| U.S. Industrial Outlook, 1994 -- |               iocsn
                | Computer Software and Networking |

(This information is excerpted from a report furnished by the US
Department of Commerce.)


  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

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.


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

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

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

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

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 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
                                  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
  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

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
                               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

  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

            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

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


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

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.


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

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.


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

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

  -- written by Mary Smolenski, Office of Computers and Business
     Equipment, 1-202-482-0551, September 1993.


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

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

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

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

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

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

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


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

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

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

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

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

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.


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.