52 Bicycles

David Hornik writes about The Softwareless Software Company, in which he essentially claims that the ability to provide a major back-end infrastructure will be the core of a SAAS venture:

I believe that a new era is upon us in the 2000’s. I believe that we have progressed from the “Computerless Computer Company” to the “Softwareless Software Company.” Taking the evolution of computer company one step further, “computer” companies are no longer about selling software, but rather about delivering services. Hosted services have the distinct advantage of meeting all three of the “new” rules suggested in the Computerless Computer Company: 1) they compete purely as a utility; 2) they monopolize the true sources of added value; and 3) they are designed to deliver the greatest possible sophistication with the simplest possible user experience…

In the era of the Softwareless Software Company, in which value is measured by utility, simplicity and reliability, the greatest asset may ultimately be the near infinitely scaling data center. It will certainly be important that the new computer company deliver great utility through its software-delivered service. But the most significant differentiator may ultimately prove to be the capacity to scale with massive demand. And those companies best situated to deliver that scale will be the winners. Thus, it is no surprise that just up and down the river from Microsoft’s new datacenter in Quincy Washington, both Yahoo and Google are contemplating building their own gargantuan datacenters. The Softwareless Software Company may have come full circle from the Computerless Computer Company and be more about hardware and infrastructure than about software after all.

Tim O’Reilly has an interesting corollary in his post, YouTube on MySQL:

Every web 2.0 company is ultimately a database company. Some roll their own, a few, a very few, use proprietary commercial databases. Most are running on MySQL.

I see why Hornik and his ilk (i.e. Venture Capitalists) would glom to this idea, much as he (and others) have to the idea of advertising-based business models: it paints a picture of a capital-intensive business, where money can be put to work, and scale begets differentiation and value with a smaller number of winners. The idea that “software” companies are really data handlers (bolstered by O’Reilly’s comment) means that the ability to scale to serve data will be the key to the future, and so is attractive to an investor.

Were it so. It is possible that there is short-term VC money to be made in the provision of back-end services, but I look at the likes of Amazon or possibly MediaTemple as examples of companies doing that right - providing this kind of infrastructure to other, customer-facing software enterprises. Drew Houston’s DropBox does not depend on an internal ability to provide an “infinitely scaling” infrastructure - he just looks to Amazon S3 to provide that, and he focuses on really exceptional software. The good people at 37Signals also look to Amazon to provide back-end

And if there is a differentiation between front and back end, there is a rapid path to commoditization in this back-end service. The empty vessel model might mitigate front-end risks, but it is easier to duplicate and scoop up. And while a poorly (or hastily) designed service might have a hard time switching back-end infrastructure providers, the very phenomenon of many new customer/consumer-facing startups means that the market remains liquid- the big existing guys do not necessarily win the new business without major price/value competitive pressures, even if their old business is more locked in. In this situation, pricing will flow to commodity levels.

So there is some money to be made right now: in this situation, early entrants can make margin on being there for the leading edge, but late entrants will focus on cramming the costs out of the business. And those who build it all themselves will see the advantage from that early model erode, as their front-end investments in data centers stop paying competitive dividends.

Turn this around for a minute. In 2005, Joe Kraus wrote his last and most influential blog post, It’s A Great Time To Be An Entrepreneur. He gives a number of reasons, but this one is at the top:

Hardware is 100X cheaper
In the 10 years between Excite and JotSpot, hardware has literally become 100X cheaper. It’s two factors – Moore’s law and the rise of Linux as an operating system designed to run on generic hardware. Back in the Excite days, we had to buy proprietary Sun hardware and Sun hard drive arrays. Believe me, none of it was cheap.

Today, we buy generic Intel boxes provided by one of a million different suppliers.

I posit that what he was really seeing was the dropping of infrastructure cost, both in aggregate (hardwardwcosts drop, value per MIP increases) and in piece (through the ability to rent just the amount you need). If this cost is going away, or at least is dropping to commodity levels, then the entrepreneurs for whom this will be a really great time are the ones who build at the higher level.

That’s not to say everyone makes $100 million (or even $50 million) - or even that a few people will, as the market looks less like a winner-take-all.

But a great deal of innovation and margin will be  - however it is delivered - in software: the ability to create systems, born out of the heads of bright people, that add value for people and organizations, building on the components that are out there and inexpensive.

This entry was posted on Tuesday, April 10th, 2007 at 8:34 pm and is filed under Technology Business. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed. Reddit This