industries. Interest in machine translation (MT) is particularly high. Advances in hardware and natural-language processing have made the technology available at the desktop level. Regulatory pressure has also played a part in its popularity. The European Economic Community, for example, plans to enforce requirements that operations manuals for heavy equipment be provided in the native language of the country of distribution. Caterpillar and Carnegie Group have begun an ambitious joint MT application project to translate automatically all of the client company's machinery-product documentation into 35 languages. Major U.S. suppliers of natural-language technology are AICorp, Natural Language, Inc., and Intelligent Business Systems. Neural networks are the fastest-growing segment of AI. These computing systems mimic the brain through a network of highly interconnected processing elements, which give them learning capabilities and enable them to recognize and understand subtle or complex problems. According to IDC, U.S. sales for neural-network software increased 65 percent in 1993 to 44 million USD. Software makes up only a small part of the market for neutral networks. The majority of revenues come from hardware, development tools, consulting, and licensing. Neural networks have been used in character recognition, industrial applications, real estate appraisals, and financial analyses. One bank replaced its expert system with a neural network in order to detect credit-card fraud, and stated that the 1 million USD system paid for itself in six months. Neural network technology will continue to receive funding from the Federal Government under the 300 million USD per year Decade-of-the-Brain program launched in 1990, as well as through the Small Technology Transfer Research (STTR) program. The SSTR program, which supplements the Small Business Innovative Research program, is designed to give researchers at national laboratories incentive to explore areas with commercial potential. The majority of STTR's 24 million USD budget is likely to go to neural-network research. Though only a small part of the 400 million USD which is currently being allotted for research and development of AI, STTR's funding is important because it stresses commercial applications as opposed to the military applications which most U.S. Government R&D funding has emphasized. Fuzzy logic, another AI technology, received a great deal of attention in 1993. Based on fuzzy-set theory, fuzzy logic recognizes that statements are not necessarily only "true" or "false," but can also be "very unlikely" or "more or less certain." Fuzzy logic allows computers to emulate the human reasoning process, which makes decisions based on vague or incomplete data, by assigning values of degree to all the elements of a set. Japan continued to lead in commercial applications of fuzzy logic technology. According to Cognizer Almanac, the 1991 global market estimate for fuzzy logic was 150 million USD, almost half of which was for training and custom applications. Cognizer predicts that the total market will be 3.5 billion USD by 1995. The use of fuzzy logic in products reduces time-to-market, lowers development costs, and improves product performance. Many U.S. firms have begun to incorporate this technology into their manufacturing processes and products. Ford Motor Co. is currently working on an antilock-braking system which uses fuzzy logic. Motorola's Advanced Microcontroller Division states that, within 4 years, half of their microcontrollers will incorporate fuzzy logic. NASA is probably the most active government organization in the field, with programs in intelligent computer-aided teaching, real-time, vehicle-health maintenance, and Space Shuttle docking. The potential commercial applications of fuzzy logic are abundant, as the Japanese have shown in more than 100 different product areas, from washing machines and video cameras to elevators and subway trains. The incorporation of fuzzy logic into U.S. products and processes is important to U.S. competitiveness. Companies which incorporate fuzzy-based technologies into their operations achieve cost savings through shortened waiting time and reduced energy consumption. In addition, the market for consumer goods with this technology is lucrative and growing. In 1990, Japanese company revenues from fuzzy-logic products reached 1.5 billion USD. Revenues from such products were less for U.S. firms, but are expected to grow as more companies like Saturn and Ford incorporate the technology into their products. Fuzzy logic is primarily a software technology, and as a result, major revenues will come from development tools and support services. Fuzzy-control applications are the most successful area for fuzzy-systems development, and many companies are developing hybrid tools with both neural networks and knowledge-based systems. The learning capabilities of neural networks are also important in developing fuzzy rules for programming microcontroller chips. According to Frost & Sullivan Market Intelligence Research Corp., the combined worldwide market for the combined technologies of neural networks and fuzzy systems by 1998 will be nearly 10 billion USD. International Competitiveness ----------------------------- European AI companies