Why Software is Eating the World

Alex: What's up everyone? Welcome back to another episode of Founder’s Journal. I'm Alex Lieberman, co-founder and executive chairman of Morning Brew. On Founder’s Journal, I act as your startup sherpa, curating the best content for entrepreneurs, summarizing it so you don't have to read it yourself, and analyzing it so you have actionable takeaways to apply to your business. Before we hop into it, I have one ask of you: Please share Founder’s Journal on social media. Podcasting is a super competitive game these days and the only way to grow is through word of mouth and promotion on social. A minute of posting on your end will make the dozens of hours that my team and I spend each week creating the show completely worth it. You can either give the show a shout-out or share the single most interesting thing that you learned from today's episode, and make sure to tag me so that I can give you the proper props once you post. You can either give the show a shou-out or share the single most interesting thing you learn from today's episode, and make sure to tag me so that I can give you props once you post. Now let's talk about today's episode. 

Just. under 13 years ago, Marc Andreessen called his shot on the future of technology, like a business version of Babe Ruth. He proclaimed that software would transform every single industry, disrupting incumbents and changing the way that consumers and employees experience the economy. Well, he couldn't have been more right. Software did in fact eat the world. Seven of the 10 largest companies in the world today are technology or software businesses. And Andreessen Horowitz, the investment firm that Marc co-founded in 2009, grew to become the largest VC in the world, with $35 billion in assets under management.

So now I'm going to read through Marc's 2011 essay, and as we go through, I want you to listen closely for two things. One, I want you to try to understand the rationale behind his predictions for the future. This is far more important than being impressed by the predictions he made and was subsequently right about. Second, I want you to think about what patterns Mark identified in 2011 and how those patterns, if at all, could be applied to today's business landscape with the acceleration of AI. So let's hop into it.

“Why Software is Eating the World” by Marc Andreessen. Software is eating the world. More than 10 years after the peak of the 1990s dotcom bubble, a dozen or so new internet companies like Facebook and Twitter are sparking controversy in Silicon Valley due to their rapidly growing private market valuations and even the occasional successful IPO.” 

Now, what I'll just say here is what is amazing about this is that controversy around big social platforms literally never went away. It's around today, and what the controversy is has just evolved.

“With scars from the heyday of Webvan and pets.com still fresh in the investor psyche, people are asking, isn't this just a dangerous new bubble?” So for those of you that weren't around for the.com bubble, Webvan and pets.com were dotcom darlings, and they subsequently blew up in the bad way. Webvan was an online grocery business, and interestingly enough was founded by the guys who founded Borders, also Michigan grads, which I found out. Go blue, except I guess not in this case, and Webvan ended up losing $800 million and went bankrupt in 2001. Pets.com was an online retailer for pet supplies, company IPO'ed in February of 2000 and shut down in December of that year.

What's interesting is clearly their thesis was right, because Chewy many years later became a very successful online retailer for pet supplies. Let's keep it going. 

“I, along with others, have been arguing the other 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'm also personally an investor in LinkedIn. We believe that many of the prominent new internet companies are building real, high growth, high margin, highly defensible businesses.” 

Let's just stop there for a second. Something to note here is that people were probably spooked by the dotcom bubble, and they threw the baby out with the bathwater, believing that all software companies were bad because a handful of bad software companies blew up at the time. But overall, it's been proven that software businesses are fundamentally better businesses on average from a unit economics perspective, and even today, like in 1999 and 2011, there are just bad software businesses just like there are bad media businesses, professional service businesses, or any other type of business, and that is just a reality of capital markets. When there is a new opportunity to make money, you will find examples of short-term opportunism absent of long-term fundamentals, but you will also find truly transformative businesses. Let's keep it going.

“ Today's stock market actually hates technology, as shown by all time low price to earnings ratios for major public technology companies. Apple, for example, has a PE ratio of around 15.2, about the same as the broader stock market. Despite Apple's immense profitability and dominant market position. Apple in the last couple weeks became the biggest company in America, judged by market capitalization, surpassing ExxonMobil, and perhaps most telling, you can't have a bubble when people are constantly screaming “bubble.” But too much of the debate is still around financial valuation as opposed to the underlying intrinsic value of the best of Silicon Valley's new companies. My own theory is that we are in the middle of a dramatic and broad technological and economic shift, in which software companies are poised to take over large swaths of the economy. 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 disruption in more cases than not. Why is this happening now? Six decades into the computer revolution, four decades since the invention of the microprocessor, and two decades into the rise of the modern internet, all of the technology required to transform industries through software finally works and can be widely delivered at global scale. Over 2 billion people now use the broadband internet up from perhaps 50 million a decade ago when I was at Netscape, the company that I co-founded. In the next 10 years, I expect at least 5 billion people worldwide to own smartphones, giving every individual with such a phone instant access to the full power of the internet every moment of every day.”

