The Software Bottleneck and its Resolution II: Software Products

The Spatial Dynamics of the U.S Computer Software Industry.Edmund A Egan

Hardware Gimmick or Cultural Innovation? Technological, Cultural and Social Foundations of Japan’s Video-Game Industry.

Yuko Aoyama and Hiro Izushi - Book Review

A geographical profile of the US Software Industry

Independent software industry is comprised of 3 parts:

Customised programming services packaged software Computer integrated systems design

Packaged software is an anonymous relationship, characterised by limited interaction between user and provider, third party distribution channel.

Findings:

The six metropolitan areas in the US dominate software production.

Packaged software is more spatially centralized than software services, andsoftware service employment more spatially concentrated than computer specialists.Smaller cities have developed more disproportionately large packaged software industries

Concentration of industries follows the same pattern.

There are connections between the economic structure of a city and its locationQuotient for software provision. This could be explained by the location patternof the employing industries, location of large universities etc.

The Transformation of the Software Bottleneck

The element of design in a software product which must be produced like any other input, constitutes “knowledge value”.

Selling of knowledge value profitably is difficult, since marginal cost is zero.

It requires an institutional setup, which will enable the realization of knowledge value at full value by itself.

This will enable an industry to appropriate the knowledge and derive profits, which will fund future investment.

Much of knowledge value today is produced independent of the computer, and is sold at full value, or whatever value it fetches on the open market - Software

Software Bottleneck.

The growth of the software industry is governed by two autonomous processes: processor innovation governed by Moore’s law, and the rise in demand for information processing capabilities by organizations.

The software bottleneck is the mismatch between the two processes, with hardware capabilities increasing and software being unable to meet the rising demand in information processing requirements.

The software bottleneck implies that the software is an ever increasing share of the cost of a system. This rising cost is a problem of lagging programmer productivity. Software bottleneck could mean there is not enough software which is because there are not enough people to write it, which translates to a labor shortage.

There are inherent problems in the nature of software itself, with software being expensive, error-prone, production never being on schedule and always over budget. Software development is considered a craft like activity, and it has not been industrialized.

These problems have induced an attempt at software engineering, which attempts to restructure the technical division of labor within the software development process, through rationalization (innovations in programming methodologies) and automation (improvements in development tools)

These improvements or technological trends in SE include models like the waterfall model and RAD, and the development of 4th generation languages, which empower end users and reduce time taken to develop applications.

This has led to a separation between work of programming and system analysis and design. While programming has been standardized, to a certain extent, no standard methodologies exists in areas which require interaction with customers

This has had an uneven effect, with standardized portions of the process being improved, and the creative aspects less so.

This labor shortage, or lagging programmer productivity has led to a long term rise in the importance of independently produced software.

Independently produced software produces economies of scope, by spreading development costs across several customers.

The substitution of cheap mass produced software for more expensive customized software, and network externalities in its use, costs tend to reduce, which leads to a spiral. The users willingness to pay increases as scale increases.

However this situation implies a trade off between cost/quality which tends to widen This “quality gap” is the market for a more specialized software, which is filled by end users, extensions of the existing package, which forms a platform for the new software.

This quality gap, which is the new market, can be exploited by the current users of the software. This new software will be domain specific as it addresses lack of specialization in the product already exisiting.

The industry matures into a network of niche markets, linked by dominant standard setters, who are the fundamental innovators. The diffusion of package software makes it easier to create new software, dominant firms find it difficult to enter those niche markets and give way to more focused firms, who produce domain specific software

However the cost/quality trade off implies that there may be an organization not willing to settle for poor quality, and will put off the hardware purchases, transforming the software bottleneck.

As the number of customers increase and unit cost of software will continue to decline. This process, not training more programmers or automating the work, could be the key to the long term resolution to the bottleneck.

The Independent Software Industry.

US software developers by industry, % of total programmers, Computer Scientists and Systems Analysts

The software industry’s share is continuously increasing. This could be due to thefact that their productivity is greater in the independent industry, commanding a higher wage, therefore they choose to work there. This implies that ISV’s are moreproductive simply because they are independent.

The top 6 software vendors in 1994 were all ISV’s

Packaged Software employment as a percentage of all Software Industry Employment.

In the same period the output of the packaged software industry grew 194%, the growth resulting from a large market.

Packaged Software establishments and firms in the US

The Changing Spatial Structure of the US Software Industry.

The most successful companies have moved away from vertically integrated closed systems towards open products. These products interact with the offering of other vendors as modules.

New companies have sought to strengthen their position by encouraging third party development for their products, which ultimately become standards.

The rise of such third party developers, is part of a structural response to the software bottleneck.

