
Software Is the New Oil - orrsella
http://avc.com/2015/10/software-is-the-new-oil/
======
jofer
If software is the new oil, be prepared for a wild ride. The oil industry is
notorious for decade-scale cycles of over-hiring and then layoffs and under-
hiring, rinse-lather-repeat.

Regardless, it's a good analogy, but be careful how far you take it. There's a
_very_ important difference between the energy and other major industries.
It's a difference that the software industry shares, but in the opposite
extreme: The amount of capital needed to do business.

The energy industry is notoriously capital intensive. For my employer, a
project has to be over 250 million to be considered a significant project. We
have a _lot_ of those, including multiple projects in the 10-50 billion range.
Sure, I work for a very large company, but even a "mom and pop" oil company
(there are a lot, actually) needs tens to hundreds of millions to get started.

By contrast, the software industry prides itself on being able to get an
initial product out the door with essentially no other investment than time.

At any rate, it's a fine analogy, but keep in mind that the oil industry is
_very_ focused on building _big_ infrastructure. In that sense, oil companies
have more in common with independent nations than with other companies. It's
something to think about, at any rate.

~~~
prostoalex
Oil is high cap-ex, low op-ex, as labor costs are relatively cheap. Software
is low cap-ex, but once you've created a prototype and need to hire people to
build a business on top of it, op-ex becomes expensive.

~~~
jofer
Oil is low op-ex compared to its cap-ex. I don't have numbers to back it up,
but I'd argue software companies' op-ex is still far cheaper than oil's.

Oil production and infrastructure maintenance aren't cheap. It's not like we
just turn on the taps after the wells are drilled. However, labor is cheap,
even in the software industry.

~~~
prostoalex
> However, labor is cheap, even in the software industry.

I think by this point we're accustomed to dealing with large software players
who have scaled their businesses to the point where labor cost is indeed
marginal to overall profit picture.

Back in the days attempts to build a small-scale software company (local Web
design firm) or even a medium-scale software business (seller of compilers,
industry-specific tooling, shareware) basically broke down because of
unfavorable economics.

So we're dealing with a bit of survivor bias here - smallish and medium
software firms for whom labor was a major cost center are either out of
business, commoditized or both. In energy business, while the large companies
still enjoy large budgets and economies of scale, it's still quite possible to
be a small to medium size player and enjoy a steady cashflow.

------
jasode
I'm not convinced by this blog post that "software" is the new oil.

To me, it's the top talent of "software PROGRAMMERS" that's the "oil".

Let's pretend that Google Inc opensourced their entire software stack. Now,
anyone can just spend money on hardware and datacenters and "replicate" what
Google does in a certain sense. But did you really duplicate their abilities?
Would intelligent and visionary investors fund such copycat endeavors?

I say no because smart people would realize you didn't replicate Google Inc's
"hiring pipeline" of the best minds from Stanford/MIT/etc. Yes, we may have
gotten a snapshot of Google's source code but we didn't duplicate their
ability to attract desirable workers who can build _< <the next future thing
that's NOT in that source code dump>>_.

Even Bill Gates had noticed this point: Google's ability to poach top talent
from Microsoft was better than Microsoft's ability to attract Google
defectors.

Same analysis can be done for Amazon inc. A person could take all their source
code for ecommerce and warehouse logistics and I'm not confident he could
outcompete Jeff Bezos. First, you must prove that you're hiring a better pool
of candidates than Amazon.

Lastly, the "software" advantage leaks outside of the organization because
others copy it (open source) or ex-employees with knowledge leave and
reimplement it (legally) at their next gig. On the other hand, it's not as
simple to make top compsci graduates switch their career aspirations from
Google/Facebook/Apple in SV to SmallPotatoesInc in Alabama.

~~~
silverbax88
This is more accurate. Taking the Amazon example, there is literally _zero_
financial reason that Wal-Mart could not compete with Amazon. None. Yet,so
far, they have not even come close. The reality is execution, not deep
pockets.

And that execution comes from the talent powering the company, at least in the
right positions.

~~~
ArkyBeagle
WalMart has a pretty significant investment in technology. It's not the same
technology Amazon uses. It's more classic logistics, POS and backroom stuff.
I've seen their job ads. They execute. WalMart grew primarily through
technology - to be sure your Dad's technology, but Mr. Sam had a comprehensive
printout for the day on his desk every day.

WalMart is significantly bigger than Amazon. WM - 485.65B v Amazon @ 88.99B.
Call it 6x.

I shop at WalMart, and I will quite frequently take their "in store pickup"
option. I also have amazon Prime and the goods I pick for those are different,
it seems.