suffered in 1993, during a recession which slowed their domestic economies and dampened AI market demand. This downturn was reflected at Avignon '93, one the world's leading expert-systems conferences, which drew only half the number of attendees and vendors as the previous year. Despite the recession, the European market for KBS methodologies and constraint-based tools was better than that in the United States. The European Strategic Program for Research and Development in Information Technologies (ESPRIT) began in 1984 and was designed to promote European transnational cooperation in information technology, increase European competitiveness through technology, and contribute to international standards. The second phase of ESPRIT began in 1987 and placed more emphasis on the industrial nature of the program than did the first phase. The KBS Project KADS, which stands for Knowledge Analysis and Design Structured, began under this second phase and was extended through the EC Research and Development Framework Program. KADS has resulted in a knowledge-based, system-development methodology which is widely used through Europe and is seen as a de facto standard, the only such standard in the world. Object technology is as popular in Western Europe as it is in the United States, and European vendors are marketing their tools in much the same way as their American counterparts. The demand for neural-network products resulted in profits for some European vendors, including Neural Computer Sciences and Neural Technologies in the United Kingdom and Mimetics in France. Natural languages is an area in which Europe is very active commercially, and research is being conducted by many private companies as well as through the ESPRIT research project. Japan continued to invest heavily in all areas of AI in 1993. The 10-year Fifth Generation Computer System (FGCS), which was to end in 1992, was extended for 2 more years with a budget for fiscal year 1993 of 9.3 million USD. This is a fraction of its previous budget. The Real World Computing (RWC) project is intended as a follow-up to FGCS, and its 1993 budget was four times larger than the 1992 level of 24 million USD. These investments may be paying off. According to a report released by the Japanese Technology Evaluation Center which studied knowledge-based systems in Japan, Japanese industry has caught up with the United States in expert-systems technology, an area in which it has traditionally trailed. The report estimates that there are between 1,000 and 2,000 fielded expert systems which are widespread across business categories, ranging from banks and securities firms to chemical and precision machinery industries. Planning-type systems were the most popular with 30 to 50 percent of the market, while use of diagnostic and design systems declined. The use of LISP- and Prolog-exclusive machines decreased as UNIX workstations continued to occupy the top position. Despite the advances Japan has made in this segment of AI, enthusiasm for expert systems has waned in favor of the more popular neural networks, fuzzy systems, and object-oriented-related technologies. Companies in all sectors are increasing the integration of neural-network technology with expert systems and fuzzy-logic processing. For example, Hitachi recently began sales of an AI-based, plant-control system called "Synergetic AI Control System", that contains all three technologies. Hitachi claims that this combination enables smoother and more detailed control of plant operations, rivaling human capabilities. The Japanese have begun to focus on the growing field of massively parallel AI (MPA*). Massive parallelism uses several thousand relatively powerful, individual processors to work on artificial intelligence projects. MPAI resulted from a need to develop parallel support for the development of large-scale AI and knowledge-based efforts. In addition to the RWC project, Japan's Ministry of Education is conducting research in a project titled "Super Parallel Computer." ATR Interpreting Telephony Research Laboratory, in Kyoto, is working in the area of machine translation using massively parallel algorithms. The United States maintains the need in the massively-parallel-computer market; however, Japanese scientists and researchers seem committed to developing their expertise in parallel computing and should not be ignored. Outlook for 1994 ---------------- Knowledge-based systems will remain the dominant segment of the AI market, but vendors will continue to align themselves with object-oriented, CASE, and client/server technologies. The expert system tools market will continue to emphasize vertical and problem-specific tools while moving toward open systems and workstations. U.S. vendors' sales of KBS in 1994 are expected to rise 17 percent to 124 million USD, according to IDC. Natural-language processing will take the lead as the fastest-growing segment of the industry, generating U.S. revenues of 117 million USD. Demand for neural networks will increase, generating revenues of 66 million USD for U.S. vendors. This technology will increasingly be integrated with expert and fuzzy-logic systems due to its speed and flexibility. Market Intelligence Research Corp. estimates the world revenues for neural networks and fuzzy logic for 1994 