Software industry seeks U.S. policy

Electronic News, Nov 25, 1991 by Joanne Connelly

WASHINGTON -- Software industry executives last week told a Senate panel that while the United States still dominates the world software market, the lack of an affirmative technology policy to control piracy, patent proliferation and delays in export licenses threaten its continued competitiveness.

Joseph B. Costello, president and chief executive officer of Cadence Design Systems, San Jose, last week cited a lack of leadership from the current Administration as one of the greatest threats to continued U.S. software dominance.

"We have no technology policy in this country," Mr. Costello testified before a hearing of the Senate Commerce Committee last week.

Mr. Costello was specifically critical of pending legislation -- H.R. 3035 -- that would threaten the amortization of software over five years or less by mandating a 14-year write-off period for all intangible assets.

"This bill would significantly increase the after-tax cost of new software for every company in America. Since computer hardware would continue to be depreciable over five years, while the software run on it would have to be held for 14, huge new accounting and allocation problems would be created for businesses," Mr. Costello said.

"Companies that had been expensing software would be hit with a 20 percent increase in their after-tax cost, while those who had been amortizing over five years would face a 12 percent increase. Foreign companies that want to purchase an American software company, or the rights to use its code, would have a significant after-tax price advantage and be able to outbid U.S. companies for the same after-tax cost."

The Cadence executive also pointed to the patent situation as a potential threat to U.S. leadership in software.

"It is not uncommon to see large Japanese companies obtaining several patents each month covering basic software technology used in the electronic design automation software industry. The potential for legal extortion and massive disruption of our industry is all too clear. Software companies don't have war chests for preparing and filing patent applications, or defending against broad patent infringement claims. Forcing us to set them up is a direct liability to our competitiveness," he said.

He noted that copyright protection provides a much better vehicle to protect the intellectual content of software than patents.

"Copyright protection should extend to the code and the detailed structure of the software program but not to the screen display or screen terms used in presenting the software to the terminal user."

He urged the government to support the software industry by extending consistent copyright protection to all countries.

"There's no overall fundamental technology policy or strategy and I think that's the fundamental problem." He added that while Japan is focusing its industrial policy and resources on overtaking the U.S. lead in software, no equivalent plan has been set forth in this country.

The Senators heard testimony from Mr. Costello and others that while the jury is still out on where the Japanese stand in software development, what is clear is that the Japanese software industry continues to make significant progress, particularly in the area of design. witnesses also testified that the Japanese are now honing their software production skills in factories for "manufacturing" software, and moving research and development operations to the United States to take advantage of the skills of American software engineers.

Despite increased challenges from foreign competitors, Oracle Corp. executive vice president Robert Miner testified that products developed outside the country do not yet pose a direct threat to the U.S. software industry. Rather, Mr. Miner warned the panel that the more serious threat to the industry's health comes from foreign investment and takeovers within the industry.

Mr. Miner also told the panel of a "disturbing trend" in the United States toward changing U.S. antitrust law to once again allow large hardware companies to bundle sales of software with equipment. he urged the Senators to reject any legislative effort that would encourage large U.S. hardware manufacturers to bundle and tie their proprietary operating systems with software products at the expense of the independent software manufacturers.

The executives also complained of rampant piracy on both international and domestic levels which some estimate could cost the worldwide software industry between $10 and $12 billion per year. As a related issue, Microsoft vice president and general counsel William Neukom sharply criticized the U.S. export control system which he claims can act as a trade barrier, impeding the legal export of software to the benefit of software pirates.

According to Mr. Neukom, Microsoft's popular Excel software package is an item currently classified under "munitions" and therefore subject to cumbersome and expensive export licensing procedures. He testified that the government is unintentionally encouraging piracy because if Microsoft is prohibited from bringing to market its next version of an already popular package like Excel, pirates surely will.