Software Is Eating the World
An essay contributed in 2011 by Marc Andreessen
‘Why Is Software Eating The World
(Why Software Is Eating The World)?’
This week, Hewlett-Packard (where I am on the board) announced that it is considering exiting its struggling PC business in order to invest more heavily in software, where it sees better potential for growth. Meanwhile, Google plans to acquire the handset maker Motorola. Both pieces of news surprised the technology market. But both are in line with a trend I have been watching. Even though the stock market has recently fallen into turmoil, that trend makes me optimistic about the future growth of the American and world economies.
This week, Hewlett-Packard (where I am on the board) announced that it is exploring jettisoning its struggling PC business in favor of investing more heavily in software, where it sees better potential for growth. Meanwhile, Google plans to buy up the cellphone handset maker Motorola Mobility. Both moves surprised the tech world. But both moves are also in line with a trend I’ve observed, one that makes me optimistic about the future growth of the American and world economies, despite the recent turmoil in the stock market.
In short, software is eating the world. More than 10 years after the peak of the 1990s dot-com bubble, the rapidly rising valuations and successful IPOs of a dozen or so new Internet companies such as Facebook and Twitter are stirring controversy in Silicon Valley. With the trauma of the heyday of Webvan and Pets.com still vivid in investors' minds, people are asking, “Isn't this another dangerous bubble?”
In short, software is eating the world. More than 10 years after the peak of the 1990s dot-com bubble, a dozen or so new Internet companies like Facebook and Twitter are sparking controversy in Silicon Valley, due to their rapidly growing private market valuations, and even the occasional successful IPO. With scars from the heyday of Webvan and Pets.com still fresh in the investor psyche, people are asking, “Isn’t this just a dangerous new bubble?”
I, along with others, have been arguing the other side of the case. (I am a partner and co-founder of Andreessen Horowitz, the venture capital firm that has invested in Facebook, Groupon, Skype, Twitter, Zynga, Foursquare and others. I am also personally an investor in LinkedIn.) We believe that many of these prominent new Internet companies are genuinely building high-growth, high-margin businesses that make sense.
I, along with others, have been arguing the other side of the case. (I am co-founder and general partner of venture capital firm Andreessen-Horowitz, which has invested in Facebook, Groupon, Skype, Twitter, Zynga, and Foursquare, among others. I am also personally an investor in LinkedIn.) We believe that many of the prominent new Internet companies are building real, high-growth, high-margin, highly defensible businesses.
As the persistently low price/earnings ratios of well-known technology companies show, today's stock market undervalues technology companies. Apple, for example, has a P/E ratio of just 15.2, about the same as the average public company, despite its immense profitability and dominant market position. (In the last two weeks Apple passed Exxon Mobil to become the largest company in America by market capitalization.) And, as most people say, you can never have a bubble while people are constantly talking about a bubble.
Today’s stock market actually hates technology, as shown by all-time low price/earnings ratios for major public technology companies. Apple, for example, has a P/E ratio of around
15.2—about the same as the broader stock market, despite Apple’s immense profitability and dominant market position (Apple in the last couple weeks became the biggest company in America, judged by market capitalization, surpassing Exxon Mobil). And, perhaps most telling, you can’t have a bubble when people are constantly screaming “Bubble!”
But compared with the intrinsic value held by the best of Silicon Valley's new companies, far too much of the debate still turns on financial valuation alone. I believe we are in the middle of a broad and dramatic shift in economic structure, a shift in which software companies are ready to take over a large part of the economy.
But too much of the debate is still around financial valuation, as opposed to the underlying
intrinsic value of the best of Silicon Valley’s new companies. My own theory is that we are in the middle of a dramatic and broad technological and economic shift in which software companies are poised to take over large swathes of the economy.
From movies to agriculture to national defense, more and more major industries are run on software and delivered as online services. Many of the winners are Silicon Valley-style technology ventures that have overturned established industry structures. I expect that in ten years many more industries will be displaced by software, and that in most cases the best new Silicon Valley companies in those fields will be the ones doing it.
More and more major businesses and industries are being run on software and delivered as online services—from movies to agriculture to national defense. Many of the winners are Silicon Valley-style entrepreneurial technology companies that are invading and overturning established industry structures. Over the next 10 years, I expect many more industries to be disrupted by software, with new world-beating Silicon Valley companies doing the disruption in more cases than not.
Why is this happening now?