at 2.5 billion USD. Fuzzy logic, which only recently has been recognized for its commercial potential in the United States, will be used more often in such applications; however, the Japanese will remain the leaders in this field. Long-Term Prospects ------------------- The current popularity of object-oriented, CASE, and client/server technologies is a result of the need for manageable computing environments. As this need is filled, however, the more basic problems of capturing and analyzing knowledge will return to the forefront, the solutions for which remain in AI. Thus, the demand for knowledge-based systems will moderate for the next several years, but user interest should rekindle at the end of the decade as businesses discover the competitive edge that KBS can afford them. Natural-language processing will continue to grow and hybrid systems, incorporating all of the natural-language techniques, will gain popularity. The market for voice-input devices will remain limited until computer speeds are increased. According to Computer Design, an industry publication, by 1996 or 1997 revenues from fuzzy development tools and support services will rise to 640 million USD a year. Fuzzy logic and neural network revenues will grow at an annual compound rate of 65 percent over the next decade, according to Market Intelligence Research Corp. Fuzzy logic will grow more rapidly until mid-decade, at which point neural networks will regain the lead. Genetic algorithms and chaos theory may offer much-needed breakthroughs in the theory of information flow in neural networks, pattern recognition, and language recognition. -- written by Shelagh Montgomery, Office of Computers and Business Equipment, 1-202-482-0397, September 1993. CAD/CAM/CAE ----------- The computer-aided design, computer-aided manufacturing, and computer-aided engineering (CAD/CAM/CAE) industry has four major areas: mechanical; electronic design automation; geographic information systems; and architectural, engineering and construction. CAD/CAM/CAE software runs on mainframes, workstations, personal computers (PCs), and network servers. In 1993, the CAD/CAM/CAE worldwide market for hardware, software and services increased more than 5 percent to 16.5 billion USD, according to Dataquest. Worldwide CAD/CAM/CAE software revenues increased 12 percent to 5.6 billion USD in 1993. Mechanical applications continued to dominate the market with 49 percent of the total, followed by electronic design automation with 23 percent. CAD/CAM is no longer a niche market. Today's CAD/CAM user ranges from the engineer designing aerospace parts to the homeowner redesigning a bathroom. However, the typical CAD/CAM customer is a professional designer. Customers are reevaluating CAD/CAM suppliers, as hardware becomes a short-term investment and users seek software packages that can share data. Many companies in the CAD/CAM customer base are moving toward networking their workstations to share resources across user groups. Most CAD software is very demanding of computer resources. The new generation of powerful personal computers (PCs) has reached a level of performance to compete with workstations for a share of the CAD market. The competition will be fierce since the workstation has become the standard of CAD/CAM users. UNIX workstations are encroaching on the market turf of PCs as prices fall. New technology trends emerging in the CAD/CAM market include multimedia and 3-D imaging. Multimedia software provides the ability to combine video, stereophonic sounds, and data into desktop presentations created by users. Some CAD/CAM software vendors have already implemented these new technologies. CAD/CAM/CAE software packages, which many aerospace companies rely on for automated design and manufacturing, are undergoing dramatic changes as demonstrated by the new 3-D modeling software. Two-D solutions are being replaced by 3-D solutions, which will soon be replaced by next-generation, integrated, and solid modeling. Progress continues in integrating modeling and analysis applications, between modeling and documentation, and ultimately into the manufacturing of the designs. CAD/CAM software developers are scrambling to design modeling programs to address adequately the assembly design and analysis, which is a crucial and often time-consuming aspect of product engineering. Besides increasing productivity and improving design processes, modeling assemblies with CAD/CAM tools should improve document creation and management, and help to track product configuration. Consequently, proponents of assembly modeling are particularly enthusiastic about this technology's potential for integrating product development and the coordination of projects. Although users have been modeling assemblies with standard CAD/CAM tools for many years, it is only recently that software developers have begun to work on products specifically designed for assembly modeling. Faced with a barrage of increasingly complex part designs, manufacturing engineers are rapidly embracing CAD/CAM systems. For true surface modeling, CAD/CAM software, such as a numerical control programming system, uses mathematical formulas to determine all required points on a surface. This enables research staff to develop a variety of prototype parts with complex