In Regard to Marc Andreessen’s “Why Software is Eating the World”
Millionaire entrepreneur and venture capitalist, Marc Andreessen, recently wrote an op-ed in the WallStreet Journal that went viral, entitled "Why Software Is Eating The World" In it he argues a few things. First that Software is taking over the world’s industries from retail to defense. Second, that we are not currently experiencing a bubble. And third, that this shift gives him optimism in the future growth of the world’s economies and stock markets. Once finished with the article, the reader can’t help but be overcome by a rosy outlook, one where software fulfills the imagined future of tomorrow that robots never quite delivered on.
Some reflection changed that. The problem: while he’s right about the explosive takeover potential of software, he grossly overestimates the future profitability of software and entirely overlooks the downside of a world where software replaces the jobs of actual humans.
I am not trying to put down the op-ed, rather just pointing to something that I think is an obvious preference *cough* bias *cough* in the journalistic outlook of the Wallstreet Journal.
On the point of profitability, are we in a bubble? Well besides his thesis of a “dramatic and broad technological and economic shift in which software companies are poised to take over large swathes of the economy” that I will get to in a moment, Marc’s case that we are not is not very strong when held up against a more scrutinizing look at the facts he references.
1) You can't have a bubble when people are constantly screaming "Bubble!”
Seriously? Maybe I only dreamt of the legions of pundits screaming “Bubble!” during the dotcom and housing bubbles.
2) Today's stock market actually hates technology, as shown by all-time low price/earnings ratios for major public technology companies. Apple, for example, has a P/E ratio of around 15.2—about the same as the broader stock market.
P/E ratios are constantly moving, but as of August 19, 2011, Apple a P/E ratio of 14.9 while the S&P500 (the closest proxy to the overall public equity market) had a P/E ratio of 6.6. That’s about 2.3x higher than the broader market. Without going into too much finance theory, this magnitude of difference is actually historically consistent with high-growth companies and therefore indicative of a market that expects a lot of growth from Apple.
The Majority of the op-ed though, points to the dramatic economic shift to software mentioned earlier. Here, a strong case is made for why software is poised to take over large sectors of the economy. The unanswered question remains – is this takeover necessarily a good thing for the markets and, more broadly, for all of our wellbeing?
Before the days of the internet, software was incredibly profitable. In those days, you sold software, and made a profit, a very straight forward, and pre-21st century business model that made guys like Bill Gates “I can get a way with killing someone” rich. Nowadays, making software, at least for broader consumers, requires more creativity to make a buck. So far the only business model that’s made Microsoft-in-the-90s type of profit is Advertising, and even there it’s been a winner-take-all game where Google (and to a lesser extent Facebook) owns the vast majority of that market.
The reason for this is two fold. One due to easier-to-learn technology and a demographic shift, there’s more engineers out there able to code, which leads to a greater supply of software out there, all competing for incredibly capricious consumer attention. And second, is the phenomenon of anti-profit digital culture. Charging directly for software has become almost taboo across both sides of the economic isle. Software engineers praise the merits of open source and building products for the egalitarian sake of it, and consumers are harshly suspicious of corporations charging them for what they see as their valuable digital attention. Call it 21st century entitlement. Call it a reaction to the gouging days of Microsoft’s monopoly. Either way, it doesn’t seem this trend is changing. Just ask the millions of up-in-arms Netflix users who recently had to pay a few dollars more for unlimited and instant access to thousands of movies, despite just years ago where the same would cost orders of magnitude more at a Blockbuster.
Allow me to take a quick detour to talk more about this idea of egalitarian and non-materialistic digital culture movements, like “open source”, so that I don’t give the wrong impression. Just to be extra clear, these are actually incredibly positive movements. Just because you can’t measure their impact in dollars and cents, doesn’t mean they aren’t marvelous sources of wealth for us all. Wikipedia is free and educates millions. The servers, databases, and free libraries out there spur digital innovation. And open-source operating systems and applications help give computer access to millions who can’t afford it. Now back to the main line of argument.
Software will take over the economy – probably. Will it bring with it incredible profits? Until it can find a way to make (big) money beyond advertising and online retail, which is already beginning to mature, I don’t think so.
Now to what is the most important point of all with respect to any optimistic outlook on technology. Technology concentrates wealth. It shifts profitability from labor to capital. Amazon revolutionized the sale of books (and now other products) but while it has proven incredibly profitable for early investors (capital holders), it now employs far fewer than those employed by the collateral damage of countless bookstores and brick-and-mortar retailers now closed.
I am not a luddite and I don’t mean to imply software companies like Amazon are doing something wrong. There is no right and wrong here, but there is change. We are in a recession and media outlets like the Wallstreet Journal would have us believe that what we need are more open markets, more unabashed capitalism to take us out of it. Here’s the problem. The old pre-recession jobs are not coming back. The twin forces of technology and globalization have eliminated those jobs. There is a systemic shift where the size of the pie is growing, but with it come income disparity and the array of consequential social problems that would derail this article too much should I try to get into them. The solution: simply put, socialism. We need a social safetynet to protect and give dignity to those who can’t find a place in the musical chairs game of capitalism we are headed for, and training programs to help those who can.
Dani Rodrik, Economics Professor at the Harvard Kennedy School of Government and one of the world leading experts on globalization, in a paper commissioned by the IMF proposed just this. My personal antipathy for economics aside, most of the academic community also supports socialist ideas like this. It is no longer crazy liberals who support this view, rather only ideologues who reject it.
So will software take over the world? Probably. Is it guaranteed to be good for us? At least in the short term, unclear. While promising movements like open source are showing us that technology can benefit us without creating huge groups of haves and have-nots, politicians haven’t yet come to the conclusions that many software engineers and digital innovators have reached long ago.


