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The software industry is a bit amorphous; it covers everything from computer game cartridges to advanced telecommunications switching programs. Nevertheless, it is possible to outline the industry?s major features. Best estimates are that the U.S. industry totaled about $145 billion in revenues in 1998 and about $182 billion in 2002. (Campbell-Kelly, 2006) Fast growth is expected to propel the industry to as much as $500 billion level in annual revenues by 2008. (Campbell-Kelly, 2006)
It is generally recognized that the industry has two main segments: prepackaged software, sold ?off the shelf ? as a commodity product; and ?custom programming services,? in which the software is created specially (or adapted) for a particular client. (U. S. Department of Commerce, 2005) Although estimates of the relative size of the two segments vary,it is thought that prepackaged software accounts for approximately 70 percent of industry revenues at present. However, the elusive nature of the industry yields some very different estimates.
Average firm size in the U.S. software industry is also difficult to estimate. The most recent survey, however, provides some rough indications. In general, firms in the industry are small. Of the survey?s 466 respondents, 18 percent had 5 or fewer employees; 20 percent had 6-15; 21 percent had 16-30; 21 percent had 31-99, and 16 percent had more than 100 employees (Kestin, 2004). Thus fully 38 percent of the firms had 15 or fewer employees, and about half (49 percent) had 30 or fewer. Commentators have generally remarked on the small firm size in the industry.
It is difficult to obtain data on average firm size in the two main segments of the industry, custom software and prepackaged software. However, the survey data just mentioned do provide some suggestions along these lines. Respondents were asked to classify their products into two broad categories, vertical market and horizontal market software. Vertical market software is sold to a specific industry--for example, bookstores, car dealerships, or hospitals. Horizontal market software is designed for a general application such as word processing or financial spreadsheets and thus is sold in many industries.
In general, vertical market software tends to be more customized while horizontal software is by definition prepackaged. Using this admittedly rough guideline, the survey response data show that firms producing vertical market software products are slightly larger than those producing horizontal market software. In other words, it appears that firms in the custom software segment of the industry are slightly larger, on average. This is what one would expect given the need for more custom service and user input. (Fishman, 2003)
In comparing profitability across industry segments, again only indirect data are available. But a comparison of price-to-earnings ratios for publicly traded firms in the two segments shows that the stock market anticipates more growth in the prepack aged software market. Average price-to-earnings (P/E) ratios for publicly traded firms in this segment are 18.7; for firms in the custom programming services segment, the average P/E is 15.2 (Kestin, 2004).Thus at least the stock market believes prepackaged software has a rosier future.
The United States has traditionally embraced strong protection for computer software. Despite some early 1990s cases moderating the strength of copyright protection, the emergence of patent protection for software ensures that overall this strong protectionist regime will continue. In copyright, the widely publicized ?look and feel? cases in U.S. courts effectively extended copyright protection to broad structural features of programs, especially user interfaces and command menus. (Kestin, 2004) In the late 1990s and early 2000s, however, several opinions cut back on the broad protection offered to software features.
In one such case, the Second Circuit Court of Appeals, the influential regional federal court based in New York City, held that a computer program must be carefully dissected into copyrightable and uncopyrightable components before determin ing infringement. Moreover, the court held that only specific expressions and features of the program were copyrightable. The broader structural features--precisely those held protectable in earlier cases--were excluded. (Campbell-Kelly, 2006) Although this ruling has been followed in some recent cases, the broad-protection view still retains adherents. The doctrine may stabilize over time; if it does not, a Supreme Court resolution will be necessary.
In the European market, American firms such as Microsoft, Lotus, and Ashton-Tate have a large market share in packaged software. In 1999 U.S. demand for software was 40 percent of the world market, and American firms had an 87 percent share of the world packaged software market. (Kestin, 2004) European firms accounted for 16 percent of world production of packaged software and consumed 41 percent. Japanese firms produced 4 percent of software packages worldwide and consumed 11 percent (Kestin, 2004). Few European independent software houses specialize in software packages; those that do include Software AG (Germany) and SAP (Germany). Most European firms specialize in professional services and custom software rather than software packages; they include Cap Gemini Sogeti (France), Finsiel ( Italy), Sema Group (France, U.K.), and SD-Scicon (U.K.). (Kestin, 2004)
There are about 13,000 European software and services firms. American and European hardware manufacturers control about 50 percent of the European market for packaged software (Fishman, 2003). In the late 1990s European hardware manufacturers began to devote a large portion of their R&D efforts to software technology. In custom software and computer services, on the other hand, independent software suppliers control about 80 percent of the market. Because of the high number of firms in this industry, producer concentration in the main European markets is relatively low. Most European firms sell primarily in their domestic markets. Even the largest European software and services firms show a limited degree of internationalization in exports and foreign direct investment. For instance, over 80 percent of SD-Scicon?s revenues come from domestic sales in the United Kingdom, and 96 percent of Finsiel?s sales are in Italy. (Kestin, 2004)
A full understanding of the current structure and position of Microsoft product such as Microsoft Vista within the conceptual framework of the software industry must take into account the dynamics of competition in the world software industry, the working of vertical linkages, and the role of organizational and institutional factors. Weak performance in packaged software and specialization in custom software are related to the weakness of the computer industry, early entry and market preemption by various packaged software producers, the fragmentation of regional demand among different domestic markets, and the lack of extensive interactions between European universities and industry.
