Dragons have been with us from the beginning.
Myths and legends about dragons are common in nearly every culture around the world. And although the appearance of dragons may differ slightly from one legend to another, some things remain constant: their ferocity, a very large number of wicked looking teeth, and an even larger appetite for destruction.
Bottom Line: Dragons were bad news.
The ancient legends were so powerful that Chinese royalty co-opted images of the dragon for themselves as a symbol of wealth and power; and which they used on gates, temples, and palaces. Kind of a very early “no trespassing” sign. "Stay away" - or suffer the consequences.
Today, most of us believe dragons to be the stuff of legend; and nothing more than a creature created to frighten small children or for our entertainment at the movies. However, that may not be entirely true.
There is a type of dragon roaming the earth today, a software dragon, and it gets stronger and more powerful with each victim. It lives to eat.
Don’t believe me?
Why not listen to what these guys have to say and make up your own mind.
Almost a year ago, Marc Andreessen, wrote a controversial article in the Wall Street Journal titled “ Why Software is Eating the World.”
Some of you may have heard of him – after all, he practically invented the modern browser and founded Netscape. As a partner in the venture capital firm Andreessen-Horowitz, he was an early investor in Facebook, Groupon, Skype, Twitter, Zynga, and Foursquare to name just a few. When Marc speaks, plenty of folks stop to listen.
Here’s a little of what he said in the Journal:
“More and more major businesses and industries are being run on software and delivered as online services—from movies to agriculture to national defense. Many of the winners are Silicon Valley-style entrepreneurial technology companies that are invading and overturning established industry structures.
Over the next 10 years, I expect many more industries to be disrupted by software, with new world-beating Silicon Valley companies doing the disruption in more cases than not.
Today, the world's largest bookseller, Amazon, is a software company—its core capability is its amazing software engine for selling virtually everything online, no retail stores necessary."
He goes on to list many of the premier firms of our times: Netflix, Apple's Itunes, Spotify, Pandora, and Pixar - all software companies. Of course, the list doesn't stop there; it includes Google, Groupon, and Skype - not to mention Facebook.
And there's still more.
"LinkedIn is today's fastest growing recruiting company. For the first time ever, on LinkedIn, employees can maintain their own resumes for recruiters to search in real time—giving LinkedIn the opportunity to eat the lucrative $400 billion recruiting industry.
Software is also eating much of the value chain of industries that are widely viewed as primarily existing in the physical world.
The financial services industry has been visibly transformed by software over the last 30 years. Practically every financial transaction, from someone buying a cup of coffee to someone trading a trillion dollars of credit default derivatives, is done in software.”
Companies in every industry need to assume that a software revolution is coming. This includes even industries that are software-based today. – Marc Andreessen
John Hempton of Bronte Capital may live on the other side of the world in Sydney, but he agrees with Andreessen strongly enough to place his financial bets on the side of Marc’s argument.
“You see I wouldn’t want to make guitar tuners."
But that sort of expresses the problem. For most purposes the hardware (the guitar tuner) becomes "appified" - that is it just becomes another app on your mobile phone. A software guitar tuner replaces a hardware one except for specialist uses.
And many things have become appified. The list of devices in a mobile phone is extensive (guitar tuner, satellite navigation, alarm clock, filofax, digital voice recorder, camera, my HP15c calculator, etc).
But phones are just the start.
“... the lesson holds true: if you make hardware-software integrated devices your risk is you are going to get appified and unless you do the appification someone will do it for you. Marc Andreessen is right: software will eat the world or at least part of it.
A financial firm I know (one office, two floors) runs about 70 desktop computers running Windows. They used to have a computer on each desk, a series of centralized servers and a backup of the servers (minute by minute) stored off-site and the desktops backed up once a week. You were told not to store stuff on the client computer - only the server.
There were a bunch of security risks with this. For example the client computers all had USB ports so you could plug in a USB key and steal data. So the USB ports were disabled. The client computers still had hard-drives. A staff member could steal data by downloading stuff to their hard drive and then walking out with the hard-drive in their bag. I guess you could lock up the client computers and put alarms on them.
It ain't run that way anymore.
The staff have their old computer sitting under their desk. They see it. They just have no idea that it is non-functional - a dumb terminal for their virtual machines with only the graphics card doing anything.
Its OK for Microsoft: Microsoft is still renting 70 software licenses to run on 70 virtual machines. It is still renting office and the whole suite of other Microsoft products. But it is diabolical for Hewlett Packard who like Dell are highly dependent on corporate computing businesses for their margin.
Those businesses are stuffed. They don't exist in ten years.
The point here is that software does not eat the world - it changes the world ... So lets change the title of Andreessen's piece: software eats a good part of the world but supplements other parts - and as an investor in existing technology you need to know whether you are eaten or not.
I think I have a ready answer for this: every time you look at a piece of kit (a hardware device) you have to ask yourself whether the output of your hardware device is information or the manipulation of information or whether it is something else."
If the output of your hardware is information or the manipulation of information then you are going to get eaten. If the output is something else then you are not. - John Hempton
Ben Horowitz , Andreessen’s partner recently gave a speech in which he spoke at length.
“Remember Borders? Amazon ate it. There was direct marketing, and Google ate that. There used to be hand-drawn films, and Pixar ate that. Disney had to buy Pixar to stay relevant. Recently NetFlix passed Comcast in terms of contracts, so software is eating the cable industry. Some of you may remember a company called Kodak. Another company called Fotomat. Digital photography plus Facebook has completely ate Fotomat, ate it for lunch, nobody noticed.”
“Payments and cash are starting to get eaten by companies like Square and PayPal.
My mobile phone ate my calculator, it ate my watch, it ate my camera, it ate my Thomas Guide, it ate my Dayrunner and like a teenage boy, it’s still hungry. - Ben Horowitz
So software is eating the world. And the next thing, software is going to eat education. Software is going to eat financial services. It’s continuing.”
I think Hempton’s question is something we all need to consider - whether as investors, entrepreneurs, or employee’s: Are we producing information? The manipulation of information? Or a product that can’t be “virtualized”?
The software dragon is coming and it is hungry. Will it eat you, your company, or your industry? Or do you dare to catch the ride of your life?
I mean, I don't want to sound too dramatic here, but I keep thinking that some folks should be screaming in fear and running away just like the crowds in those old black and white Godzilla movies.
I repeat - the software dragon is coming. Time to make a choice: Suit up, leave town, or you can hang around and do lunch.
Think you'll taste good with ketchup?
Originally published in Capital Thinking: June 5, 2012