contours, without building patterns manually. The complexity of a new part can make a firm completely rethink its manufacturing processes. Mechanical CAD/CAM covers tools used to design, analyze, document, and manufacture single-function parts, components, and assemblies, In 1993, the worldwide mechanical CAD/CAM/CAE software market grew to more than 2.5 billion USD, an increase of more than 12 percent over 1992. The automotive and aerospace industries are the largest customers of mechanical CAD/CAM/CAE tools. By taking advantage of the power of new, high-performance computers, software vendors can redefined the concept of interactive design. The nature of mechanical CAD/CAM/CAE will change, allowing anyone in the design and manufacturing process to simulate real problems, to evaluate potential solutions, and to communicate the changes instantly to all involved. The electronic design automation segment has tools to automate the design process of a variety of electronic products. The market has three segments: electronic computer-aided engineering; integrated circuit layout; and printed circuit board/hybrid/multichip module. In 1993, the worldwide market for electronic design automation grew more than 10 percent to revenues of 1.4 billion USD. Integrating complex software applications from different suppliers became easier as more producers began to comply with the standards and guidelines put forth by the Computer Framework Initiative, Inc., a consortium dedicated to the development of industry standards. The electronic design automation industry had mixed growth and financial performance, indicating that the market for high-priced, basic technology is nearing saturation, while specialized technologies are finding niche markets in which price and number of seats appear to be no object. Popular technologies in 1993 included the IEEE-standard Very High Speed Integrated Circuit Hardware Description Language and tools for designing field-programmable gate arrays, multichip modules, high-frequency integrated circuits, printed circuit boards, and mixed-signal products. Electronic-design automation vendors are turning to resellers. Once handling mostly low-cost products from small companies, value-added resellers are now being recruited to sell sophisticated, high-ticket, electronic-design automation items. Using resellers is vastly less expensive than employing a dedicated sales force. There is tremendous pressure on vendors to bring down the cost of their software products, a task aided by cutting back on the use of a direct-sales force. In 1993, optimizing software for mechanical applications was increasingly used in the design laboratory to find a quick solution for new product requirements, including changes to existing products. As an example, design for recycling makes material selection more critical. This issue is especially relevant when nonrecyclable plastics have been used. The design task can be facilitated by the use of optimization software packages that run through several analyses before reshaping a design within an engineer's prescribed boundary. Engineers can now select from several packages, some focusing on balancing shape, stress, vibration frequencies, and heat transfer. Others, usually software shells, which act as "managers", read and write files from one analysis or design package to another. Focused optimizing packages usually run faster, but shells have the advantage of working with a wide range of independently-developed software. Shells also allow users to program rules that more extensively reflect experience and perform discrete optimizing, such as selecting a best pattern of features. Since industry is implementing concurrent-engineering, CAD/CAM suppliers are now designing their tools with this concept in mind. Companies no longer view design as an isolated event in the development cycle. Instead, design works within concurrent-engineering to reduce rework and cost overruns. Concurrent-engineering ensures that all engineering disciplines work in parallel, without the risk that one change made somewhere else will make the engineer's work obsolete. Getting a product to market quickly can be a critical factor leading to prime sales. Overall, concurrent-engineering brings greater speed and productivity to a company. The architecture, engineering, and construction sector covers computer-aided software tools used by architects, contractors, and plant and civil engineers to aid in designing and managing building and industrial plants. The industry is divided into four categories: architectural, civil and structural engineering, facilities design and management, and process plant design. In 1993, the worldwide market for architectural, engineering, and construction software grew nearly 12 percent to almost 850 million USD. The demand for architecture, engineering, and construction CAD systems usage is growing as many companies report a need to deliver design information in electronic form. To assess future growth areas for architecture, engineering, and construction CAD, industry analysts examined market penetration at existing CAD sites. Although the architecture, engineering, and construction industry is not driven by the latest technology, users, as a whole, have sufficient experience with CAD products to know