to-order, it is more geographically constrained than product software. Proximity to the stakeholder is often crucial, especially if tacit (uncodified) knowledge is involved. Thus, software products are more readily exportable than custom software.

Nearly every computer needs systems software, and the mass market provides very favorable conditions for creating systems software as packaged products. Hence, systems software is now marketed almost exclusively as packaged products. And, over time, the need for compatibility among operating systems has become a critical requirement of both enterprise and retail users; this need has increased with the advent of the Internet. As a result, a few operating systems now dominate the computing landscape and have considerable pricing power. Compared to the demand for applications software, the demand for systems software has relatively little “give” in terms of pricing. Consumers of systems software, such as high-availability server-operating systems and real-time embedded operating systems, are willing to pay high prices for quality and interoperability. Consequently, the producers of systems software are less sensitive to production costs than product quality and the need for people with highly specialized skills.

Although product software is designed to meet a wide range of customer requirements, it can incorporate only a limited number of variations. Beyond this limit, software must be written to a customer’s specifications. Industries such as banking, in which customer requirements vary significantly, need custom software. In general, the more varied the needs of different end-users, the more likely software is to be customized. And, because needs vary most at the applications stage, most customized software is applications software. Table 1 compares the uses of product and custom software.

The United States is the market leader in software product development, accounting for 41 percent of the total.⁶ The U.S. share of exported software products is probably even higher because many countries only produce software products for protected local markets. For instance, data on Brazil and Japan (Table 6) show that while Brazil’s annual output of product software earns revenue of about $3 billion and Japan’s annual output earns about $21 billion, these products are only available to domestic markets. Western Europe and Israel, like the United States, develop product software for global markets.

Custom software is part of a larger category called software services, as defined in NAICS 54151. Software services are described by type and size in Table 3.

The independent software-vendor (ISV) industry was created by two events, both related to market leader IBM. First, in 1956, IBM settled a long-standing antitrust suit by the federal government by agreeing, as part of a consent decree, to stop offering computer-consulting advice (McKenna, 2006).⁷ With IBM out of the picture, leading accounting firms, such as Arthur Andersen, then began offering computer consulting services. Second, in 1969, IBM