Last week, Hewlett-Packard (where I’m on the board) announced that it is investigating jettisoning its struggling PC business in favor of investing more heavily in software, in which it sees the better possibility for growth.
Google intends to buy the handset manufacturer Motorola Mobility up. The world surprised. But the two moves are also based on a trend I’ve discovered, one which makes me optimistic regarding the future development of the world and American economies, despite the turmoil in the stock exchange.
In short, the computer program is eating the entire world.
More than 10 years after the 1990s bubble’s summit, a dozen or so fresh Web companies such as Facebook and Twitter are sparking controversy within Silicon Valley, because of their growing market valuations, as well as the occasional IPO. With scars from the heyday of Webvan and Pets.com still new from the investor psyche, people are asking, “Isn’t this only a harmful new bubble”.
I, together with others, have been arguing the opposite 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 think that businesses are being built by a number of the new Web businesses.
Now’s stock market hates engineering, as shown by low price/earnings ratios for public tech companies. Apple, by way of instance, includes a P/E ratio of approximately 15.2 — roughly the same as the broader stock market, even though Apple’s enormous sustainability and dominant market position (Apple at the previous couple weeks became the largest company in the united states, judged by market capitalization, exceeding Exxon Mobil). And, perhaps most telling you-you cannot get a bubble when folks are continuously screaming”Bubble!”
But too much of the debate remains about evaluation that is financial, as opposed to the greatest of Silicon Valley’s newest companies’ inherent intrinsic worth. My theory is that we are in the midst of a stunning and wide economic and technological change in which software businesses are poised to take over large swathes of the market.
More and more major companies and industries are being run on applications and delivered from videos to agriculture to domestic protection. A number of the winners are Silicon entrepreneurial tech companies which are invading and overturning established business constructions. Over the next 10 years, I expect a lot more industries to be disrupted by applications, with new world-beating Silicon Valley businesses doing the disruption in more instances than not.
Why is this happening today?
Six decades into the computer revolution, four decades since the creation of the microprocessor, and also 2 years to the rise of the modern Web, each the technology needed to transform industries through software finally works and can be widely delivered in the global scale.
More than two billion people now use the broadband Web, up from maybe 50 million a decade ago, when I was at Netscape, the company I co-founded. In the next 10 decades, I expect at least five billion people worldwide to possess smartphones, giving every person with such a phone immediate access to the entire power of the web, every second of every day.
On the back end, applications programming instruments and specialized solutions make it easy to launch new international software-powered start-ups in several industries — without needing to invest in infrastructure and educate new employees. In 2000, if my spouse Ben Horowitz was CEO of the very first cloud calculating firm, Loudcloud, the price of a client running a basic Internet application was roughly $150,000 per month. Running the exact application now in Amazon’s cloud prices about $1,500 a month.
With reduced startup costs and a significantly expanded market for internet services, the outcome is a worldwide economy that for the first time will be fully digitally wired — the fantasy of each cyber-visionary of the early 1990s, eventually delivered, a full production later.
Perhaps the one most dramatic example of this phenomenon of applications eating a traditional business is the suicide of the corresponding rise of Amazon. In 2001, Borders agreed to hand over its internet business to Amazon under the theory that online book sales were non-strategic and insignificant.
Nowadays, the world’s biggest bookseller, Amazon, is a software firm — its core capacity is its awesome software motor for selling nearly everything on the internet, no retail stores necessary. On top of this, while Borders was thrashing from the throes of bankruptcy, Amazon rearranged its internet site in order to promote its Kindle digital publications over physical books for the very first time. Now the novels are software.
Today’s largest video service by the number of readers is a software firm: Netflix. The way Netflix eviscerated Blockbuster is an old story, but other traditional amusement suppliers are facing the identical threat. Comcast, Time Warner, and others are responding by changing themselves to software firms with efforts like TV Everywhere, that liberates content in the physical cable and joins it to smartphones and tablets.
Today music businesses are Apple’s iTunes, Spotify software providers, also, and Pandora. Record labels that are traditional increasingly exist only to offer those software companies. Industry earnings from digital channels totaled $4.6 billion in 2010, growing to 29 percent of overall revenue from 2% in 2004.
Now’s fastest growing entertainment businesses are videogame makers, software — with the sector growing to $60 billion from $30 billion five years back. And the fastest growing leading videogame business is Zynga (manufacturer of games such as FarmVille), which supplies its own games completely online. Zynga’s first-quarter earnings grew to $235 million this past year, over double earnings from a year earlier. Rovio, the manufacturer of Angry Birds,” is anticipated to clear $100 million in earnings this year (the company was almost bankrupt when it surfaced the popular game on the iPhone in late 2009). Meanwhile, videogame powerhouses like Nintendo and Electronic Arts have observed earnings autumn and stagnate.
The most effective new movie production company in many years, Pixar, turned into an applications firm. Disney — Disney! — needed to purchase Pixar, a software firm, to stay relevant in animated movies.
Photography, obviously, was consumed by applications. It’s virtually impossible to purchase a mobile phone that doesn’t incorporate a software-powered camera, and photos are uploaded automatically to the Internet for permanent archiving and global sharing. Firms like Snapfish, Shutterfly and Flickr have stepped into the spot of Kodak.