~~~
silverbax88
They execute in a different space than Amazon. What I wrote was 'competing
with Amazon', which they are absolutely not.

I'm talking strictly in the 'online retail' space, which I believe was pretty
clear.

~~~
ArkyBeagle
But you can actually buy stuff on walmart.com . I think they do compete in
that. And the sheer number of stores for in-store pickup is a pretty good
option.

------
roymurdock
I think it makes more sense to say that data is the new oil, and software is
the machinery used to extract, refine, store, and convert it into energy. AWS,
Azure, etc. will be the Shell and BP of the data world. But not all data is
created equal, and we still haven't gotten the refining process down.

Hopefully we'll be able to use digital oil to fuel more than just the great
engine of personalized advertising, which seems to be where most of the
revenue is coming from right now.

------
pjc50
One of these is a capital-intensive industry that extracts finite resources
from the particular areas of the earth that happen to have them. The resource
is consumed on a continuous basis.

The other is entirely dependent on skilled labour, and once deployed continues
to deliver value.

Software is much more like real estate: the first entrants erect a patent
barrier around the best bits and use it to charge rent to everyone that
clusters around the core. It's subject to gearing-driven bubbles.

------
kfk
And yet when you look at it, the biggest opportunities to create immense value
added are on the hardware side of things: self driving cars, pharma (aging,
cancer, etc.), robotics, batteries, power generation, interstellar
expeditions, bringing billions of people out of poverty, etc.

I don't want to be dismissive, but the software industry might very well go
through and M&A and commodification phase once it matures. It looks like oil
now because those companies are big monopolies, will it last? I don't know, I
wouldn't put all my assets in software, that's a bad idea in general anyway,

~~~
pjc50
_self driving cars, pharma (aging, cancer, etc.), robotics, ... , power
generation, interstellar expeditions_

All of those involve very large software elements, and benefit from software
innovation.

It's quite plausible that the existing winners are at the top of their ramp,
so buying in today at high p/e might not be a good bet. But all the unicorn
investing is betting on new software companies coming along and reaching
ascendency.

~~~
kfk
Excluding maybe self driving cars (maybe), I doubt that the core capability
needed to drive the innovation in the above is software. I mean, that's like
saying metal is everywhere in those industries. Of course it is, but it's also
a commodity because it's easy enough to be produced by many competitors. I
don't see software as so complex that few companies can keep the monopoly.

~~~
pjc50
I didn't downvote you, but I disagree strongly. Software is both the most
complex and skilled-labour-intensive thing that humanity has produced, and
something that needs to be individually commissioned for any kind of real
business edge. And it's supply constrained; that's why we're paid better than
most of the non-finance economy.

You can't just go down and pump another few thousand barrels of raw software
into your Strategic Software Reserve.

~~~
kfk
It's really not, it's now because few things are relatively new, it wont be
like this forever. Building a rocket, a plane, a car factory, it's way more
complex.

------
fab1an
I don't know nearly enough about macroeconomic trends or basics to have an
informed opinion on this, but I do wonder how much of the software giant's
cash-generating power is eventually still based on industries that 'extract
stuff out of the planet'. Even if that dependency were indirect - say by the
amount of oil/minerals/diamonds needed to produce a chip that your software
needs to run on - such a dependency would still mean that software can never
be as much of a 'primal' industry as oil is/was.

~~~
adventured
It's an interesting consideration. Software is clearly not a primary layer,
but neither is oil.

Energy, land, machinery, labor, transport - a few of the things you need to
extract and then process oil. The same goes for creating and making a
microchip useful. The first oil tower at Titusville didn't use oil as its
energy source.

Is oil a layer two product, and software a layer three product? Perhaps,
however oil is definitely not primal, it just seems like it is. The vast
effort and industry required to make oil useful, along with a century of
science, is mostly hidden away from view.

------
eddd
Difference between oil and software is that you can easily quantify oil (1
barrel) whereas it is tremendously hard to quantify the value of software
product.

~~~
sharemywin
most companies pay by the click.