Because six decades into the computer revolution, four decades after the invention of the microprocessor, and two decades after the arrival of the Internet, all of the technology needed to transform industries through software finally works properly and can be delivered at global scale. Back in my days at Netscape, the company I co-founded, about 50 million people used the Internet a decade ago, whereas now more than 2 billion people use it. I expect that in ten years at least 5 billion people will own smartphones, so that every individual can be connected to the Internet at any time.
Why is this happening now?
Six decades into the computer revolution, four decades since the invention of the microprocessor, and two decades into the rise of the modern Internet, all of the technology required to transform industries through software finally works and can be widely delivered at global scale. Over two billion people now use the broadband Internet, up from perhaps 50 million a decade ago, when I was at Netscape, the company I co-founded. In the next 10 years, I expect at least five billion people worldwide to own smartphones, giving every individual with such a phone instant access to the full power of the Internet, every moment of every day.
Behind that, the development of software programming tools and Internet-based services will let new software-based start-ups in many industries grow easily and cheaply into global start-ups without building new infrastructure or hiring new staff. In 2000, when my partner Ben Horowitz was CEO of Loudcloud, the first cloud computing company, it cost a customer about $150,000 a month to run a basic Internet application, while the same service on Amazon today costs only about $1,500 a month. Thanks to lower start-up costs and a vastly expanded market for online services, the digitally connected world dreamed of in the early '90s is becoming reality a generation later.
On the back end, software programming tools and Internet-based services make it easy to launch new global software-powered start-ups in many industries—without the need to invest in new infrastructure and train new employees. In 2000, when my partner Ben Horowitz was CEO of the first cloud computing company, Loudcloud, the cost of a customer running a basic Internet application was approximately $150,000 a month. Running that same application today in Amazon’s cloud costs about $1,500 a month. With lower start-up costs and a vastly expanded market for online services, the result is a global economy that for the first time will be fully digitally wired—the dream of every cyber-visionary of the early 1990s, finally delivered, a full generation later.
If you had to pick one dramatic example of software eating an existing business, it would probably be the decline of Borders and the corresponding rise of Amazon. In 2001 Borders decided that online book sales were unimportant and handed its Internet business over to Amazon. Good grief. Today Amazon, the world's largest bookseller, is a software company. That is because Amazon's core capability is the software engine that lets it sell products online. On top of that, while Borders was writhing in the pain of impending bankruptcy, Amazon revamped its website to promote its Kindle e-books ahead of physical books for the first time. Now the books themselves have become software.
Perhaps the single most dramatic example of this phenomenon of software eating a traditional business is the suicide of Borders and corresponding rise of Amazon. In 2001, Borders agreed to hand over its online business to Amazon under the theory that online book sales were non-strategic and unimportant.
Oops.
Today, the world’s largest bookseller, Amazon, is a software company—its core capability is its amazing software engine for selling virtually everything online, no retail stores necessary. On top of that, while Borders was thrashing in the throes of impending bankruptcy, Amazon rearranged its web site to promote its Kindle digital books over physical books for the first time. Now even the books themselves are software.
Today's largest video service by number of subscribers is a software company, Netflix. How Netflix brought down Blockbuster is an old story by now, but other traditional entertainment providers face the same threat. Comcast, Time Warner and others are responding by reinventing themselves as software companies, with services such as TV Everywhere that let you watch content on a smartphone or tablet.
Today’s largest video service by number of subscribers is a software company: Netflix. How Netflix eviscerated Blockbuster is an old story, but now other traditional entertainment providers are facing the same threat. Comcast, Time Warner and others are responding by transforming themselves into software companies with efforts such as TV Everywhere, which liberates content from the physical cable and connects it to smartphones and tablets.
Today's most dominant major music companies, such as Apple's iTunes, Spotify and Pandora, are also software companies. Traditional record labels merely supply content to these software companies. In 2010, industry revenue through digital channels reached $4.6 billion. That is 29% of total industry revenue, up sharply from 2% in 2004.
Today’s dominant music companies are software companies, too: Apple’s iTunes, Spotify and Pandora. Traditional record labels increasingly exist only to provide those software companies with content. Industry revenue from digital channels totaled $4.6 billion in 2010, growing to 29% of total revenue from 2% in 2004.