So by the way, just to fact check Mark Andreessen, he said that he expected at least 5 billion people worldwide to own smartphones in 10 years, so that would've been in 2021. For context, that number is closer to 7 billion today, so he was incredibly correct. 

“On the back end, software programming tools and internet based services make it easy to launch new global software powered startups in many industries without the need to invest in new infrastructure and train new employees. In 2000, when my partner, Ben Horowitz, was the CEO of the first cloud computing company, LoudCloud, the cost of a customer running a basic internet application was approximately $150,000 a month. Running that same application today in Amazon's cloud costs about $1,500 a month, with lower startup costs and a vastly expanded market for online services. The result is a global economy that for the first time will be fully digitally wired. The dream of every cyber visionary of the early 1990s finally delivered a full generation later.” 

Now, I just wanna stop here for a second. If you've read Marc Andreessen's other great essay called The Only Thing That Matters, he talks about the single most important determinant of a startup success, and there are three kind of factors. He talks about product, team, and market, and he basically said that it's not product, it's not team, and it is market. Further, he defines a market as the number and growth rate of customers or users for your product, and he explained that market was the most important factor, because in a great market, a market with lots of real potential customers, the market pulls product out of the startup. So bringing this back to software, what Andreessen is basically saying is that so many things that had to exist for consumers to finally be ready, willing, and able to interact with software products finally did exist. And a lot of people will say that you're seeing this with the acceleration of AI today and more specifically in the world of robotics. If you look at the work being done by companies like Figure, they will say that all of the pieces are starting to be in place for the timing to be perfect, not just build an AI company, but to build a robotics AI company. Let's keep it going. 

“Perhaps the single most dramatic example of this phenomenon of software eating a traditional business is the suicide of Borders and corresponding rise of Amazon. In 2001, Borders agreed to hand over its online business to Amazon, under the theory that online book sales were non-strategic and unimportant.”

Which just to pause for here for a second, if you listen to the recent Founder’s Journal episode on Seven Powers, Amazon's introduction into online bookselling is a perfect example of counter-positioning against Borders with a business model that had Borders tried to compete, it would have cannibalized its core physical business. Oops. “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. On top of that, while Borders was thrashing in the throes of impending bankruptcy, Amazon rearranged its website to promote its Kindle digital books over physical books for the first time. Now even the books themselves are software. 

Today's largest video service by number of subscribers is a software company, Netflix. How Netflix eviscerated Blockbuster is an old story, but now other traditional entertainment providers are facing the same threat. Comcast, Time Warner, and others are responding by transforming themselves into software companies with efforts such as TV Everywhere, which liberates content from the physical cable and connects it to smartphones and tablets. Today's dominant music companies are software companies, too. Apple's iTunes, Spotify, and Pandora. Traditional record labels increasingly exist only to provide those software companies with content. Industry revenue from digital channels totaled $4.6 billion in 2010, growing to 29% of total revenue, from 2% in 2004.” 

A few points to make here. It is interesting to see that even with software eating the world, record labels have continued to wield a ton of power that has taken away leverage from software businesses in the space like Spotify. The other thing I just wanna point out is Marc just shared that in 2010, digital music was 29% of total revenue, and that was up from 2% in 2004. Today, so 14 years later, that number is 84%. So digital music streaming is 84% of total revenue and it is $17.5 billion instead of $4.6 billion. Let's keep it going. 

“Today's fastest growing entertainment companies are video game makers. Again, software, with the industry growing to $60 billion from $30 billion five years ago, and the fastest growing major video game company is Zynga, maker of games including Farmville (throwback, love that), which delivers its games entirely online. Zynga's first quarter revenues grew to $235 million this year, more than double revenues from a year earlier. Rovio, maker of Angry Birds, is expected to clear a hundred million dollars in revenue this year. The company was nearly bankrupt when it debuted the popular game on the iPhone in late 2009. Meanwhile, traditional video game powerhouses like Electronic Arts and Nintendo have seen revenue stagnate and fall. 

