(Related content: E-book: Software Delivery in the Digital Era, for the Now Economy)
As of February 5th 2016 Apple, Alphabet (Google) and Microsoft, were the three largest companies in the world by market capitalization. Along with Facebook (6) and Amazon.com (10), these companies are 50% of the top ten most valuable organizations in the world.
In essence, we have five software companies with a market capitalization of nearly 2 trillion dollars. That's more than the market cap of Exxon Mobile, Berkshire Hathaway, Johnson & Johnson, General Electric, Wells Fargo and AT&T combined.
When we look around us, it becomes obvious why the market has put such a high value on software companies -- software has become embedded in our lives in unprecedented ways.
We stream TV series and movies to our homes and mobile devices; when we go to the movie theater, chances are that the biggest hits are movies created by software. We flip through books and magazines by tapping the screen on our personal devices. We listen to personalized radio stations, and we make purchases through websites and apps in our tablets and smartphones.
Everything is being transformed by software.
But, in most cases, software is not the product—it’s the enabler. Software, as an enabler, is the new model for software in the business world.
The New Software Business Model: Software as a Differentiator
Apple makes most of its revenue from selling iPhones, not software. In fact, most of Apple’s software products are free. Yet it is the company’s ability to develop great software that sets them apart.
Yes, the iPhone is a great device, but it is not that different from other smartphones from LG, HTC or Samsung, in terms of features and capability.
But the iPhone has a very powerful software infrastructure behind it. It is the iOS Operating System, plus iTunes, plus iCloud, plus the App Store, and several other software components that integrate seamlessly to Apple devices, setting them apart from the rest.
Google barely makes any of its revenue from licensing its software; pretty much like Facebook who lays out its platform to be used by people to share content.
Apple, Facebook and Google hardly get any revenue from selling software.
Even Microsoft, whose main source of revenue comes from selling software, is starting to change its model by giving away its new version of its Windows Operating System, and even Microsoft Office, at no cost, while charging monthly fees for extended functionality.
There is irony in the fact that in the golden era of software, Microsoft, the most emblematic software company in the world, is shifting its focus from product-centric to service-centric. Aided mainly by software, the software giant is using cloud-based technology to manage what could be one of the most powerful subscription services in the world.
Software has evolved from being a product - a tool that companies or individuals buy to increase their productivity - to becoming the binding agent that enables products or services to be successful in the marketplace, for almost every industry.
When Industrial Giants Become Software Companies
Perhaps the most powerful way to exemplify the new software business model is to see what companies outside the software realm are doing.
Companies, like General Electric, are embracing software as a key component of their strategy. GE, a member of the S&P top 10 and probably the most iconic industrial company, opened its San Ramon, California, Software Center of Excellence (CoE) in 2011.
Marco Annunziata, Chief Economist at GE, said, “We’re no longer selling customers just a jet engine, a locomotive, or a wind turbine; we’re bringing data and actionable solutions along with the hardware to reduce costs and improve performance.”
GE estimated its portfolio of software-enabled products yielded roughly $5 billion in 2015, and expects to reach $15 billion by 2020.
As GE divests from most of its financial services assets and focus on its industrial strength, there is no doubt that its ability to integrate software into its portfolio remains pivotal. Or, as Jeff Immelt, GE Chairman and CEO said to a room packed with GE executives, clients and partners 5 back in October 2014: “If you went to bed last night as an industrial company, you are going to wake up in the morning as a software and analytics company.”
Software: the Binding Agent for Success
In a fast-moving business environment, GE has shown it has the agility to remain relevant throughout the years. When an industrial giant declares itself as a software company, it is safe to assume that indeed, software has entered the big leagues.
Software has evolved from being a product to becoming the binding agent that enables products or services to be successful in the marketplace, for almost every industry.
