The Business of Code, The Code of Business
This post is part of the Who's @ Google I/O, a series of blog posts
that gives a closer look at developers who'll be speaking or demoing at Google I/O. This post is written by Albert Wenger, partner at Union Square Ventures (and still enjoys
writing code!). Albert will be speaking alongside others in venture capital on a panel at Google I/O.Reading the
Google Code blog, it is hard not to marvel at the
fundamental transformation that is taking place in the business of code. By the business of
code, I mean the economics of developing and selling software. My first exposure to the
software business was as a teenager in Germany some twenty five years ago. Driver's education
there is quite expensive because one has to take many mandatory lessons. After all, once you
have passed you get to drive on the Autobahn, which, to this date, has long stretches without
a speed limit! I thought I was being clever by agreeing to write software for a driving school
in exchange for free lessons. It turns out the clever one was the owner of the driving school
who turned around and sold the software to several other schools.
So
what would it have taken for me then to become an ISV (independent software vendor), other
than actually having the idea? These were the early days of PCs. I would have had to spend a
lot of money on marketing and a lot of time on in-person sales and on-premise / telephone
support. Most ISVs at the time grew locally for that reason and it was not uncommon to have
highly fragmented markets with literally dozens of different vendors. As the software would
have grown past the very simple initial functionality that I had created, I would have had to
write pretty much everything I needed myself. Need billing? Write a billing module. Need asset
tracking? Write an asset tracking module. The marketplace for components evolved only much
later and was almost as fragmented as the ISV market.
This situation
persisted until quite recently. In fact, in 2003 I spent a year getting to know the market for
software for trucking companies in the US (Why? That's a long story). That market still had
essentially the same characteristics: highly fragmented, regional customer bases, and almost
100% monolithic custom systems.
Since then, the situation has changed
dramatically. Today, creating new software means focusing on what the unique contribution is
that one wants to offer and figuring out how to integrate with everything else. Need a
spreadsheet? Use Google Apps. Need telephony? Use
Twilio (disclosure: Twilio is a USV portfolio company). Marketing
can happen on the web through keyword advertising and, better yet, SEO and customer sharing.
For many solutions, even sales can be entirely web-based (enter a credit card!). Support can
happen over the web and often users can support each other through community. Add cloud
computing to the mix and you eliminate the fixed cost that was such a high barrier to entry in
the early days of the web (I remember the extraordinary bills for servers and bandwidth in
1999!).
All of this has made it possible for small teams to create big
successes. It is amazing what a few great coders can do, leveraging all the services that are
now available. It is,however, not just the cost side of the business of code that has changed
dramatically. Competition has gone global. Someone in a faraway place can create a system, and
it is instantly available everywhere. The days of the profitable, regional ISV business are
over. The source of competitive advantage has also shifted. In the past, if your solution had
better features, you could land a sale even against a competitor that had more customers. Now,
better features don't mean that much if the larger competitor has built a network effect into
their business. Imagine trying to start a LinkedIn or Salesforce competitor with better
features. So the very same forces that are making it much easier to get started are making it
much harder to build a successful and sustainable business.
Does that
mean that there will be fewer opportunities going forward? Maybe. But there is a strong
countervailing force that is creating important new opportunities: the code of business is
also changing. By the code of business, I mean how companies and industries (and even
societies) are organized. At Union Square Ventures, we are convinced that over time, the
Internet will transform most, if not all, industries as much as it is changing the software
business. This has started with the media industry, where after years of prediction of change
we are now seeing massive shifts.
The reason that the code of business
will change is that much of it is based on historic constraints on the bandwidth and latency
of information flows. For instance, a command-and-control type hierarchy is still at the heart
of (almost) all large corporations. Information flows up the hierarchy with middle management
in charge of aggregating information flows. Commands then flow down with middle management
translating into finer grained actions. This basic structure dates back to a time of
messengers and telegraphs. Corporations are slowly shifting away towards more of an Internet
architecture of "small pieces, loosely joined" -- but in many cases the end state may mean
that the "pieces" are independent, small companies instead of units of a large company.
These changes will take a great deal of time (decades) because existing
structures have a ton of inertia. Far more people tend to be interested in preserving the
status quo than in making radical changes. Also, when a whole system needs changing, it is
often difficult to get there one piece-at-a-time because all the components need to fit
together. But as they start to occur in other industries, the opportunities will be massive.
To give just one example, consider education: the size of the textbook industry alone in the
US is estimated at $7 billion annually. This is a pure content business ripe for
disruption.
Enough reading -- time for everyone with a transformative
idea to start coding!
By Albert Wenger, Union Square Ventures and Continuations.
