Verum’s CEO on the business of software engineering.

It’s the Software, Stupid

Finally, we have arrived at an interesting moment in tech history: the moment that software ceases to be merely the thing that makes hardware work and instead becomes the dominant factor in a product’s success. This change has been building for a long time, but only recently has it become strategically apparent. Perhaps the single clearest example is HP’s recent decision to in effect become a software company. The tablet wars however provide a wider ranging illustration of the change. 

Essentially, Apple created the tablet market with the iPad/iOS and currently has more than 60% market share. Almost everyone else is using Google’s Android, which has a 30% market share. HP has decided that webOS cannot compete and Blackberry has been hopelessly left behind, gambling on QNX.

This and the fact that so many manufacturers have rapidly kicked out so many different Android tablets clearly indicates that it’s the software platform that matters; that compared to developing hardware the cost of developing and establishing a software platform is prohibitive. Further, the plethora of tablets available are barely distinguishable from each other in terms of hardware, as the debate around Apple’s lawsuit against Samsung’s Galaxy Tab shows.

The single feature that distinguishes one tablet from another is end user functionality. In other words the tablet has to come with an “App Store”. A tablet or smartphone without an App Store is a guaranteed lame duck. Part of the joy of owning a tablet is discovering new and funky applications for it. My coolest experience so far was taking my iPad on a sailing holiday and using a sea navigation app to plot my course, record my track and dump the whole lot onto Facebook so my parents could follow our progress. All software.

So as far as tablets go, clearly it’s about the software.

But this conclusion is not limited to the tablet world. Tablets are after all just a type of embedded system with dual camera’s, GPS receivers and tilt/motion detectors, etc. I read recently that change is sweeping the EDA business. Where EDA companies previously had to deliver (only) drivers for their chips/systems, they are now expected to deliver them fully integrated into platforms, such as Android. Their customers no longer want to carry the cost of developing bespoke platforms and simply want to use off-the-shelf software and supporting hardware for everything that is not related to their core IP.

Core IP is also moving away from hardware into the pure application domain. This is typified by a company I know that at one time considered its core IP to be X-Ray detection. These days they describe it as image processing and integrated workflow. Ericsson goes further: their Multimedia division states that it is already largely a software business and in the near future will become entirely a software business.

The issue at stake is the recognition of software as a core strategic activity. Or stated more simply: many companies think that they sell hardware because they price their product in terms of the cost of manufacturing the hardware. But it’s not hardware that sells, it’s end user functionality. Unique end user functionality is increasingly a function of software. Clever players such as Apple, IBM and HP have already realized that on the longer term that’s where the real money is.

So in what way can a business recognize the strategic value of software? For one thing it could add the cost of developing the software for an embedded system directly onto the system’s bill of materials – something that in practice seems to be rarely done. The relative cost per unit of the hardware and software components will then become immediately apparent. In all likelihood this will lead to a business focussing on reducing the cost of the software component. And this is an area where much can be won.

But perhaps the biggest advantage of recognizing the strategic value of software lies in achieving new insights into one’s business and in finding new ways to compete. Who would ever have guessed that the Kindle App would have caused such a huge drop in printed book sales in such a short period of time? Who could have imagined that in little more than a year Amazon would become able to charge more for an eBook than the paperback edition of the same thing?

I was taught that there are three types of businesses in the world: Type 1, metaphorically driving down a country road, rounds a corner and crashes into a wall that has been built across the road. Type 2, driving along, rounds the same corner, sees the wall, swerves and manages to narrowly miss it. Type 3, driving along the same road, rounds a corner and thinks, “Gee, this is a great place to build a wall!”

Will software be your wall?


Posted on 29/08/2011 by Robert Howe
Robert Howe

Robert Howe