The New Economics of Software

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The New Economics of Software

As previously explained in Trends, as well our recent book, Ride the Wave, civilization is in the middle of the most recent of five techno-economic revolutions that have swept the world since the original "Industrial Revolution" began in England around 1771.1

These revolutions are defined by the fundamental value-creation paradigm which makes that revolution different from any prior era:

  • The Industrial Revolution was based on factories.
  • The Railroad Revolution was based on steam-driven transportation.
  • The Steel and Chemicals Revolution was based on scale economies in batch manufacturing.
  • The Mass Production Revolution was based on the assembly line.
  • The Digital Revolution is based on logic circuits and software.

Unlike an earlier set of revolutions driven by breakthroughs in agriculture, materials, and printing which took centuries to mature, each of these five has taken around half-a-century to complete. The result has been a dramatic rise in living standards and lifestyles.

Each revolution starts with a focus on the revolutionary technology itself, still operating under the rules of the previous paradigm. Then, as each revolutionary technology becomes more capable, inexpensive, and ubiquitous, the rules and institutions of the prior paradigm are replaced and modified to enable the new paradigm to utterly transform the value creation processes across the economy. This inevitably leads to the emergence of new business models, eventually extending into virtually every industry.

Most analysts peg the "big bang creation event" for the digital revolution at the 1971 release of the first microprocessor: Intel's 4004. Computers and software business models adopted by pioneers like Steve Jobs and Bill Gates neatly fit into the mass production world into which they were introduced.

And while ecommerce and software-as-a-service have changed the way we look at devices and applications, business has only recently been forced to re-examine the fundamentals of how IT is bought and sold, and how value can be captured along the value-chain.

As Ben Thompson of the "Stratechery" blog observes, there is a growing disconnect between the value objectively delivered by software and the willingness of consumers to pay for it.2 As Internet pioneer and venture capitalist Marc Andreessen famously declared in 2011, "Software is eating the world."3 Its central role in value creation is clearly underscored by the trend we discussed earlier in this issue, titled, Why Software is the Secret Ingredient in America's Manufacturing Renaissance...

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