Software Is Eating the World
Trace how software shifts product value and industry control
- Difficulty
- Moderate
- Time to result
- ~months to results
- Steps
- 5
- Confidence
- 98%
The framework is a three-part chain. First, every product or service that can become software will do so, including both the consumer interface and the back-end systems that make the service work. Second, the companies producing those goods and services must become software companies rather than traditional companies that merely bolt software onto existing operations. Third, the strongest software company in each industry gains strategic control and captures most of the value. The winning structure may be vertically integrated, like Apple combining hardware and software, or horizontal, like Microsoft licensing the controlling software layer to hardware makers. The diagnostic question is therefore not simply who makes the best physical product, but who owns and improves the software layer defining the experience.
Origin
Andreessen described the three-part forecast behind his 2011 essay “Software is Eating the World.”
Core principles
- 01Every product or service that can become software will become software
- 02Companies serving those markets must become software companies
- 03The best software company ultimately captures strategic control and profits
- 04Software transformation includes back-end systems, not only app interfaces
How to run it
- 1
Find what can become software
Break the product or service into experiences and operations, then identify which components software can deliver, coordinate, or improve.
Pro tip Look beyond the app to the complete back-end system.
Watch out Do not equate software transformation with adding a superficial interface.
- 2
Assess the company transition
Determine whether each competitor treats software as its core product capability or as an add-on to a legacy business.
Watch out Strong legacy sales and marketing do not substitute for software capability.
- 3
Locate strategic control
Identify the software layer that defines the customer experience and governs how the wider system evolves.
Pro tip Track where profits accrue, not only where manufacturing work occurs.
- 4
Test the industry structure
Evaluate whether the likely winner integrates hardware and software vertically or supplies a horizontal software layer to many producers.
Pro tip Use Apple and Microsoft as contrasting structural analogies, not automatic answers.
Watch out The framework does not predetermine whether vertical or horizontal integration wins.
- 5
Back the software leader
Favor the company most capable of building the software that controls the experience, economics, and future direction of the industry.
Watch out Physical engineering and safety still matter even when value flows toward software.
In the wild
Andreessen argues that autonomous driving and the software-defined in-car experience can move value away from companies that see software as a component. Tesla illustrates a vertically integrated contender, while a separate software supplier serving many carmakers would resemble Microsoft’s horizontal PC model.
→ The key contest becomes control of the software layer, whether vertical or horizontal.
The host compares the framework to the iPhone: assembly captures relatively little value while Apple’s integrated product and software capture profits and strategic control across the mobile ecosystem. Andreessen agrees that this is the framework’s general implication.
→ Software-centered integration captures disproportionate value.
Common mistakes
Stopping at appification
A polished app does not transform a company if its underlying systems and product capabilities remain unchanged.
Assuming vertical always wins
Andreessen explicitly allows both vertically integrated and horizontal software winners.
Measuring production instead of control
The party doing most of the physical work may not capture the profits or dictate the industry’s future.
Is it for you?
Best for
It is best for leaders and investors evaluating industries undergoing software-driven transformation.
Not ideal for
It is not ideal as a short-term prediction of exactly which company will win or which industry structure will prevail.
From the transcript
“Every product or service UM that can become software will become software UM.”
“every company that makes those products or services has to and will become a software company.”
“in any industry, in the long run, uh, the winning company will be the best software company.”
From the episode
Interview With Marc Andreessen: Masters in Business (Audio)
Marc Andreessen