The biggest direct marketing and advertising platform of today is a software firm — Google. Now it’s been united by Groupon, Living Social, Foursquare and others, which might be using software to eat the retail advertising and advertising industry. Groupon created around $700 million in revenue in 2010, after being in business for only two years.
Now’s fastest growing telecom company is Skype, a software company that was just purchased by Microsoft for $8.5 billion. CenturyLink, the third largest telecom company in the U.S., using a $20 billion market cap, had 15 million access lines at the end of June 30 –falling at a yearly rate of roughly 7%. Regardless of the revenue from the Qwest acquisition, CenturyLink’s revenue from these legacy services declined by over 11%. The two biggest telecom businesses, AT&T and Verizon, have survived by transforming themselves to software companies, partnering with Apple and other smartphone manufacturers.
LinkedIn is today’s fastest growing recruiting firm. For the first time, on LinkedIn, employees can assert their own resumes for recruiters to search in real time — giving LinkedIn the chance to consume the lucrative $400 billion recruitment market.
Software is also eating a lot of the value chain of businesses that are frequently viewed as mostly existing in the physical world. In the current cars, the software runs the motors, controls security attributes, entertains passengers, guides drivers into destinations and joins each car to mobile, satellite and GPS networks. The times when a car aficionado could fix their own car are extended ago, due primarily to the high content material. The trend toward electric and hybrid vehicles will only accelerate the software change — electric cars are entirely computer controlled. Along with the creation of software-powered driverless automobiles is already underway at Google along with the significant automobile companies.
Now’s leading real merchant, Wal-Mart uses software to power its own logistics and supply capabilities, which it has employed to crush its competition. Likewise for FedEx, which can be best thought of as a software network which happens to get trucks, planes and supply hubs connected. And the success or failure of airlines today and in the future hinges on their ability to price tickets and optimize yields and routes correctly — with software.
Oil and gas firms were early innovators from supercomputing and data visualization and analysis, which can be critical to today’s oil and gas mining attempts. Agriculture is increasingly powered by applications too, including satellite evaluation of lands linked to per-acre seed selection computer software algorithms.
The financial services sector has been markedly transformed by software over the past 30 decades. Practically every financial transaction, from someone purchasing a cup of coffee to somebody trading a hundred dollars of credit default derivatives, is done in software. And several of the leading innovators in financial services are software providers, for example, Square, which allows anyone to accept credit card payments with a cell phone, and PayPal, which generated over $1 billion dollars in earnings in the second quarter of the calendar year, up 31% over the previous year.
Health care and schooling, in my view, are next up for basic software-based transformation. My venture capital company is backing competitive start-ups in both these gigantic and critical industries. We consider both of these industries, which historically have been resistant to entrepreneurial shift, are poised for tipping by great new software-centric entrepreneurs.
Even national defense is software-based. The battle soldier is embedded in a variety of applications that offers communications, intelligence and logistics, and weapons guidance. Software-powered drones start airstrikes without putting human pilots at risk. Intelligence agencies do monitor and large-scale information mining using applications to discover terrorist plots.
Businesses in every industry have to presume a program revolution is forthcoming. Including today, industries that are software-based. Great incumbent software companies such as Oracle and Microsoft are threatened with irrelevance by brand new applications offerings such as Salesforce.com and Android (especially in a world at which Google owns a major handset maker).
In certain sectors, particularly those with a heavy real-world element such as oil and gasoline, the software revolution is primarily an opportunity for incumbents. However, in the upswing of Silicon Valley-style start-ups that interrupt existing businesses with impunity, new applications ideas are going to end in most industries. The battles between insurgents that are software-powered and incumbents will be epic. Joseph Schumpeter, the economist who coined the term”creative destruction,” would be thrilled.
And while people watching the values of the 401(k)s bounce up and down the past couple of weeks may doubt it, this is a deeply positive narrative for the American market, particularly. It’s not an accident that many of the largest tech firms — including more, Amazon, eBay and Google — are businesses. Our mixture of research universities, a business culture that is pro-risk pools of equity capital that is innovation-seeking and company and contract law is unprecedented and unmatched.
However, we face a number of challenges.
First of all, every company today has been built at the face of financial headwinds, which makes the challenge than it had been from the comparatively benign’90s. About building a business during times such as this the good news is are likely to be extremely strong and resilient. And when the economy eventually stabilizes, look at — that the top of the companies will expand even quicker.
Second, many people in the U.S. and around the globe lack the education and skills necessary to take part in the great new companies coming from the program revolution. This is a catastrophe because every business I use is completely starved for a gift. While unemployment and underemployment are sky high Licensed applications engineers, managers, entrepreneurs, and salespeople from Silicon Valley can rack up dozens of high-paying, the high-upside project provides any time that they want. This problem is much worse than it looks because workers in existing industries will likely be stranded on the incorrect aspect of software-based disruption and may never be able to work in their areas. There’s not any way through this difficulty apart from schooling, and we’ve got a long way to go.
I’m privileged to work with some of the best of this new breed of applications providers, and I will tell you they are great at what they’re doing. If they function for others’ expectations, then they will be valuable base companies in the market, eating markets far larger than the technology industry has been able to pursue.
Instead of always questioning their valuations, let us seek to understand the way a new generation of technology businesses are doing what they do, what the wider consequences are for both companies and the economy and what we can collectively do to expand the amount of innovative new software firms created from the U.S. and across the world.
That’s a significant opportunity. I know where I’m putting my own money.