The fastest growing entertainment companies today are videogame makers. Once again, software companies. The industry has grown from $30 billion five years ago to $60 billion today. And the fastest growing major videogame company, Zynga (the maker of FarmVille), delivers its games entirely online. Zynga's revenue in the first quarter of 2011 was $235 million, more than double the figure a year earlier. Rovio, the maker of Angry Birds, is expected to earn $100 million in revenue over 2011 (the company was nearly bankrupt before it launched Angry Birds as an iPhone game in late 2009).
Meanwhile, revenues at traditional videogame powerhouses such as Electronic Arts and Nintendo cannot escape their slump.
Today’s fastest growing entertainment companies are videogame makers—again, software—with the industry growing to $60 billion from $30 billion five years ago. And the fastest growing major videogame company is Zynga (maker of games including FarmVille), which delivers its games entirely online. Zynga’s first-quarter revenues grew to $235 million this year, more than double revenues from a year earlier. Rovio, maker of Angry Birds, is expected to clear $100 million in revenue this year (the company was nearly bankrupt when it debuted the popular game on the iPhone in late 2009). Meanwhile, traditional videogame powerhouses like Electronic Arts and Nintendo have seen revenues stagnate and fall.
Pixar, the best film studio to emerge in many decades, was also a software company. Even the mighty Disney had no choice but to acquire Pixar to stay relevant in animated movies.
The best new movie production company in many decades, Pixar, was a software company. Disney —Disney!—had to buy Pixar, a software company, to remain relevant in animated movies.
Photography, too, was replaced by software long ago. It is now virtually impossible to buy a mobile phone without a software-controlled camera, and photos are uploaded automatically to the Internet for keeping and sharing. Companies such as Shutterfly, Snapfish and Flickr are taking over Kodak's place.
Photography, of course, was eaten by software long ago. It’s virtually impossible to buy a mobile phone that doesn’t include a software-powered camera, and photos are uploaded automatically to the Internet for permanent archiving and global sharing. Companies like Shutterfly, Snapfish and Flickr have stepped into Kodak’s place.
Today's largest direct marketing platform is a software company, Google. Google has now been joined by Groupon, LivingSocial, Foursquare and others, all using software to eat the retail marketing industry. Groupon generated $700 million in revenue in 2010, only two years after starting the business.
Today’s largest direct marketing platform is a software company—Google. Now it’s been joined by Groupon, Living Social, Foursquare and others, which are using software to eat the retail marketing industry. Groupon generated over $700 million in revenue in 2010, after being in business for only two years.
Today's fastest growing telecom company is Skype, a software company bought by Microsoft not long ago for $8.5 billion. CenturyLink, the third largest in the United States with a market capitalization of $20 billion, had 15 million access lines as of June 30 and is declining at about 7% a year. Excluding the revenue from its Qwest acquisition, CenturyLink's revenue fell by more than 11%. Meanwhile, the two big telecom companies AT&T and Verizon have survived by successfully transforming into software companies through partnerships with Apple and other smartphone makers.
Today’s fastest growing telecom company is Skype, a software company that was just bought by Microsoft for $8.5 billion. CenturyLink, the third largest telecom company in the U.S., with a $20 billion market cap, had 15 million access lines at the end of June 30—declining at an annual rate of about 7%. Excluding the revenue from its Qwest acquisition, CenturyLink’s revenue from these legacy services declined by more than 11%. Meanwhile, the two biggest telecom companies, AT&T and Verizon, have survived by transforming themselves into software companies, partnering with Apple and other smartphone makers.
LinkedIn is today's fastest growing recruiting company. Through LinkedIn, for the first time ever, job seekers can keep their resumes on the Internet for recruiters to search in real time. That has given LinkedIn the opportunity to eat the lucrative $400 billion recruiting industry.
LinkedIn is today’s fastest growing recruiting company. For the first time ever, on LinkedIn, employees can maintain their own resumes for recruiters to search in real time—giving LinkedIn the opportunity to eat the lucrative $400 billion recruiting industry.
Software is also eating much of the value chain of industries that are thought to exist necessarily in the physical world. In today's cars, software runs the engine, controls the safety features, entertains the passengers and guides the driver to the destination. And it connects cars to mobile, satellite and GPS networks. Because of all that advanced software, the era when a car enthusiast could repair his own car is long past. The trend toward hybrid and electric vehicles will accelerate the move of the car into software, because electric cars are completely computer controlled. Driverless cars run by software are already under development at Google and the major car companies.
