Software eats the world, charges for the privilege

Software eats the world, charges for the privilege

Cardiff Garcia

| Jul 22 17:24 | 3 comments | Share

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Charlie Warzel writes at Buzzfeed:

Since its beginning, the internet and a broad, loose conception of “freedom” have been inextricably linked. The “first web page,” authored by Tim Berners Lee, described the web as a “wide-area hypermedia information retrieval initiative aiming to give universal access to a large universe of documents.” The notion of a “free and open internet” has animated some of the web’s biggest movements, from open-source software to Wikipedia to, in some cases, outright theft. Broadband connections grew popular, leaving users continuously logged on. Regular internet users soon came to expect that almost every type of media they once paid for — music, movies, news — would be available for free, legally or otherwise.That era — let’s call it the internet’s free trial period — is coming to an end. In the 12 years since courts shut down Napster, the internet has taken its hatchet to every other branch of the media industry, deftly pruning ad dollars, jobs, and shaving away bottom lines. Now the reaction, opposite but never quite equal, and always late, is starting to take effect. The untamed and lawless expanses of web content are quickly being replaced by paywalls and monthly fees. And, surprisingly, we don’t really seem to mind all that much. Most of us don’t even seem to notice.

The rest of the article supports the thesis, including a summary of recent surveys showing both that newspapers are increasingly moving towards digital pay plans and that readers are increasingly tolerant of paywalls. We recommend the whole piece.

It reminded us of something Ben Horowitz explained in a debate sponsored by The Economist two years ago — that the widespread monetisation of the internet on a much bigger scale, if not quite inevitable, at least would be consistent with previous computing cycles. Just as the earlier “Internet is free” era, when the technology was promising but had yet to realise its ability to make money for its owners, was consistent with those earlier cycles.

The debate was about whether technology companies were in a new bubble, with Horowitz making the case against. An excerpt of what he wrote:

History shows that major technology cycles tend to be around 25 years long with the bulk of the purchases occurring in the last five-to-ten years. This has to do with adoption rates; this period seems about right for the oldest cohorts (less likely to adopt new technologies) to die off and for younger cohorts (quickest to use new technologies) to enter the market.

Let us look at examples of the last two major computing cycles (prior to the Internet).

 

 

 

As you can see, we are poised to hit the major adoption wave for the Internet technology platform over the next 8 years.

The internet is working

A lot has changed since the internet bubble eleven years ago. Firstly, the cost of running an internet application has fallen 100-fold. In 2000, I was CEO of the first cloud computing company, Loudcloud, where the price for a customer running a redundant version of a basic internet application was approximately $150,000 per month. The cost of running that same application today in Amazon’s cloud costs about $1,500 per month.

Secondly, developers are more productive. In 2001, Stewart Butterfield abandoned plans to build a massively multiplayer online game (MMOG) after costs became too great; he built photo-sharing service Flickr instead. Now Stewart’s new company, Tiny Speck, is again building that MMOG, but today it is working brilliantly. Why? Because Stewart’s programmers are ten times more productive than they were in 2001 due to massive advances in programming language technology.

Thirdly, the market is far bigger. In 1998, I was working at Netscape, which owned well over half of the browser market. We had about 50 million users, more than half of them on dialup connections which could not run many interesting applications. Today, there are over 2.1 billion people on the internet, most of them using broadband connections. The true market for internet businesses is about 50 times larger than during the actual technology bubble.

With costs 100 times lower, programmer productivity ten times higher, and the market 50 times larger, it stands to reason that many more internet businesses will work today than did the last time around. …

Software is eating the world

Back in 1994, very few people would have predicted that the largest bookseller in the world would be a software company. Today, not only is it a software company, but all of Amazon’s most important competitors are also software companies.

Books were just the first of many industries to be eaten by software. Some other examples:

Magazines and newspapers—really requires no explanation.

Music distribution—the largest music distributor in the world is a technology company, Apple; its largest potential threat, Spotify, is a software company.

Radio—the most valuable radio company in the world is Pandora, a software company.

Animated film—in order for Disney to remain relevant in the animated film industry, they had to buy Pixar, a software company.

Direct marketing—the largest direct marketing company in the world is a software company, Google.

What is next?

Oil and gas—new finds are increasingly software driven.

Financial services—many of which would be far better served by an integrated software platform.

Local business—increasingly present in the online world via offerings from new companies like Groupon, Foursquare and Square.

As software eats one industry after another, the market for technology business expands, rendering previous market size estimates obsolete. That is not to say that no price is too high for a technology company, but there is a fine case that the old prices are too low.

Obviously we’re familiar with what’s been happening in the journalistic realm, which has moved towards silos and paywalls much more quickly than we had expected just a few years ago. It’s lamentable for those of us who ply our trade as bloggers, and who thus have benefitted acutely from an open web. But it’s not all bad, and at any rate it’s happening and unlikely to reverse any time soon.

As for another industry mentioned by Horowitz, see also this piece with the latest updates on banking in the cloud.

Appeals to history when the sample size is so small should always be accepted with appropriate caution. But thus far it seems as if the basic contours of Horowitz’s argument were right.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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