The best new movie production company in many decades, Pixar, was a software company. Disney had to buy Pixar, a software company, to remain relevant in animated movies. Photography, of course, was eaten by software long ago. It's virtually impossible to buy a mobile phone that doesn't include a software-powered camera. And photos are uploaded automatically to the internet for permanent archiving and global sharing. Companies like Shutterfly, Snapfish, and Flickr have stepped into Kodak's place. 

Today's largest direct marketing platform is a software company Google. Now it's being joined by Groupon, LivingSocial, Foursquare, and others, which are using software to eat the retail marketing industry. Groupon generated over $700 million in revenue in 2010 after being in business for only two years.”

Now, just to pause here for a second, this is a good example of how being macro correct about an industry is more important than being micro correct, especially as an investor, but also as an entrepreneur. Marc Andreessen has absolutely crushed it. Backing up the truck on this thesis of software eating the world, even with examples where he was wrong, like in the case of Groupon, which is doing less revenue today than it was 13 years ago. Also as a sidebar, I think that would be a great case study to break down, which is why did Groupon not work as software ate the world and so many other software companies did work? Let's keep it going. 

“Today's fastest growing telecom company is Skype, a software company that was just bought by Microsoft for $8.5 billion. CenturyLink, the third largest telecom company in the US with a $20 billion market cap, had 15 million access lines at the end of June 30, declining at an annual rate of about 7%. Excluding the revenue from its Quest acquisition, CenturyLink’s revenue from these legacy services declined by more than 11%. Meanwhile, the two biggest telecom companies, AT&T and Verizon, have survived by transforming themselves into software companies, partnering with Apple and other smartphone makers.” 

I think they've also survived because they have a monopoly on infrastructure, but that's a different point. 

“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.” 

Now, what I'll say is what feels super interesting to me is that as big and disruptive as LinkedIn was, it feels to me like there is a better solution to recruiting than LinkedIn that just has not been created yet and maybe will be in kind of this next generation of AI-powered businesses. Let's keep it going. 

“Software is also eating much of the value chain of industries that are widely viewed as primarily existing in the physical world. In today's cars, software runs the engines, controls safety features, entertains passengers, guides drivers to destinations, and connects each car to mobile satellite and GPS networks. The days when a car aficionado could repair his or her own car are long past, due primarily to the high software content. The trend toward hybrid and electric vehicles will only accelerate the software shift. Electric cars are completely computer controlled, and the creation of software-powered driverless cars is already underway at Google and the major car companies.”

Just to pause here for a second, I wanna share that it is pretty amazing reading this line about driverless cars that Marc Andreessen just shared, given that news came out yesterday that Waymo was given the green light to expand its driverless car service onto highways into parts of LA as well as the Bay Area. And I think what's interesting is on one hand it shows you how right Marc Andreessen was about the acceleration of technology, but also how long certain things take to really gain traction and mass adoption, especially when there are large regulatory hurdles like driverless cars on highways. Let's keep it going. 

“Today's leading real world retailer, Walmart, uses software to power its logistics and distribution capabilities, which it has used to crush its competition. Likewise, for FedEx, which is best thought of as a software network that happens to have trucks, planes, and distribution hubs attached, and the success or failure of airlines today and in the future hinges on their ability to price tickets and optimize routes and yields correctly with software. Oil and gas companies were early innovators in supercomputing and data visualization and analysis, which are crucial to today's oil and gas exploration efforts. Agriculture is increasingly powered by software as well, including satellite and analysis of soils linked to per acre seed selection software algorithms. 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, and many of the leading innovators in financial services are software companies such as Square, which allows anyone to accept credit card payments with a mobile phone, and PayPal, which generated more than a billion dollars in revenue in the second quarter of this year, up 31% over the previous year. Healthcare and education, in my view, are next up for fundamental software-based transformation. My venture capital firm is backing aggressive startups in both of these gigantic and critical industries. We believe both of these industries, which historically have been highly resistant to entrepreneurial change, are primed for tipping by great new software centric entrepreneurs.” 

Now, just to pause here, I wanna share about education for context. Udemy was founded in 2010, so a year before this essay was written. Coursera was founded in 2012, so right after this essay was written. Udacity was founded in 2011, a month or two before this essay was written, and Duolingo was founded in 2012. So Marc was on the nose about education being disrupted by software businesses, and it was happening right under his nose.

“Even national defense is increasingly software based. The modern combat soldier is embedded in a web of software that provides intelligence, communications, logistics, and weapons guidance. Software-powered drones launch airstrikes without putting human pilots at risk. Intelligence agencies do large scale data mining with software to uncover and track potential terrorist plots.” 