Software is also eating much of the value chain of industries that are widely viewed as primarily existing in the physical world. In today’s cars, software runs the engines, controls safety features, entertains passengers, guides drivers to destinations and connects each car to mobile, satellite and GPS networks. The days when a car aficionado could repair his or her own car are long past, due primarily to the high software content. The trend toward hybrid and electric vehicles will only accelerate the software shift—electric cars are completely computer controlled. And the creation of software-powered driverless cars is already under way at Google and the major car companies.
Wal-Mart, today's leading offline retailer, uses software to strengthen its logistics and distribution capabilities, and has used that to gain an edge over its competitors. Likewise, FedEx can be understood as a software network that happens to have trucks, planes and distribution hubs attached. And the success or failure of airlines, now and in the future, depends entirely on how well they can set prices and optimize routes and yields through software.
Today’s leading real-world retailer, Wal-Mart, uses software to power its logistics and distribution capabilities, which it has used to crush its competition. Likewise for FedEx, which is best thought of as a software network that happens to have trucks, planes and distribution hubs attached. And the success or failure of airlines today and in the future hinges on their ability to price tickets and optimize routes and yields correctly—with software.
Oil and gas companies were early innovators in supercomputing and in data visualization and analysis, which play a decisive role in today's oil and gas exploration. Agriculture, too, increasingly draws on the power of software. Algorithms that select seeds based on satellite analysis of soils are one example.
Oil and gas companies were early innovators in supercomputing and data visualization and analysis, which are crucial to today’s oil and gas exploration efforts. Agriculture is increasingly powered by software as well, including satellite analysis of soils linked to per-acre seed selection software algorithms.
Over the last 30 years or so, financial services have been visibly transformed by software. Practically every financial transaction, from buying a cup of coffee to trading a trillion dollars of credit derivatives, is processed by software. And many of the innovative leaders in financial services are software companies: Square, which lets anyone accept credit card payments with a smartphone, and PayPal, which generated more than $1 billion in revenue in the second quarter of 2011, up 31% from the previous year, are exactly such companies.
The financial services industry has been visibly transformed by software over the last 30 years. Practically every financial transaction, from someone buying a cup of coffee to someone trading a trillion dollars of credit default derivatives, is done in software. And many of the leading innovators in financial services are software companies, such as Square, which allows anyone to accept credit card payments with a mobile phone, and PayPal, which generated more than $1 billion in revenue in the second quarter of this year, up 31% over the previous year.
In my view, health care and education are the next fields to be transformed by software. My venture capital firm is backing start-ups working in these two gigantic and critical industries. We believe that these two industries, historically unfriendly to change, are now ready to be transformed by great new software-centric founders.
Health care and education, in my view, are next up for fundamental software-based transformation. My venture capital firm is backing aggressive start-ups in both of these gigantic and critical industries. We believe both of these industries, which historically have been highly resistant to entrepreneurial change, are primed for tipping by great new software-centric entrepreneurs.
Even national defense is gradually becoming software-based. The modern combat soldier is connected to a web of software that provides intelligence, communications, logistics and weapons guidance. Drones flown by software carry out airstrikes without a human pilot having to take the risk. Intelligence agencies carry out large-scale data mining with software to uncover and track potential terrorist plots.
Even national defense is increasingly software-based. The modern combat soldier is embedded in a web of software that provides intelligence, communications, logistics and weapons guidance. Software-powered drones launch airstrikes without putting human pilots at risk. Intelligence agencies do large-scale data mining with software to uncover and track potential terrorist plots.
Whatever field you are in, every company should assume that a software revolution is coming. This applies even to industries that already run on software today. Giants of the established software industry such as Oracle and Microsoft increasingly feel threatened by companies like Salesforce.com and Android. If Google acquires Motorola, Android will become an even bigger threat.
Companies in every industry need to assume that a software revolution is coming. This includes even industries that are software-based today. Great incumbent software companies like Oracle and Microsoft are increasingly threatened with irrelevance by new software offerings like Salesforce.com and Android (especially in a world where Google owns a major handset maker).
In industries centered on physical things, such as oil and gas, the software revolution will be an opportunity for the incumbents. But in many industries, new software ideas will lead to the birth of Silicon Valley-style start-ups that challenge the incumbents. Ten years from now, the battles between the incumbents in power and the software-led insurgents will be epic. Joseph Schumpeter, the economist who coined the term creative destruction, would be proud.
