†1996 Rieko Mashima.

† Attorney, Loeb & Loeb, Century City, CA; LL.B., Tokyo University; LL.M., Harvard Law School. The author wishes to thank Professor Robert P. Merges, Boalt Hall School of Law, for valuable comments and encouragement, and Professor Daniel H. Foote, University of Washington School of Law, for thoughtful comments on an earlier draft of this article. The author also thanks Ms. Kazuko Ohtani of the Japan Research Institute, Ltd., for her help in gathering useful Japanese materials, and Finnegan, Henderson, Farabow, Garrett & Dunner in Washington, D.C., for its support.

1. Game software is excluded from the scope of this business perspective, for the following reasons: (1) game software is typically far less expensive than other types of prepackaged software; (2) the product cycle of game software is much shorter than for business software; (3) many users of game software are children, meaning that the target-market is different than for other prepackaged software; and (4) large game software companies such as Sega and Nintendo sell game software in combination with hardware they manufacture. In short, the game software industry is quite different from the rest of the prepackaged industry, and must be analyzed separately.

2. JAPAN INFORMATION SERVICE INDUSTRY ASSOCIATION (JISA), JYOHO SERVICE SANGYO HAKUSHO 40 (1994) [hereinafter 1994 JAPANESE WHITE PAPER]. The Ministry of International Trade and Industry (MITI) supervised the preparation of this paper. The Japanese software industry revenues totaled $42 billion in 1992, while the U.S. software industry earned about $42 billion in revenues in 1991 and was expected to earn $100 billion by 1995. Id.; Robert P. Merges, A Comparative Look at Property Rights and the Software Industry, in THE INTERNATIONAL COMPUTER SOFTWARE INDUSTRY: A COMPARATIVE STUDY OF INDUSTRY EVOLUTION AND STRUCTURE 273-274 (David Mowery ed., 1996).

3. The software industry can be divided into two main market segments: prepackaged software, sold "off the shelf" as a commodity product; and custom programming services, or customized software, referring to comparatively large software programs created for a particular client. Merges, supra note 2, at 273.

4. Id. at 275, 282-290.

5. Thomas Cottrell, Standards and the Arrested Development of Japan's Microcomputer Software Industry, THE INTERNATIONAL COMPUTER SOFTWARE INDUSTRY: A COMPARATIVE STUDY OF INDUSTRY EVOLUTION AND STRUCTURE 131, 157 (David Mowery ed., 1996).

6. A network externality is that the marginal value of a product increases with the number of people using it. One example is the telephone-the more people that own telephones, the more valuable and useful they are. See, generally, id. at 137-38.

7. Until 1991, the Japanese computer software industry enjoyed between 20-30% annual growth. Recently, though, the industry has experienced severe setbacks for the first time. In 1991, its growth rate fell to approximately 10%, then fell to negative growth in 1992. 1994 JAPANESE WHITE PAPER, supra note 2. See, generally, Hidehiko Oguchi, Asunaki Soft-gyokai (No Tomorrow for Software Industry), NIKKEI COMPUTER, Aug. 23, 1993, at 48.

8. See Wayne Arnold, Why is Japan Finally Embracing PCs? Try This: They're Fun, ASIAN WALL STREET JOURNAL, November 5, 1996 (discussing trend of PC purchases by Japanese consumers, and noting that in 1995 Japan's PC sales grew 70%).

9. For example, Digital Research (DRI), an independent software company, introduced the CP/M operating system in 1976 for use on microcomputers. It was very successful in the 8-bit OS market, garnering 70% of the market share by 1984. Robert T. Fertig, THE SOFTWARE REVOLUTION: TRENDS, PLAYERS, MARKET DYNAMICS IN PERSONAL COMPUTER SOFTWARE 114 (1985).

10. While the progression in the U.S. was BASIC etc. to CP/M (8 bit) to MS-DOS (16 bit), the trend in Japan was BASIC etc. (8 bit) to BASIC (16 bit) and then Assembly and Disk-BASIC (16 bit) to MS-DOS (16 bit). Correspondence with Mr. Michio Tomita, Author of PASOCON SOSEIKI, infra this note (Jun. 11 and 30, 1995); Internet Correspondence with Mr. Shozaburo Nakamura, Systems Engineer (Jul. 31 1995) (on file with author). In the BASIC-based systems, the monitor program controlling the hardware environment was much simpler than what is labeled an "operating system" in industry parlance. Telephone Interview with Mr. Eiji Kuge, NEC Technologies, and Mr. Akira Tanaka, former Chief Engineer, NEC (Mar. 1996). The CP/M OS did not become prevalent in Japan. CP/M had some reputation among engineers, but it never gained popularity in the business application sector. Correspondence with Professor Katsuya Hirose, an experienced PC user since the early 1980s (Jun. 1995); Correspondence with Nakamura. Some game machines used the CP/M OS, so game software was written for that environment. Written Correspondence with Ms. Miyuki Yasucka, Assistant Manager of Intellectual Property Department, SEGA Enterprises, Ltd. (Mar. 12, 1996). But almost all of the application programs for the NEC PC-98, introduced in 1982 as a 16 bit machine, were written in BASIC. MICHIO TOMITA, PASOCON SOSEIKI 254 (1994). Mr. Shozaburo Nakamura, who had been a Software Engineer at Kanri Kogaku Kenkyujo, the company which developed Matsu, a popular word-processing program introduced in 1983, stated that many top-selling programs ran on the BASIC/Disk-BASIC runtime environment. They were written in the hybrid of BASIC/Disk-BASIC and Assembly language in the mid-1980s. Correspondence with Nakamura.