One thing I'll just say here, this is Alex, in the context of national defense and government is what's interesting to see in 2024 is how startups and private sector companies are getting involved in this space today through vertical integration, where they are building both the hardware and software. So I think about that with Anduril for defense tech or Varda for space tech, and then the government is starting to partner with these firms in a bigger and bigger way. Let's keep it going. We're almost done. 

“Companies in every industry need to assume that a software revolution is coming. This includes even industries that are software-based today. Great incumbent software companies like Oracle and Microsoft are increasingly threatened with irrelevance by new software offerings like salesforce.com and Android, especially in a world where Google owns a major handset maker. In some industries, particularly those with a heavy real world component such as oil and gas, the software revolution is primarily an opportunity for incumbents, but in many industries, new software ideas will result in the rise of new Silicon Valley style startups that invade existing industries with impunity. Over the next 10 years, the battles between incumbents and software-powered insurgents will be epic.

Joseph Schumpeter, the economist who coined the term “creative destruction,” would be proud. And while people watching the values of their 401(k)s bounce up and down the last few weeks might doubt it, this is a profoundly positive story for the American economy in particular. It's not an accident that many of the biggest recent technology companies, including Google, Amazon, eBay, and more, are American companies. Our combination of great research universities, a pro-risk business culture, deep pools of innovation, seeking equity capital and reliable business and contract law is unprecedented and unparalleled in the world.” 

Now, I'll just pause here and say this does what Marc just said about America being the superpower for new companies. It does feel like a very different narrative than at least what the prevailing narrative is by mainstream media and on social media today, where lots of people are expressing a lot of concern about the position of the United States on the world stage to create the next class of world-changing businesses. I will say that I am personally extremely optimistic about American entrepreneurship and innovation, but it does feel like competition with Chinese technology companies has never been more real. Let's finish this up. 

“Still, we face several challenges. First of all, every new company today is being built in the face of massive economic headwinds, making the challenge far greater than it was in the relatively benign nineties. The good news about building a company during times like this is that the companies that do succeed are going to be extremely strong and resilient, and I'll just share that my favorite quote around this idea of building resilient businesses during tough times is the quote that “great economic times mask bad entrepreneurs, and bad economic times reveal great entrepreneurs.” And so I think the best entrepreneurs are revealed during the toughest times. And when the economy finally stabilizes, look out; the best of the new companies will grow even faster. Secondly, many people in the US and around the world lack the education and skills required to participate in the great new companies coming out of the software revolution. This is a tragedy, since every company I work with is absolutely starved for talent. Qualified software engineers, managers, marketers, and salespeople in Silicon Valley can rack up dozens of high paying, high upside job offers anytime they want, while national unemployment and underemployment is sky high. This problem is even worse than it looks because many workers in existing industries will be stranded on the wrong side of software-based disruption and may never be able to work in their fields again. There's no way through this problem other than education, and we have a long way to go.” 

Just one thought I'll share here is I kind of feel like this is where we're at with AI, an evolution of technology that will enable structural change to every single industry, much like what software did over the last 20 years, but also the possibility to completely change what work looks like and what jobs become more or less valuable. Now, I've heard folks way smarter than me, like Sam Altman, say that the creative, more intuitive side of work will get more and more important as the more operational side of work will get replaced by AI. But I do think in general, there's a lot of concern and confusion around what's happening, and I believe you owe it to yourself as a participant in the global economy to learn as much as you can from the folks who are on the frontier of this industry, and this industry being AI. 

“Finally, the new companies need to prove their worth. They need to build strong cultures, delight their customers, establish their own competitive advantages, and yes, justify their rising valuations. No one should expect building a new high-growth software-powered company in an established industry to be easy. It is brutally difficult. I'm privileged to work with some of the best of the new breed of software companies, and I can tell you they're really good at what they do. If they perform to my and others' expectations, they're gonna be highly valuable cornerstone companies in the global economy, eating markets far larger than the technology industry has historically been able to pursue. Instead of constantly questioning their valuations, let's seek to understand how the new generation of technology companies are doing what they do, what the broader consequences are for businesses and the economy, and what we can collectively do to expand the number of innovative new software companies created in the US and around the world. That is the big opportunity I know where I'm putting my money.”

So that is the 2011 essay “Why Software is Eating the World” by Marc Andreessen. Before we go, just a quick reminder to give Founder’s Journal a shout out on social media and tag me so I can thank you personally. As always, thank you so much for listening to the podcast and I'll catch you next episode.