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.

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.

Game Consoles: The Last Remaining Walled Garden

The reddit user kmesithax wrote a brilliant comment yesterday about the realities of game console development, describing the tools and costs:

Well, no, there is no OpenGL or any graphics API for that matter, it’s all some stupid low-level hardware API that you have to tickle to get any 3D rendering to work.

and

So let’s say you get over your initial API shock, you have a decent handle on what all the little libraries do, and you wanna buy some development hardware now. Well, uh, okay. That’ll be anywhere from $2,600 (leaked 3DS devkit figures) to $10,000 or more (leaked Xbox 360/PS3 devkit figures).

This reminds me exactly of the pre-iPhone “walled garden” mobile app world, when you needed ~$10,000 for a development license for Qualcomm’s “BREW“.  The original article  “The Minecraft Test” (e.g. could your platform spawn the next Minecraft?) is a fabulous way to think about platform openness.  (Also see Nate Brown’s post “Stupid, Stupid Xbox!!” for an insider critique).

The console platforms have completely missed the market transition to open, low-friction developer on-ramps, and it’s no surprise the console market is now anemic.  In contrast, the new OUYA console (I have one on pre-order) has a fledgling, but very open SDK and just had a “game jam“.  The OUYA is under-powered relative to current consoles, but I bet the openness will more than make up for that issue.

Gorilla Anti-Trust Posturing

As the big four (Google, Apple, Amazon, and Facebook) continue to wield disproportionate influence over the digital ecosystem, these gorillas are having to worry a lot more about anti-trust issues.  Nobody wants to be broken up like the Bell System.

For example, last month, Liz Gannes wrote about Facebook’s search plans:

…the fact that Facebook has finally made its search intentions known could actually be really good for Google. That’s because regulators — especially those in Europe, who are in the thick of deciding whether to settle with Google over antitrust — now have the prospect of additional search competition to consider.

Also, Google now has Gmail, Maps, and Chrome on the iPhone, where Apple had previously rejected apps that “duplicate the functionality” of built in iOS apps.  But it doesn’t look good (in anti-trust terms) for Apple to reject competitive apps, and Google’s smart to get as many apps as possible to dilute Apple’s platform influence.

I think it’s net-good for consumers, as it increases the chances that more of our devices and systems will interoperate.  But what we really need are some new gorillas.

IP-Delivered TV: Are We There Yet?

I’ve started watching Netflix’s new original show, House of Cards.  I’m only ~2 episodes in; it’s rough in some places, but I like it.  It definitely has a unique feel and visual style.  More deeply, it’s a $100m bet by Netflix they can “become HBO faster than HBO can become us.”  (One of the clearest strategy articulations I’ve heard in a long time.)

I think they’ve got a decent shot.  I’ve always felt television, in the limit, will be delivered over IP.  Specialized, proprietary cable TV distribution is gradually giving way to big, fast, cheap IP pipes. Your phone, tablet, and TV screens will be iOS or Android-powered, and will stream video from anyone. Of course, HTML5 & native apps will enable the long-awaited vision of “interactive TV”.

I’ve written about this before (going back years):

What’s taking so long?!?

The problem isn’t technology; it’s the business model.  The way our traditional television content is produced, financed, and distributed is balled up in a big legacy with a lot of inertia.  Payments flow in various ways between advertisers, production companies, traditional TV networks, premium networks (e.g. HBO), and cable companies.  This makes it hard for anything to change quickly; if HBO wanted to sell direct Internet subscriptions, they’d be shooting themselves in the foot.

It’s good to see Netflix getting enough critical mass to stir things up.

Why You Can’t Find Any Mobile Developers

In case you haven’t noticed, it’s impossible to find mobile developers. People ask me all the time if I “know anyone”, and I’ve all but given up helping with referrals.

The reason is “self-publishing” is now a reasonable option.  The app store ecosystem has removed most friction from the system, provided a clean and easy business model (70/30 revenue split), and eliminated almost all barriers to entry.  If you have talent, a laptop, and a coffee shop wifi connection, you have a chance at writing the next great app hit.

As a result, many good developers have (or believe they have) a better chance at doing their own thing vs working for someone else for salary or an hourly rate.