11. Interview with Mr. Yukio Ohno, General Manager of Legal Affairs, Japan Research Institute (May, 1994).

12. Interview with Mr. Eiji Kuge, Senior Vice President, NEC Technologies, Inc. (May, 1995).

13. Id.

14. Cottrell, supra note 5 at 133-134.

15. Interview with Mr. Yoichi Shimamoto, Senior Consultant of Business and Information Systems, Sanwa Research Institute (Aug. 1994).

16. Yasunori Baba et al., The Japanese Software Industry: The 'Hub Structure' Approach, 24 RESEARCH POLICY 474, 484 (1995).

17. Shimamoto, supra note 15.

18. NIKKEI COMPUTER, Aug. 9, 1993, at 51.

19. Information Service Industry-Creating New Strategic Value, NIKKEI SHINBUN (U.S.), June 6, 1994, at 36.

20. The largest competitors, other than IBM, include Hitachi, NEC, and Fujitsu. Bob Johnstone, Japan Tackles its Software Crisis, NEW SCIENTIST, Jan. 30, 1986, at 60.

21. Ofucons were used in mid-size or small companies to deal with routine business transactions such as sales management (issuing invoices and bookkeeping), accounting, and wage calculation. Until recently, PCs were not capable of handling these tasks.

22. Written correspondence from Mr. Akira Tanaka, former Chief Engineer of NEC (Mar. 10, 1996) (on file with author).

23. NIKKEI COMPUTER, Feb. 7, 1994, at 55.

24. W. Edward Steinmueller, The U.S. Software Industry: An Analysis and Interpretive History, in THE INTERNATIONAL COMPUTER SOFTWARE INDUSTRY: A COMPARATIVE STUDY OF INDUSTRY EVOLUTION AND STRUCTURE 31 (David Mowery ed., 1996).

25. Id. at 40.

26. Id.

27. See Cottrell, supra note 5, at 131.

28. Motoshige Itoh, KOKUSAIKEIZAI NYUUMON 295 (1989).

29. See id. at 298.

30. Hisashi Washiyama, Kawaru Beikoku Sangyo, NIKKEI SHINBUN (U.S), Feb. 15, 1996, at 26.

31. Hisatsugu Nounaka, Changing U.S. Industry, NIKKEI SHINBUN (U.S), Jan. 18, 1996, at 28.

32. Interview with Mr. Akira Uchinuno, General Manager, Hitachi Information Systems, Ltd. (Aug. 1994).

33. Gekisen Pasocon Shijo, NIKKEI SHINBUN (U.S), Jan. 19, 1995, at 12.

34. In 1989, approximately 2.7 million wahpro units were shipped compared with 1.6 million PCs. Japan Electronic Industry Development Association (JEIDA), Computer Data Book 40 (1994).

35. Jonathan Band and Masanobu Katoh, INTERFACE ON TRIAL 29-30 (1995).

36. Initially, NEC obtained a free license from Microsoft to bundle MS-DOS with application programs for the NEC PC-98.

37. Stephen Manes and Paul Andrews, GATES 152 (1993).

38. 1994 JAPANESE WHITE PAPER, supra note 2, at 268.

39. Id. at 270 (citing a survey by Dataquest showing the statistics for retail level sales but not reflecting NEC's direct sales to companies).

40. Id. at 218.

41. Written correspondence from Professor K. Hirose, Hosei University, Tokyo (May 26, 1995) (on file with author).

42. Kuge, supra note 13.

43. Telephone Interview with Mr. Takayuki Torii, Massachusetts Institute of Technology (Apr. 30, 1995).

44. TOMITA, supra note 10, at 423-33. Kana-kanji conversion is necessity for Japanese word processing because Japanese sentences are written in the combination of kanji (Chinese letters) and kana (Japanese alphabets). Nouns and core parts of verbs, adjectives, and adjective verbs are written in kanji and the rest (including counterparts of prepositions in English) are in kana. In word processing, people first type some words, phrases, or a short sentence in kana or alphabets. Then, people use kana-kanji conversion function to translate all kana or alphabets into the combination of kana and kanji. The better the conversion function is, the longer the phrases that can be translated all at once.