In some industries, particularly those with a heavy real-world component such as oil and gas, the software revolution is primarily an opportunity for incumbents. But in many industries, new software ideas will result in the rise of new Silicon Valley-style start-ups that invade existing industries with impunity. Over the next 10 years, the battles between incumbents and software-powered insurgents will be epic.Joseph Schumpeter, the economist who coined the term “creative destruction,” would be proud.
People who have watched their retirement accounts (U.S. Retirement Plans) bounce up and down over the last few weeks may doubt it, but this is a profoundly positive thing. It is especially so for the American economy. It is no accident that the great technology companies of recent years, including Google, Amazon and eBay, are American companies. America's combination of great universities that can do basic research, a business culture that takes risks, deep pools of capital seeking innovation, and a reliable legal system is unprecedented and without parallel anywhere in the world.
And while people watching the values of their 401(k)s bounce up and down the last few weeks might doubt it, this is a profoundly positive story for the American economy, in particular. It’s not an accident that many of the biggest recent technology companies—including Google, Amazon, eBay and more—are American companies. Our combination of great research universities, a pro-risk business culture, deep pools of innovation-seeking equity capital and reliable business and contract law is unprecedented and unparalleled in the world.
Still, there are several things left to solve. First, every new company today is being built in economic conditions far harsher than in the '90s. The good news is that the companies that succeed even in these conditions will be extremely strong and resilient. And the moment the economy stabilizes, watch out, those young companies will grow even faster.
Still, we face several challenges.
First of all, every new company today is being built in the face of massive economic headwinds, making the challenge far greater than it was in the relatively benign ’90s. The good news about building a company during times like this is that the companies that do succeed are going to be extremely strong and resilient. And when the economy finally stabilizes, look out—the best of the new companies will grow even faster.
Second, many people in the United States and around the world do not have the skills and education needed to take part in the new companies born of the software revolution. It is nothing short of a tragedy that most of the companies I have worked with are starved for talented people. Recognized software engineers, managers, marketers and salespeople in Silicon Valley can pick up dozens of high-paying, high-upside job offers whenever they want, while unemployment and underemployment nationally are at very serious levels. This problem is worse than it looks. Many workers in existing industries will be driven onto the losing side of software-based creative destruction, and the fields they can work in will disappear. There is no way through this problem other than education. We have a long way to go.
Secondly, many people in the U.S. and around the world lack the education and skills required to participate in the great new companies coming out of the software revolution. This is a tragedy since every company I work with is absolutely starved for talent. Qualified software engineers, managers, marketers and salespeople in Silicon Valley can rack up dozens of high-paying, high-upside job offers any time they want, while national unemployment and underemployment is sky high. This problem is even worse than it looks because many workers in existing industries will be stranded on the wrong side of software-based disruption and may never be able to work in their fields again. There’s no way through this problem other than education, and we have a long way to go.
Finally, the new companies have to prove their worth. They have to build strong cultures, delight their customers, and secure their competitive advantages in order to justify their soaring valuations. Building a new high-growth, software-based company inside an established industry is never easy. It is brutally difficult.
Finally, the new companies need to prove their worth. They need to build strong cultures, delight their customers, establish their own competitive advantages and, yes, justify their rising valuations. No one should expect building a new high-growth, software-powered company in an established industry to be easy. It’s brutally difficult.
I consider it a privilege to work with the new software companies. And I can tell you that they are really good at what they are trying to do. If they live up to my expectations and those of others, they will become highly valuable companies that serve as cornerstones of the global economy. They will be able to take over markets far larger than the ones technology companies have pursued so far.
I’m privileged to work with some of the best of the new breed of software companies, and I can tell you they’re really good at what they do. If they perform to my and others’ expectations, they are going to be highly valuable cornerstone companies in the global economy, eating markets far larger than the technology industry has historically been able to pursue.
Rather than constantly questioning their valuations, why not try to understand how this new generation of technology companies does what it does, what the broader consequences are for industry and the economy, and what we can do together to create more innovative software companies? This is a truly big opportunity.
Instead of constantly questioning their valuations, let’s seek to understand how the new generation of technology companies are doing what they do, what the broader consequences are for businesses and the economy and what we can collectively do to expand the number of innovative new software companies created in the U.S. and around the world.
I know where I'm putting my money.
That’s the big opportunity. I know where I’m putting my money.
Topics: Marc Andreessen,Big Tech
Category: Scrap/Article
Source: https://a16z.com/why-software-is-eating-the-world/