~~~
mrweasel
No, that's ad companies you're thinking of. Software companies make money by
selling services or shipping a product.

~~~
sharemywin
Google's a software company last time I checked and most of their money is
paid by the click. FYI, if you aren't paying for it your the product.

~~~
mrweasel
Google is an ad company. 91% of their revenue comes from selling ads. They
just happen to be an ad company that started with a successful search engine.

All the amazing software Google develop is to support their ad business, more
or less.

------
ph0rque
_Amazon, the company that “will never make money” surprised Wall Street last
week with strong profits and it seems to me that they are going to start
producing cash like these other big tech companies now._

I missed this... any good articles about it?

~~~
sharemywin
wonder when amazon shed's it e-commerce business to focus on it's real money
maker cloud computing?

~~~
adventured
They'll remain linked for at least another decade. Bezos can now lean on AWS
to print money that he can funnel into numerous other expeditions. He won't
let go of it any time soon, he has been seeking a big money maker for some
time (see: efforts in search, auctions, advertising, phones - where the
leaders have generated sizable profits).

Why did Amazon launch a semi-high priced phone (rather than stay consistent to
the traditional low price strategy)? Bezos was hoping it would spit off a few
billion a year in profit, and they'd finally have a big cash fountain to swim
in like his competitors in tech.

In four to six years AWS will be a $150-$200 billion company in terms of
valuation. It'll be capable of generating $4 or $5 billion in operating profit
in that time frame. It'll likely pass Facebook in terms of sales within 36
months, and Facebook is worth $292 billion.

------
tacos
And posts like this are why I hold shares of Berkshire Hathaway instead of
Tumblr.

------
pcurve
It's a grabby headline, but after reading it, it came across as an attempt to
create a new business meme, rather than compelling arguments. All these
companies make money through very different means, not just software. Most of
them are valuable because they've monopolized sizeable chunk of consumer space
through combination of good planning, products, designs, marketing, and a
little bit of luck.

Also, there are other wildly profitable companies in other sectors that have
been around for decades.

------
vezzy-fnord
More specifically, it seems that he's referring to software _as a service_ (or
service as a software substitute, depending on your POV) as the one netting
the surplus value. Distributed server-side applications with intrinsically
limited client-side interaction and no standard release model or auditability
so to speak of. That's actually a rather different beast than just "software".

------
mtgx
So what's the renewable alternative to software then? And are we going to make
wars over software, too?

~~~
sharemywin
open source?

------
jefe_
I like the analogy, and eagerly await the arrival of a software rentier state.

------
mathgeek
"Facebook could have $20bn of cash in the next year and could be producing
$20bn of cash a year soon."

Came here hoping to find a "Facebook could..." line when talking about
revenue. Was not disappointed. :)

~~~
adventured
Why? They're tracking to a likely $18+ billion in sales in the next four
quarters. That's obviously an extremely substantial business.

By comparison SAP is Europe's largest tech company and does $21 billion in
sales. Facebook will surpass them within eight quarters (at a mere ~14 years
old as a company).

~~~
mathgeek
It's just the common line that you see when people talk about revenue
possibilities and Facebook. There's a tendency to talk about Facebook's
potential (rather than their current state) because they're a company with a
lot of it.

------
sharky93
I feel 'data' or rather big data is the new oil. There are big monopolies
which control a lot of it and are trying to make sense out of it, the likes of
Amazon, Google, Palantir et. al. and similarly there are companies like
ExxonMobil in the energy sphere. We could in fact extend this analogy to
smaller players in the renewable energy zone which are trying to make better
qualitative use of their resources and similarly you will find small startups
trying to make qualitative sense out of whatever lesser data they have but
with niche applications.

~~~
rm_-rf_slash
The difference between data and oil is that you aren't going to drive to the
oilfields one morning and find that it's all been hacked and stolen. Data is
collected. Oil is sold.

~~~
saryant
> The difference between data and oil is that you aren't going to drive to the
> oilfields one morning and find that it's all been hacked and stolen.

Ask Western oil workers in Libya or Nigeria or Venezuela or Mexico (depending
on the decade) how accurate they feel that sentence is. Oil concessions have
been regularly expropriated.