45. Written correspondence from Mr. Kazuhiko Nishi, President, ASCII (Jul. 20, 1995) (on file with author).

46. Hisatsugu Nounaka, Kawaru Beikoku Sangyo, NIKKEI SHINBUN (U.S), Jan. 18, 1996, at 28.

47. 1993 Sales Revenues for PC Applications (in millions):

1. Microsoft Office for Windows $493

2. Microsoft Word for Windows $407

3. WordPerfect for Windows $390

4. Microsoft Excel for Windows $292

5. Lotus 1-2-3 for DOS $257

6. Lotus 1-2-3 for Windows $207

7. WordPerfect for DOS $204

8. Microsoft Office Professional for Windows $177

9. Lotus Notes $149

10. Borland dBase IV $117

 1994 JAPANESE WHITE PAPER, supra note 2.

48. For example, Mr. Kauzuki Kagemasa, President of KONAMI, a successful game software company, attributes the robust growth of theJapanese game software industry to the existence of a large market in Japan even in the 1980s - there were millions of people with game machines. Interview with Mr. Kauzuki, Dec. 4, 1994.

49. Four to seven times as large as the prepackaged software market in sales revenues. 1994 Japanese White Paper, supra note 2, at 40.

50. Theodore G. Bryant, The History, Development and Changing Environment of Protecting Computer Software Against Copyright Violation in Brazil, 8 Transnat'l Law 375, n.175, (1995) (citing PC Software Industry Lost $8.08 Billion to Pirates in 1994: Piracy Rates in the U.S. Declines, SOFTWARE PUBLISHERS ASSOCIATION, News Release, Feb. 24, 1995).

51. Id.

52. JAPAN PERSONAL COMPUTER SOFTWARE ASSOCIATION (JPSA), DAMAGE CAUSED BY ILLEGAL COPYING 2 (Nov. 1993) [hereinafter JPSA DAMAGES]. Out of its 249 members, 109 companies which develop and sell prepackaged software replied to this survey. Id.

53. Id.

54. Id.

55. JPSA predicts that prepackaged software will become the majority of the software market and that prepackaged software market will increase almost ten-fold between 1993 and 2001. The basis of prediction is the market growth rate of PCs from 1992 to 1993 (16.4%). JAPAN PERSONAL COMPUTER SOFTWARE ASSOCIATION, SANGYO-NO SHORAI VISION HOHKOKUSHO [PERSONAL COMPUTER SOFTWARE] 4-6 (MAR. 1994).

56. NIKKEI PASOCOM, Aug. 29, 1994, at 151. Novell ranked 7th and Borland ranked 13th. In 1992, the ranking was Microsoft, ASCII, Lotus, and Justsystem.

57. NIKKEI SHINBUN (U.S), Nov. 2, 1995, at 11.

58. Id.

59. Using the word "outsourcing" to translate gaichu is misleading because outsourcing is used in a specific way in Japan. That is, an information service company (including a software company) takes a customer's information system or computer system, and manages and operates the system for the customer. Economical efficiency is brought in by co-owning hardware between the company and the customer.

60. 1994 Japanese White Paper, supra note 2, at 88.

61. Employee lay-off or dismissal is uncommon in Japan.

62. 1994 Japanese White Paper, supra note 2, at 71 (data from 1992).

63. Id.

64. NIKKEI COM., Aug. 23, 1993, at 54 (based on Tokutei Service Sangyo Chosa of MITI).

65. Interview with several executives of JPSA member companies (Mar. 1995).

66. Interview with Mr. Yoshiharu Ohi, Director of Systems Development, PCA (Mar. 16, 1995).

67. Id.

68. 1994 Japanese White Paper, supra note 2, at 132.

69. Merges, supra note 2, at 289.

70. TOMITA, supra note 10, at 395.

71. NIKKEI COM., Feb. 7, 1994, at 59; NIKKEI PASOCOM, Aug. 29, 1994, at 140.

72. NIKKEI COM., Feb. 7, 1994, at 66.

73. Interview with Mr. Yoshinobu Watanabe, Director of Dynaware (Mar. 17, 1995).

74. Id.

75. The program was graphics-based and ran more slowly than a text-based program. Therefore, this program and a similar integrated program were not commercially successful until desktop publishing later became popular. Id.

