This is Not Your Father’s Software Industry

The software industry has seen major changes in the past 10 years, as the business of software has gotten increasingly efficient and friction-free.  Expensive software stacks, primitive tools, million dollar server farms, and 50+ person development teams have given way to free, open source, high-quality tools, small teams, and rentable infrastructure.  There are more skilled people creating software than ever before, and the market provides ways for the best talent to find opportunity well above an annual salary.  And just when you think it couldn’t get any easier to create software, it does. One can check this out for the detailed information about the software.

As friction goes away, things become much more fine-grained.  You don’t need $5m anymore to start a company:  a laptop and a cafe wifi connection will do.  This enables an explosion of new projects, but with smaller teams and narrower ideas.  The industry gorilla platforms fuel a “feature ecosystem”:  are those icons on your phone “apps” or “features”?  Viewed in person terms:  a thousand 100-person software teams might now be 30,000 3-person teams.  Software is no longer a sport of kings.

This effect, in turn, is flattening the industry.  Most projects now start on nearly identical footing, often with many competitors or near-competitors.  It’s like starting a civilization in a desert vs the mountains; there are far fewer strategic passes and valleys to control and extract disproportionate value from surrounding areas.  It’s a maddening conundrum for entrepreneurs and investors:  we’re all toting personal super computers, the world is bathed in wireless access, and there are millions & millions of mobile apps and Web sites.  But why does it feel harder than ever to create a $1b software company?  This is why.

Does this mean software’s dead?  Not at all, not even close.  When Marc Andreessen said “software is eating the world“, he got it exactly right.  Software & computation are fueling a level of innovation, disruption, and advancement never seen before.  But the way software companies extract value is evolving.  In the beginning, software was sold as a product;  then, rented as a service.  Now, many companies use software to enable other services and business models.

However, for the reasons outlined above, companies who are “just software” will have a much harder time achieving scale.  The real opportunities are in the next phase:  embedded software.  This might be software literally embedded in hardware, or cases where software value is embedded in (and enabling) some other business.  For example, Amazon is on their way to being the world’s largest retailer, and is the largest software company that doesn’t sell any software.  Uber is building the world’s largest virtual taxi fleet, and Airbnb has built the world’s largest vacation rental network.

My bet is that the next wave of disruptive software companies will look more like these examples, and less like Oracle, Microsoft, Facebook, or Salesforce.com.

This is not your father’s software business any more.

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  1. Pingback: A new way of launching a startup | Mere O Notes

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