~~~
rm_-rf_slash
Fine then, stolen at the click of a button. Oil is a finite resource, software
isn't. We create our own scarcity. Oil = software is a lazy metaphor.

~~~
saryant
As opposed to the stroke of a pen?

------
grflynn
Assumes that software is a tangible item, when a more suitable term for it is
the _wetware_ between the CPU and a user's screen? This connotation of
software with some form of product is analogous to selling sand to The Arabs.
There is more than enough to go around, and it is not scare. Soo leave it
alone and create products _borne_ from soft, not make the soft the _product_.

------
doczoidberg
Very vague comparison. Software is a technology and oil is a commodity.

you can't copy oil, you can't open source oil, software isn't limited

------
jmnicolas
Oil is finite, one day there won't be anymore. Software is potentially
infinite as long as you can produce electricity ton run it.

------
kriro
Another interesting related perspective that we used to give our (business
information systems) students to argue about is "IT doesn't matter" by Carr
(2003) _.

_ Can be found online at: [https://hbr.org/2003/05/it-doesnt-
matter](https://hbr.org/2003/05/it-doesnt-matter)

------
peter303
I've heard the exobyte data centers called the 21st century's "refineries" or
industrial plants. They are physical plants consuming large amount of
electricity (and nearly no labor). Although valiant attempts are made to
minimize environment costs, the overall energy consumption increases and data
creation rapidly grows.

------
Spooky23
Oil is fundamentally rent-seeking. You're pumping money out of the ground.
Software platform companies are the real equivalents.

I think the difference is that the state of the art shifts so quickly, long
term survival for platforms is questionable. There's always a new player.

~~~
refurb
How is oil "rent seeking"? They are pumping something out of the ground and
producing a product for sale.

------
blobbers
Amazon made 17 cents per share and that was enough to convince you? "strong
profits"? Drink the koolaid much?

I'll sell you some shares in my software company at the same multiple. We've
even got better margins. It'll be great. I promise.

~~~
adventured
They generated a billion in operating profit between AWS and retail.

Specifically what's so amazing, is that AWS is set to produce perhaps $2.25 to
$2.5 billion in operating profit in the next four quarters. With the growth
curve it's on, it'll very rapidly become one of the most valuable companies in
the world, buried within Amazon. They'll hit $20 billion in sales in just
three years, assuming slower growth.

By comparison, AWS is already generating 2.5 times the operating profit of
VMWare. It has greater sales than either Salesforce or Netflix, and is
generating a _drastically_ greater operating profit than either of those two.

------
tempodox
“ _We are long software_ ”

Of all the suit babble I ever heard, this must be the most incomprehensible.
Juggling stock options apparently wreaks havoc on the speech center of your
brain.

~~~
jasode
The author just inadvertently left out the word " _on_ " as in "we are long on
software", or "long on gold", "long on the euro", etc. It's typical phrasing
that describes a long-term bet on something going up in value.

~~~
harryc2011
FWIW, the duration has nothing to do with it - you could be 'long APPL' etc.
for only a few minutes (or even seconds, microseconds etc.) - see [0] An
alternative phrasing here might be "We are bearish on software" [1]
[0][https://en.wikipedia.org/wiki/Long_(finance)](https://en.wikipedia.org/wiki/Long_\(finance\))
[1][https://en.wikipedia.org/wiki/Market_sentiment](https://en.wikipedia.org/wiki/Market_sentiment)

------
sharemywin
It's software as communication/marketplace platform that makes most of the
money. metcalfe's law + near zero marginal cost = $$$$.

------
ryanmarsh
Hydrocarbons are something companies buy in order to burn or use to make other
molecules they can sell.

Explain to me again how this is an analog for software?

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liveoneggs
software is definitely a lot of snake oil.

------
douche
Apparently acknowledging the existence of Michael O. Church is still verboten
around here...

------
theworstshill
The physical analogy isn't even close. The volatility at the present time may
be applicable. Software is a product of someone's imagination, while oil is
pumped out of the ground. Without invention of the combustion engine (also a
product of someones imagination), all the oil in the world would be nearly
worthless.

------
dear
So California Is the New Texas.

------
penglish1
I just know there is a "There Will be Blood" joke in here somewhere..

------
k__
Isn't it more like the new "Movies"?

------
beambot
So when is "peak software"?

~~~
crpatino
I don't know _when_ , but it certainly seems to abide by the diminishing
returns rule:

"Programming today is a race between software engineers striving to build
bigger and better idiot-proof programs, and the Universe trying to produce
bigger and better idiots. So far, the Universe is winning."

