The Business of Code, The Code of Business

MAR 08, 2010
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.