what they want. These CAD users are clamoring for easy-to-use products with high vendor responsiveness and product compatibility. While the advanced users have gradually shifted toward 3-D CAD, a large group of potential users exists that do not understand the benefits of CAD systems and continues to use paper for design work. Geographic information systems and mapping software enables users to capture, edit, display, and analyze various geographically-referred data. In 1993, this was the fastest-growing segment of the CAD software market. The worldwide market for geographic information system software grew almost 15 percent to more than 720 million USD in 1993. Faster, cheaper computers and developments in open systems provide a gateway to an expanded user base. Advances in global positioning systems and aerial photography make it possible to create mapping systems, which are significantly more accurate and enhance existing paper maps, giving experienced users some compelling reasons to reinvest. Portable computers, multimedia, cheaper storage, and better compression of satellite imagery will create more opportunities to develop richer, more accurate, and more useful software. Geographic information system software is one of the rare industries in which relatively simple government action can directly fuel growth, since the industry depends on government cooperation for basic data development. The Federal Government is in a particularly influential position, with such programs as LANDSAT, which make satellite imagery more affordable. An example of the value of geographic information system software to the work of governments comes from the Washington, D.C. metropolitan area. The Metropolitan Washington Council of Governments is examining the use of mapping software for environmental analysis. The council, which coordinates selected activities of several local governments, hopes to be able to use the system to locate potential environmental hazards, such as underground storage tanks. International Competitiveness ----------------------------- U.S. vendors supplied more than two-third of the 1993 world CAD/CAM/CAE market, followed by Asian firms with 20 percent, European with 10 percent, and suppliers from the rest of the world accounting for 2 percent. In 1993, the European CAD/CAM/CAE software market grew to less than 6 billion USD, making Europe the slowest-growing region worldwide. The Asian CAD/CAM/CAE markets, dominated by Japan, grew 9 percent in 1993. Foreign electronic design automation vendors have made few inroads in the U.S. market, but a new group of suppliers is hoping to make a change with new products and effective distribution channels, although they face a tough marketing challenge. One key to success in the electronic design automation business is a company's distribution channel. Foreign vendors have had minimal success in developing such channels in the United States. However, a window of opportunity may open for foreign vendors if they can build improved distribution channels, through such organizations as resellers and original equipment manufacturers. Foreign vendors may also be helped by the existence of standards, which will make it possible to integrate incompatible software packages. Outlook for 1994 ---------------- Worldwide CAD/CAM/CAE demand for hardware, software, and services should increase by almost 5 percent in 1994, with revenues reaching an estimated 17.5 billion USD, according to Dataquest. Of this amount, the software portion will account for 36 percent, hardware 48 percent, and services 16 percent. Mechanical CAD/CAM/CAE software is expected to continue to hold the largest market share, with revenues of nearly 3 billion USD; followed by electronic design automation, with revenues of more than 1.5 billion USD; architecture, engineering, and construction, with revenues of approximately 950 million USD, and geographic information systems and mapping, with revenues of approximately 850 million USD. Growth in revenue of architecture, engineering, and construction, and in geographic information system and mapping applications through 1997, will exceed growth forecasts for mechanical and electronic applications. Long-Term Prospects ------------------- The worldwide CAD/CAM/CAE market is expected to grow at a consistent, steady rate of 4.6 percent, reaching 21 billion USD by 1998. In the long term, as the complexity of designs and the need to share and store information electronically increases, the benefits of automation will increase. A significant number of currently untapped users in the mechanical; architecture, engineering, and construction; and geographic information system and mapping application areas will help to drive additional growth. Technological advances, growing sophistication of users, and competitive pressures will make software easier to use, more flexible, and interoperable. These forces will promote business alliances between small, innovative niche players and major vendors, allowing companies to sell across the spectrum of new and replacement markets. CAD/CAM users and vendors must work together to create user environments structured to promote growth in the CAD/CAM market. -- written by Vera A. Swann, Office of Computers and Business Equipment, 1-202-482-0396, September 1993.