The absence of a competitive European computer hardware industry has impeded the birth and performance of local producers of system software and packaged software. European computer firms have been relatively unsuccessful in the past thirty years. As a consequence, during the 1980s and 1990s wouldbe European entrants in systems software and packaged software could not benefit from cooperation and interaction with technologically advanced and commercially successful European hardware producers, and were not able to interact closely with American hardware producers that were operating at the technological frontier. For example, British firms usually gained access to specifications of new hardware products one or two years later than American software houses (U. S. Department of Commerce, 2005).
This situation has been worsened by early entry into Europe and market preemption by the successful American system and packaged software firms such as Microsoft. Such firms benefited from continuous interactions and cooperation with highly competitive hardware manufacturers in the United States (such as the early cooperation between Microsoft and IBM in the development of DOS) and therefore could rapidly adapt their products to state-of-the-art hardware technologies. They also made major R&D investments in new standard software packages because they had a potentially large internal market. (Kestin, 2004) Successful American software houses entered all the European countries simultaneously, deterring entry by European firms and in the meantime reaching a certain overall threshold of sales in Europe. Their link with American hardware manufactures also gave American packaged software firms access to hardware producers? extensive sales networks.
European firms focused on relatively small national markets. The fragmentation of the European markets is due to many historical, cultural, linguistic, fiscal, and legal differences, a full explanation of which is beyond the scope of this work. These differences have reduced the opportunities for economies of scale and scope that are so important for commercially successful software packages. They have favored the development of a European industry composed of small and medium-sized firms that offer customized software and services, system integration, and hardware resale. The absence of a strong European hardware industry has favored the diffusion of standard software packages designed for American computers.
With the partial exception of Germany, the European software industry also has suffered from weak links between industry and university. In the United States, many innovative firms have emerged from university research programs; although the interactions between industry and academia vary, in general, European universities have contributed less to the local software industry than U.S. universities have in America. Even in the United Kingdom, which has an outstanding tradition of academic research in computer science, communication between industry and university has produced few products or spin-offs. The only European university spin-off that has gained a leading world position in packaged software is Germany?s Software AG. (Fishman, 2003) As a consequence, EEC technology policy and a few national programs are now promoting cooperation between industry and university. (Campbell-Kelly, 2006)
Finally, previous national policies have focused mainly on computer hardware and on building a few ?national champions.? (National champions are large domestic firms--often created by mergers of several firms--that receive state support through direct subsidies and preferential government procurement contracts.) (Kestin, 2004) Only recently have some countries and the EEC launched policies aimed at software. The regional software industry is hampered by weak legal (patent and copyright) protection in most European countries, which increases transaction costs and contributes to national specialization in customized software and services (Kestin, 2004).
One factor that has hindered the development of a successful packaged software industry is the weakness of the European computer industry, with the partial exception of Germany. This unsatisfactory performance dates back only to the 1960s; before the late 1950s European scientific and technical capabilities in the information technology sector were in fact nearly as strong as those of American firms. (Gibson, 2005) The United Kingdom provides the most striking example of early entry, followed by rapid decline, in the computer industry.
The United Kingdom has an advanced scientific tradition in computer science that dates back to the 1930s and was strengthened by the military alliance with the United States during World War II. During the war the British mathematician Alan Turing worked for the British Ministry of Defense on decryption of German secret communication codes. Soon after the war, Cambridge and Manchester Universities made considerable contributions to basic and applied research in computer science and to the development of the first British computers.
In 1948 Manchester University developed a prototype computer--the Manchester Mark 1--and in 1949 Cambridge University developed the EDSAC (electronic delay storage automatic computer) under the direction of Maurice Wilkes, who in 1951 invented the concept of microprogramming. Some British companies such as Marconi, General Electric Co. (GEC), EMI, and Ferranti entered the industry during the late 1950s and the 1960s. (Gibson, 2005) As these companies encountered problems they gradually withdrew from the industry, leaving ICL the only large computer firm in Britain. In 1990 ICL was taken over by Fujitsu.