This structural response to the bottleneck results in an extension of software capabilities, into user domains.

The fundamental software innovations are extremely pervasive, and this is a constraint on what could be done downstream.

If one software product precipitates another, this software will form an important part of the input to the new software, indicating a round about nature to the industry.

Relationship between Labor and Location:

Dominant locational factors were subjective, (residential preferences of employees) or were non existent (firms were where they always had been)

There could be a relation between the location of the industry and its dominant inputs/outputs, i.e. producers/consumers of software. The industry could locate itself close to where other producers of software were, or could locate itself where its consumers were.

The ordering of the industry could be determined by the division of labor, which determines which skills are demanded by the industry. Such skill sets have economic freedom, and the subjectivity in the locational decision is a result of the power of the workforce.

Footlooseness in an industry is when a firm is not forced to locate in a specific location. This implies that there are no advantages to location, and subjective decisions hold sway.

Given subjective decision making with regard to location, the software industry is still clustered.

The industry is where the programmers are.

The primary input to a new software is existing software or protocols, and skilled labor to produce them.

Familiarity with existing tools is indicative of the market in that segment, since these tools become commodities.

The second input to the development is provided by the restructuring process of the industry itself.

Software Industry employment in high technology manufacturing areas should grow more slowly: because of the influence of increasing returns; and competition in these areas improve capabilities of the software and reduce costs. This leads to the “quality gap” paving the way domain specialists, who may locate close to their market locations.

Organizational pressures and Spatial Instability in the emergence of ApplicationDistricts

The liberalization of the American software development gave rise to the independent software industry, which is dominated today by America.

The US open model of development was slow to change, and the competitors adopted the ISI model. Further given that the US was a monopoly, it had a policy autonomy which its competitors could not share.

This policy was to create an open software network, which was in line with the structural evolution of technology.

However, as late entrants, countries like India, Israel, Taiwan and Ireland have developed significant independent software industries.

This they achieved by building a network with the dominant American producers, and spinning off successful domestic companies on their own.

Paranoia and Opportunism

Given that the software industry is organized into a network of monopolies, with increasing returns stemming from economies of scale and network externalities, the network forms the most essential part of the industry.

The emergence of standards across computers, and in general purpose segments, led to the adoption of more specific software. This further lowers the cost of information processing.

Commitment to an industrial organization means that a high switching cost is associated with change, leading to paranoia. If future likely trends in the industry is ignored, a firm could disconnect from the network, eliminating its source of income.

The user is the main source of feedback to the industry. If the software industry ignores this crucial element, and develops a software which precludes further extensions by users or other developers, this interaction with the users will vanish, again leading to a disconnect.

Hardware Gimmick or Cultural Innovation? Technological, Cultural and Social Foundations of Japan’s Video-Game Industry.

Yuko Aoyama and Hiro Izushi

Most cultural exports come from the west, with Japan’s video games being the exception

Given Japan’s industrial organizational structure, which hinders creative development, how have Japan’s video game firms succeeded?

Video games do not suffer from the same problems its independent software industry did. It has lower barriers to entry, and escaped negative effects of state-led industrialization, since it evolved solely out of private entrepreneurship.

The video game industry has been sustained through selling platforms, and not consoles.

The video game industry began with “Space-war” developed at MIT, and gained popularity with “Pong” developed by Atari. Due to poor quality and over supply, it also crashed in 1984.

The industry was rescued by Nintendo, whose success stemmed from its alliances with hit arcade video games, price competitiveness and original software.

Nintendo also nurtured a lot of talent in software in-house, and averted competition by its knowledge of toys and entertainment industry, upgrading technologies through hardware alliances, and controlling the distribution channel.

Nintendo however did not change over to CD-ROM technology, which was capitalized by SCE.

SCE’s success comes from the fact that it has a good brand image, in-house manufacturing capabilities, which enabled it to meet demand rapidly, and its alliances with major software publishers.

SCE’s in-house manufacturing capabilities, and Nintendo’s alliance with Mitsubishi, played crucial roles in their successes. They outsourced manufacturing activities concentrating on the design.

Platform developers facilitate the entry of software publishers into the market through information exchange

While a game goes through almost the same stages of development as a software, it involves occupational categories like artists, sound designers and game designers.

In response to the changing skills requirements, the video game industry drew from Japan’s well established “manga” comics.

The “manga” comics gave rise to animation movies, which coupled with its presence in video games reinforced its position in Japan’s popular culture.

This cross cultural sharing was possible because both separate industries emerged at the same time.

These 3 separate industries have been increasingly linked together and used to boost marketing sales of the others.