76. See generally, TOMITA, supra note 10.

77. Watanabe, supra note 73; Interview with Mr. K. Ukigawa, President, Justsytem (Nov. 1, 1996).

78. NIKKEI COM., Feb. 7, 1994, at 62.

79. NIKKEI SHINBUN (U.S), Apr. 17, 1995, at 16.

80. Id.; BABA et al., supra note 16, at 478.

81. Hisashi Washiyama, General Manager of JAFCO America NY, NIKKEI SHINBUN (U.S), Feb. 15, 1996, at 26.

82. NIKKEI SHINBUN (U.S), Apr. 17, 1995, at 16.

83. NIKKEI SHINBUN (U.S), Jan. 4, 1995, at 15.

84. Id.

85. Id.

86. Id.

87. Telephone Interview with Mr. George Hara, Accel Partners and DEFTA Partners (Mar. 3, 1996). Mr. Hara is a Japanese venture capitalist with more than a decade of U.S. work experience.

88. NIKKEI SHINBUN (U.S), Apr. 18, 1995, at 23. Hara, supra note 87.

89. NIKKEI SHINBUN (U.S), Apr. 18, 1995, at 23. In 1994, the Committee revised its Guidelines to lift the restriction. Unlike in the U.S., venture capital's ownership of more than a 50% share of a venture company is against the Japanese Antimonopoly Law (Article 9).

90. NIKKEI SHINBUN (U.S), Apr. 14, 1996, at 27.

91. Written Correspondence with Kazuo Sugeno, Professor of Labor Law, Tokyo University (Mar. 11, 1996) (on file with the author).

92. Id.

93. The literal translation is "worker dispatching" but "leasing" more accurately describes the concept in English.

94. The jobs are included depending on whether they are jobs that require special expertise and whether they are difficult to cultivate under the long term employment system. Sugeno, supra note 91.

95. Id.

96. Yasuhisa Tashiro, Chitekizaisanken-no Tanpo-toshiteno Katsuyo-nitsuite [Use of Intellectual Property Rights as Collateral], in RESEARCH OF BASIC PROBLEMS ON THE ECONOMIC EFFECTS OF INTELLECTUAL PROPERTY RIGHTS 283 (Institute of Intellectual Property 1993).

97. Id.

98. Interviews with JPSA member companies (Mar. 1994).

99. NIKKEI SHINBUN (U.S), Jul. 23, 1995, at 1.

100. NIKKEI SHINBUN (U.S), Dec. 18, 1995, at 1.

101. This market is called daini tentoh kabuishiki shijoh. It allows a company without a history of earnings to be listed as long as their R&D spending equals at least 3% of their revenues. The minimum required net assets is 200 million yen. NIKKEI SHINBUN (U.S), Jul. 19, 1995, at 3; Japan Launches Small-Firm Stock Market, WALL ST. J., Jul. 19, 1995, at A5.

102. Stock Option Seido, VB Dohyu daiichigo Tanjo, NIKKEI SHINBUN (U.S), Feb. 7, 1996. {295}

103. In March 1995 Dynaware was granted a loan of $150 million by a commercial bank after using its word-processing software for Macintosh (MacWord) as collateral. Daisuke Akiba, Michinori Kewashii Chitekishoyuuken Tanpo Yuushi, NIKKEI BUSINESS, May 22, 1995, at 120.

104. BABA et al., supra note 16, at 480. Telephone Interview with Mr. Akira Tanaka, former Chief Engineer of NEC (Mar. 30, 1996). A study showed that, among those newly hired by the information service industry in 1990 with a bachelor's degree or above, 58.6% had majored in economics, law, or other subjects in the social sciences and humanities, while only 3.6% were computer science majors. BABA et al., supra note 16, .at 479.

105. JAPAN PERSONAL COMPUTER SOFTWARE TECHNICAL LABORATORY (JPL) AND JAPAN PERSONAL COMPUTER SOFTWARE ASSOCIATION, JAPAN'S PERSONAL COMPUTER SOFTWARE MARKET: 1990 229 (1991).

106. NIKKEI SHINBUN (U.S), Jan. 8, 1995, at 1.

107. Id.

108. Though stock options became available in Japan in autumn 1995, only corporations that the MITI certifies have developed innovative technology under the new business law, Shinkijigyoho, can provide stock options. Only thirty-one companies were eligible as of February 1996. Stock Option Seido, VB Dohyu daiichigo Tanjo, NIKKEI SHINBUN (U.S), Feb. 7, 1996.

109. See, e.g., NIKKEI SHINBUN (U.S), Jan. 9, 1996, at 13.

110. NIKKEI SHINBUN (U.S), Jan. 4, 1996, at 15.

111. These two engineers exhibit characteristics typical of successful engineers in Silicon Valley. For instance, their enthusiasm for computers and software led them to concentrate on their work day and night, except when they took time out to sleep in sleeping bags at their office! In addition, one declared himself a "genius." Watanabe, supra note 73.