The Software Industry Is An Arms Race For Global Market Leadership
“Software is eating the world, ” says Marc Andreessen in his Wall Street Journal article from August 2011. What he means is that software is creeping into all other products as well as creating the basis for completely new products and services that we didn’t even think we needed. Most industries will become software driven, and some will also be disrupted by software killing the incumbents and giving fresh life to the lean and agile insurgents.
Conclusion: The information technology (IT) and software industry is growing and IT is creeping into all other industries. The IT and software industry rocks. It’s a great place to start and run a business!!
The other good news is that the barriers to entry are declining. With just a few Macs, some development tools and an Internet connection we can have a minimum viable product on the market in no time. Through the Internet and social media we can reach billions of potential customers, and as the marginal cost of selling software is zero, we can bank the full gross margin. Even when we deliver our software as a service through the cloud, our marginal cost per additional user is low and continues to decline. No need for manufacturing, logistics and repair shops.
No wonder that a lot of software companies show immense growth rates, outstanding profit margins, impressive return on assets, shorter and shorter time to IPO and that the industry as a whole is attracting about 65% of all venture capital available on the planet.
The Dark Side of the Moon
Looking at the big picture the IT and software industry obviously also produces a massive amount of casualties. A majority of start-ups don’t survive the meeting with the market (or the missing market), but of those that do manage to get some tracking and even profitability, most fail to cross the chasm not to speak of making it past the tipping point.
New businesses are mostly started on bright ideas in the lab or with customers. Seeing the gap in the market or seeing that we can do something no one else has thought of before, we move ahead and start our business. We become successful and even profitable, but then it levels off.
It’s an arms race for global market leadership
Because we don’t realize that the IT and software industry is also an arms race for global market leadership, and when we don’t understand that then we get overtaken by those who know the rules of the market penetration game better than us.
People get the same ideas at the same time across the globe. We believe we are unique, and maybe we are, but not for long and mostly only in our domestic market. Somewhere else someone else is starting a similar business. They are more focused than us, and they have a sharper sense of urgency than us, so they move faster than us, grow faster than us, cross the chasm before us and get past the tipping point before us. Now they are enjoying superior CAC/CLV ratios , economy of scale advantages, are more attractive to investors, file for huge IPOs, have a large base of customers that make new potential customers more comfortable choosing them and so on. Before we get our act together they open a subsidiary in our domestic market and while we are fighting to protect our home turf they start recruiting our people.
Now it is too late. We had the opportunity, but we failed to execute fast enough. Will we get acquired and capitalize a little on our efforts? Maybe, but probably not. Why should they acquire us when they can recruit our people and take our customers?
 CAC: Customer Acquisition Cost, CLV: Customer Lifetime Value, IPO: Initial Public Offering.
The software industry is increasingly becoming a global winner takes all game. We either win the game or we lose the game. If we want to play in the IT and software industry we better be prepared to go for the gold.
Thank you to The Dark Side of The Moon for allowing me to borrow the image.
The software industry is increasingly becoming a global winner takes all game.