Start-up Entrepreneurs' Blog

The Storm that Will Change the Application Software Industry Forever

November 3, 2010

The software industry is changing. The personal computer industry is changing. Mobility is hot among consumers and is making inroads among business applications. Cloud computing is becoming mainstream. The digital world is shifting and not just a little, it is changing a lot. What is happening in the digital world to cause the perfect storm?

Let’s look at the changes in the software industry because software is the interface with the end user.  In the beginning, software packages were “robust and feature rich”, a phrase found in almost every software product plan 10 to 15 years ago. The software had hundreds of features packed into one small package.  Each typical user needed only 10 percent of the functionality and each user needed a different 10 percent.  In the beginning, hardware was expensive to develop, but software was considered much less costly to develop and upgrade because changes could be made, recompiled, tested and released quickly. The mantra in companies became put changes into the software, but only modify the hardware as a last resort. Then somewhere along the way software became very complex, and it became more expensive to develop and change than the hardware. The new mantra became put changes into the hardware, but don’t change the software unless there is no other option.

The world has changed once again.  Application software had become so complicated that today’s applications look much like the early operating systems (OS).  In these early days, a company developed an OS and independent software vendors (ISV) developed all sorts of extensions and applications. When one these became very popular, the OS would simple absorb the functionality and it became part of the base feature set for the OS.

Today, an application is a base software product and ISVs are creating smaller add-on applications to create all the old “robust and feature rich” packages.  Look at WordPress, the popular blogging platform.  WordPress is the base applications and all sorts of small ISVs are offering plug-ins and widgets. The same is true of iPhone and its exploding number of available mobile applications.  Facebook is yet another example of this trend.

Along with this change in the business model for software are shifting winds in the personal computer and mobile computing markets. The direction away from personal computers to smartphones is already quietly happening. People love their mobile phones and laptops, precisely because they are mobile. Once there were mainframes and users accessed the compute power from dumb terminals.  Personal computers moved applications onto desktop computers, allowing the masses to reap the productivity benefits of the computer age.  The desktop could be thought of the first step in mobility, distributing compute power into homes and everyone’s offices.

 Inadequate connectivity kept many applications on the desktop, but the Internet has improved dramatically since the days when this direction was taken. Now consider that cloud computing is moving the compute power of the commonplace software application away from the desktop into the cloud.  Many small businesses are using their cell phones to correspond with customers – everything seems to be tagged with “from my iPhone” or “from my Blackberry”.  Appointments are made and confirmed with online calendars, bills sent to email accounts and payments made electronically. Add to this trend the development of super smartphones, which feature on-board memory, multi-core processing, and graphics and video acceleration – and now compute power is moving into our pockets.

Often disruptive technology takes an expensive, but very useful solution and creates a cost reduced version for the masses by using the latest industry innovations.  Start-ups are taking the popular software packages developed over a decade ago and rewriting them: what was sophisticated and complicated by the standards of yesterday are no so today. The venture capital industry is undergoing a shake-up. One reason is the advent of Internet and software innovations that have significantly lowered the costs of development and market validation.  It no longer takes a $5 million investment to get a company started. This has lead to the institutionalization of the super angels and a proliferation of start-up incubators, which are closer to being micro venture capitalists. Funding is being poured into this new style of software start-ups, cloud computing and mobile – where there is funding, there is progress.  The winds of change are creating a storm on the horizon. As a result, the landscape of the digital world will be different.

What does this mean for those software companies that began in the 1980’s and still operate under the old software business model? Consumers are getting used to low-cost add-ons. Instead of paying for those 90% of features they never use, doesn’t it make more sense and better economics to only pay for the 10% that they do use?  The younger generation didn’t experience the birth of the PC industry. For them, mobile is the standard. They are used to hearing their parents say, “Is that app for free?”  Consumers will be less inclined to buy software packages for one large upfront fee in the future.  When users migrate to laptops and smartphones, it makes sense to share the same interface and information across platforms.

Could many of today’s software companies go the way of the music producers? Will they experience the same painful shift going from selling high priced, multi song albums to digital, single song downloads at dollar store pricing?

Filed under: Technology News

Tags: cloud computing, incubators, microsoft, mobility, personal computers, smart phones, social networking, super angels