“The measure of intelligence is the ability to change.”
— Albert Einstein
According to Bloomberg Businessweek, since the year 2000, an information technology company was counted among the world’s five largest businesses every year but two, 2007 and 2008. Microsoft was by far the most successful, serving as the industry’s representative on that list eight years out of the decade beginning in 2001. It hasn’t made the list since 2010, however, even as 2013’s list included both Apple and Google. This changing of the guard perfectly symbolizes the transition currently underway in the industry, one leading away from software as revenue and toward revenue using software.
It is a paradox that the economic value of software is falling even as its strategic value rises, and paradoxes are by definition challenging to accept. But look no further than Microsoft’s absence for confirmation of the risks. Even as the business continues to print money with its two most popular software franchises, it is retooling itself to compete in a very different landscape, and its new leadership reflects that.
Because the software industry has generated so much wealth historically, because it continues to today, and because software really is eating the world, it can be difficult to accept the idea that its intrinsic commercial value is in decline. But the evidence is both broad and conclusive. When large, successful incumbents are having difficulty growing license volume, margins, revenue, or all of the above, and new emerging players are releasing as open source assets that would have been worth millions a decade ago, it’s safe to say that a new pattern is emerging.
Software has never been more important than it is today, but software producers expecting to match the performance of years past are setting themselves up for disappointment. There are exceptions, but in the majority of cases, the realizable revenue and margins of traditional standalone software businesses are trending downward, and there is no reason to expect a recovery. From startups to big businesses, enterprise to consumer, it’s simply getting harder for businesses to make money selling software by itself.
The silver lining is that the slope of the decline is mild, which means that there is time to adapt—assuming organizations can acknowledge that there is a problem in the first place. Open source and the rise of the developer kingmaker have altered procurement fundamentally and permanently, but enterprise buyers at least have three decades of conditioning telling them that they must pay for software. Many buyers, frankly, will keep paying for software not because they have to but simply because it’s routine. Intelligent, adaptive organizations will therefore use whatever software runway they have left to subsidize the generation of new complementary or even replacement lines of revenue. Their less-progressive competitors, meanwhile, will be left to fight over a budget pool that will grow smaller every year.
Once upon a time, an entire industry knew that the economic value wasn’t in software, when in fact it was. Today, we know the economic value is in software licensing, when in fact it increasingly is not. With history unequivocal on the outcomes for those who know what the value is versus those willing to question it, everyone producing software should be considering what the Software Paradox means to them.