Software has eaten your world

Marc Andreessen wrote his article, Why Software is Eating the World, in 2011. Within it were the signals for boards, leaders, and businesses of the world we are in today.

This week a number of articles/podcasts have converged in my mind and referenced back to 10 years ago, when, Marc Andreessen wrote in the WSJ his seminal article ‘Why Software is Eating the World’ (link here to a16z).

It started with a re-listen to Marty Cagan’s podcast on CPO Mastery where he references the article in relation to all product managers and business leaders re-reading the article, as it seems that a large number of industry leaders have not truly understood what it meant to their businesses, industries, people, leadership and how software-driven businesses will shape the future.

Then, in the Australian Financial Review this week there was reference made to a session at the Australian Council of Superannuation Investors conference focused on how boards need to be more digitally savvy, with this quote from the chairwoman of Commonwealth Bank:

My perspective would be that every director on a board should be comfortable with a digital environment, digital business models.

— Catherine Livingstone, chairwoman, Commonwealth Bank

This was alongside the theme of the session, which was “… how rapidly the ground is shifting beneath Australia’s corporate sector.”

When I posted this quote on LinkedIn, I got a great comment from my friend Alex Freeman, which underscored my thinking on this discussion, which was … how is this a surprise to anyone and digital is now the norm, or, as Alex put it:

Using the word “digital” in front of the word “business” in 2021 is the equivalent of in the 1990’s when everyone put and “e” or an “i” in front of things.

Now, there were some positive signals from the session it seems on the need to change the profile of directors on boards across all industries, alongside increasing the diversity of gender, background, and mindset on boards, yet this did make me see the pattern between the podcast and the article, which was …that it was just 10 years ago than Marc (formerly founder and ‘product manager’ at Netscape, now co-founder of a16z) wrote this view of the next/future world, which is now in place, across all geographies, industries, and generations …that software has eaten your world.

So, I thought to a) repost the article, so you can read it again, pick out the signals and realities, over coffee in lockdown or not and b) pick out where the 2021 reality is now where software has eaten that industry and that boards, leaders, and organisations as a whole need to embrace this and use it as the foundation for the next 10 years.

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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?”

This cycle/flywheel is still turning and 1990 dot-com models and businesses are now able to scale given the exponential growth of mobile connectivity and the change of consumer habits to digital-first over the past 18 months. From 10 minute grocery deliveries (a la UrbanFetch and WebVan in 1999) through to mobile streaming live sports (which we were testing in 1998 at Sportal).

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.

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!”

Apple’s P/E ratio is now at 33.01, Google (Alphabet) is at 35.81, Facebook is at 30.94 …and they have been at these levels for the past 5-7 years, whereas Commonwealth Bank is 27.61 and BHP is 26.53.

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.

Not sure I need to comment on this one, the leading companies in the world at Alibaba, TenCent, Apple, Amazon, Alphabet, Facebook and here in Australia the leading businesses are shifting to Atlassian, Canva and there are others on the rise.

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.

This is the clearest signal to boards and executives in all industries, 10 years ago, that by the time we got to 2021, with or without a global pandemic, the “ground [was] shifting beneath Australia’s corporate sector.”

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.

Benedict Evans / Shoulders of Giants from 2020

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.

Every industry from retail, through financial services into manfacturing, media and onto government is now hindered if they are not ‘cloud enabled’. This provides scale benefits, riding on the shoulders of giants (where code patterns are transferable through the cloud providers from large organisations to smaller players) and also building continuous improvement and experimentation into their whole businesses.

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.

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.

All retail is now omni channel and operates at a global scale, therefore requiring businesses to adopt a customer-first, data-led approach to how they sell products and experiences, be that on the phone, bricks and mortar or on a mobile.

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.

Over the last 10 years this has accelerated to the level where, in lockdown as we are now Sydney (and also Melbourne and Adelaide) people are streaming the majority of their entertainment and this is the habit worldwide.

Amazon is buying film studios, Netflix are making movies and TV shows, which in turn are winning Emmys and being promoted at Cannes and News Corp has more subscribers to on-demand streaming platforms here in Australia than cable/satelitte subscriptions …and this is the norm.

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.

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.

Steam users globally / steampowered.com

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.

Disney+ is now one of the worlds largest streaming platforms and moves movies into the world of ‘eating by software’

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. 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 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.

Over the past 18 months Zoom, Micrsoft Teams (Skype and Sharepoint hybrid), Google Meet, FaceTime, WhatsApp, Slack, Signal etc. have kept the whole world connected and created adjacent businesses and app stores which are making the world smaller, connection syncronous and also allowed multiple industries to thrive on these platforms that are, software to empower, and reducing the power of the telcos to ‘pipes’.

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 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.

The car, reinvented. From scratch (1 of 8 articles from Monday Note)

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 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.

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.

SO much here to talk about, and the last 10 years has seen a fundamental shift of banking and financial services to software driven experiences, but perhaps DeFi is the signal for ‘next’.

Beginners guide to DeFi

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.

a16z bio & Digitizing Healthcare for the Long Term

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.

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 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.

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, 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.

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 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’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.

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.

This is the key takeaway for all boards, leaders and businesses, that 10 years ago was a call to arms for incumbents, that the status-quo was being challenged by new entrants or your traditional competitors, who were (and are) embracing software thinking, software approaches and new business models (not digital ones) that unleash the potential of your people, data, processes, products and platforms in a world where habits have shifted …and software has eaten your world, well, the world you thought still existed, but as 2020/2021 has shown, has shifted on it’s axis to a different and exciting place.

That’s the big opportunity. I know where I’m putting my money.

Originally published in The Wall Street Journal on August 20, 2011. 

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So, as you can see, having read this and looked at some of my comments (not to the standard of Marc’s prose, but giving it a little 2021 context) the ground has shifting, software has indeed eaten the world we knew and it is exciting to see what the next 10 years will hold.

I know I have missed a number of key areas, developments, technologies, but that is also the point …if you don’t keep looking, learning, and changing then the shifts are larger when you do see the patterns and understand the signals.

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