Steve O”Grady of Redmonk has an easy to read book out.
His thesis is summarized as
“By the time Andreessen wrote those words, there were few who would disagree with the core thesis. Those who would were most likely to be employed by industries in the process of being actively disrupted by software. Software was, and still is, the new reality for most industries. Much as Amazon is now more appropriately described as a technology company than a retailer, so too are an increasing number of businesses in an ever-widening number of industries.
A curious thing was happening while software was hungrily consuming the world, however. Even as it was becoming more and more vital and disruptive, software’s commercial value was declining. Software that would have once generated billions in revenue per quarter is increasingly made available for free. Companies that once battled each other and struggled to differentiate similar proprietary products now collaborate with each other on a common platform, competing on implementations and service. Developers that solve interesting problems with software see more benefit than cost to making it available for free than attempting to charge for it.
This is the Software Paradox: the most powerful disruptor we have ever seen and the creator of multibillion-dollar net new markets is being commercially devalued, daily.”
I would recommend the book – it is a short easy read, and it’s available for free download courtesy of PayPal on the O’Reilly site
Reading it, four things came to mind
a) High software margins of 80 to 90% – which explain high valuations – were never sustainable. In economics 101, we were taught “abnormal profits” don’t last over the long haul
b) More buyer executives are like Kent Johnson of Boeing who told Dennis Howlett “Boeing has to reduce the TCO of its aircraft by 1% every year over the product lifecycle. Why don’t software companies do the same?”
c) Most enterprise software tends to be “horizontal” – financials, hr, call center, spreadsheets, IT infrastructure related. In the early 90s I had noticed that Computer Associates, by itself had 15 General Ledgers across its product portfolio. Since then, easily another 250 companies have written GL functionality – each with an incremental feature, or for a certain regional language support or “for the cloud” – but not significantly different. It’s demand and supply. If you want abnormal profits, you have to create a monopoly, not share space with hundreds of other companies. You have to verticalize.
d) The definition of “verticalize” is becoming much more nuanced. Auto companies which need software for their infotainment, safety and other systems increasingly write their own software – millions of lines of code. They can leverage all kinds of software development pools – offshore talent, crowdsourcing, open source communities. Or they license them from their competitors, not from software companies. It’s not just Amazon as Stephen points out, its just about every company as they make their products and services “smarter” with software, sensor, satellite support. More of them are behaving like auto companies – developing their own.
Personally, I am excited software has become so mainstream. We may not see too many “unicorn” valuations, but its impact on our daily lives is worth toasting. And the fact that we have people in California, Bangalore, Munich, Shanghai and elsewhere collaborating with 0s and 1s is worth a second celebratory round.
(Cross-posted @ Deal Architect)