Since the late 1980s many British software firms have been taken over by foreign firms: Istel by AT&T ( United States) in 1988, SD-Scicon by Electronic Data Systems (EDS) ( United States) in 1991, Hoskyns by Cap Gemini ( France) in 1990, and Logica by Santa Cruz Operations ( United States) in 1992. (Gibson, 2005) As a consequence of these changes in ownership, few British firms maintain an international position in software services (see chapter 8 for a more detailed discussion).
As in the United Kingdom, in France the first steps in the new computer industry were taken for scientific and military purposes. The first French electronic computer was developed in 1953 by Soci?t? d?Electroniques et d?Automatisme (SEA) for the French Minist?re des Armes. Unlike U.K. universities, however, French universities had few research programs in computer science. The leading French firm, Bull, entered the computer business only in the late 1950s. In 1958 Bull launched the Gamma 3 ET computer to compete with the IBM 650 mainframe; but Bull was unable to match the technological or commercial expertise of American firms, and in 1964 General Electric took control of the firm. (Campbell-Kelly, 2006)
In 1970 G.E. sold its share in Bull to Honeywell, and in 1975 Honeywell-Bull and Compagnie International pour l?Informatique (CII) merged into a single company: CII-Honeywell-Bull. The French government acquired a majority stake in CII-Honeywell-Bull, but the company was unsuccessful during the late 1970s and the 1980s. After Honeywell withdrew in 1990, the French government acquired complete control of Groupe Bull. Since 1991, Bull has increased its commitment to software and services, especially in Unix applications.
The case of Germany is quite different. During the 1930s and 1940s Germany accumulated significant scientific competence and technical know-how in the field of electronics, magnetism, and the theory of computer languages. After the war, the German scientist Konrad Zuse established a company specializing in computers for scientific applications. Universities and ?bridging institutions? that played a major role in the birth of the German computer industry included Berlin University, the Max Planck Institute at G?ttingen University, the Munich Institute of Technology, and the Institute for Practical Mathematics at Darmstadt. (Gibson, 2005) In 1964 the German firm Zuse was sold to Brown Boveri (Switzerland) and in 1971 to Siemens, which became the leading computer hardware firm in Germany. In 1989 with the takeover of Nixdorf (the other main German computer firm), Siemens acquired a diversified expertise in computers and software. Siemens-Nixdorf has become a major European producer of software. (Gibson, 2005)
Other European countries entered the computer industry on a smaller scale. Philips started its activities in computers with the acquisition of Electrologica, but in 1990, after a long period of unsuccessful performance, the firm abandoned the computer business. Olivetti entered the computer business relatively early with the ELEA 9003. Financial problems arising from its acquisition of the American typewriter producer Underwood forced Olivetti to enter a joint venture with General Electric and to leave the computer industry altogether in 1968. (Gibson, 2005) At the end of the 1970s Olivetti re-entered the computer industry and recently has devoted substantial resources to software and services.
It is important from Microsoft perspective to analyze software industry by separating software products into two broad classes: packaged software and custom software and services, since this allows to show competitive advantages and market potential of Microsoft Vista product in it specific segment. Software packages include programs that are developed to perform either cross-sector functions (such as scientific and engineering calculations) or sector-specific functions (in the financial sector and retailing, for example). According to the International Data Corporation, software packages include the following subclasses of products: system software (operating systems and utilities), programming languages, application tools (such as computer-aided software engineering tools), and application solutions. (Campbell-Kelly, 2006)
Custom software and services include software systems developed for medium-sized customers (so-called turnkey systems) and large customers (system integration services that are offered through long-term contracts), professional services (customized software, consulting, professional training, and maintenance), facilities management (at the customer EDP [electronic data processing] center), and EDP services (such as problem solving, transaction processing, and on-line information services).
The market for software packages is expected to grow more rapidly than that for custom software and services. Within the packaged software market, the market for application solutions is expected to increase more rapidly than the market for system software (U. S. Department of Commerce, 2005). Within the computer services market, the most dynamic segments are system integration, facilities management and turnkey systems (U. S. Department of Commerce, 2005). Professional services and EDP services, which were internationally the only types of computer services marketed in the 1960s, are not expected to grow.
Because data on firms and the organization of innovative processes in the software industry are not widely available to the public, it will be necessary to conduct two surveys on the innovative activities of software firms in both United States and Europe. The survey respondents would provide information on written questionnaires and in direct interviews. The surveys would include questions on the competitive performance of firms, the types of innovations undertaken, the sources of technological change and the organization of the innovative process, the type of skills needed and the technological strategies followed.
In order for Microsoft Vista to succeed in increasing Microsoft market share in the given segment, all market peculiarities need to be taken into consideration. It seems plausible for the company to focus the promotion of its new product on the European software markets, as they are more vulnerable to US company penetration. Moreover, Microsoft Vista will need to be introduced to a very diversified types of potential users in order to ensure successful share increase.
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