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What is a Software Company?

Published September 18th, 2007 in Tech & VC

Paul Kedrosky has the killer insight of the week:

Here is a factoid that jumped out at me yesterday, one having to do with the ratio of software developers to non-developers at a major quant fund versus a major software company:

- Oracle (56,000 empl.): 1 - 8 (one developer for every eight employees)
- Renaissance Technologies (178 empl.): 2 -3 (two developers for every three employees)

It’s not too much of a stretch to say that hedge funds are the new software companies. After all, they have more developers per capita than the latter, and they certainly generate more cash flow per capita.

This begs an interesting question: in an age where nearly every industry has companies that are leveraging original software development to streamline business processes, what is a software company? Surely they’re not just the companies writing a lot of code because every industry has geeks writing code: book publishers (lulu.com) through t-shirt vendors (Threadless) would fit that definition of “software company.”

Are software companies now the ones building platforms, whereas individual industries are building applications off of these platforms? In that case, then Google, Oracle, MSFT, Salesforce, Facebook, etc are all software companies… but, that’s still not quite right. Google is a media company (whether they like it or not). So is Facebook.

A software company can’t just be a company that sells software. First of all, simply selling a string of “0″s and “1″s is a tired business model. Most players that used to sell compiled code are now doing SaaS instead. And, these SaaS companies are often not selling software at all. They’re giving software away for free and then selling support (think: Firefox, RedHat, IBM, etc). Those SaaS companies are “consultants” (just like McKinsey) by that definition. Besides, if the definition of “software company” is just a company that sells software then there are hardly any software companies left, and I don’t think that’s true… people use the term “software company” to describe companies all the time today.

I think the old concept of a “software company” is pretty dated. The only way to really understand the definition of the phrase today is from a pragmatic approach. Software companies are the companies that people say are software companies in conversation. The term is now defined by its usage; there’s no longer a common thread that is exclusive to just this set of companies. Rorty is probably smiling from beyond the grave about my application of his pragmatic linguistic philosophy.

3 Responses to “What is a Software Company?”  

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  1. 1 Nate Westheimer Sep 18th, 2007 at 4:51 pm

    Andrew, I think is is exactly what the ITAC found when they came out with their report last week which showed more actual tech workers in NYC than the Valley and other places. This reconceptualization of a “tech worker” or software worker was also seen today. Our head of ad ops at NPB spent all day at “Ad Monsters” http://www.admonsters.org/ today. She and so many other people work directly with software, optimizing ad operations and usually go uncounted when we talk about software professionals.

  2. 2 Ethan Bauley Sep 26th, 2007 at 2:22 pm

    Basically all former “media” or communications companies need to become software companies.

    The processes and apparatuses the distribute and provide context for the absurd amount of “content” out there are going to capture all the value.

    Depending on how the economics of online ad *buying* shake out, it will likely be impossible to *consistently* capture value by producing and marketing “desirable” content.

    In media industries, the “SaaS”-y things that help produce, distribute, and filter content are the new bottlenecks. “Attention Economy” for WikiU students ;-)

    I believe BigMediaProfessionals have more insight than TheValleyPeople in how to serve these “unmet needs” but their reluctance to get down and dirty with the how these new technologies work what is holding them back.

    i.e. they still think in terms of “having a website”, instead of a service that leverages the edge, is constantly iterated and improved, blah blah

  3. 3 Nick Malik Oct 2nd, 2007 at 5:46 am

    Andrew, There is a large difference between a “software company” and a “company that hires software developers.” The first class has a lot of elements in common in the business model, risks, structure, and mechanisms for selling. The second is a generic cloud that includes most organizations of any size. If you judge a set by its contents, then you have two very different sets.

    Think about it this way: what is a manufacturing company? Would you agree that a manufacturing company is involved in a process of “making stuff” and then “selling what you make?”

    It is entirely possible for a company to make things that they do NOT sell, but that does not turn them into manufacturing companies. That just means that one of the line items on their expenses includes something akin to “make stuff for our folks to use.”

    It is not the “making” of something that makes a company into a manufacturing company. It is a two part process: 1) Make it and 2) Sell it. If you don’t do BOTH, you are not a manufacturing company.

    Therefore a company that writes software, but does no provide access to functionality, is not a software company. Period. American Express is not a software company. General Motors is not a software company. Both write millions of lines of software.

    If there is a question about what kind of company you have, look at the money. Where does the company make money? What do they sell?

    If they sell advertising, they are a media company.
    If they sell software or access to software (SaaS), they are a software company.
    If they sell stuff that they assembled, they are a manufacturing company.
    If they sell the ability to return an increased yeild on your investment, they are an investment company.

    Of course, a company can do more than one thing. Microsoft sells software and access to software and services and they manufacture XBox equipment… etc. So why is Microsoft a software company? Because (a) the Lion’s share of their income comes from selling software or access to software, and (b) the Lion’s share of their investment goes to supporting that business.

    It really is pretty simple.

    The business is not defined by the people who observe. It is defined by the people who run it and where the money comes from.

    And software developers do not all work at software companies. It has NEVER been the case that the majority of software developers in the world worked for software companies. Not in 1960, not in 1990, and not today. Nothing has changed… except perhaps your perception. And that, perhaps, is a good thing.

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