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.
"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."
We've already been through one. We may be on the high side of another right now. I think the mechanisms are sufficiently different from the oil world that comparisons aren't too helpful, though; the presence of some form of negative feedback in the system is often sufficient to produce oscillations. The negative feedbacks are quite different in character even if the results are the same at a sufficiently high level of abstraction.
(I'm not sure that we're in a "bubble" in the 1999 sense that people worry about, but still, if the economy ever becomes healthy again and interest rates go up, software will cease to be the only investment people can make that has any chance of paying of, which will mean that even without a "collapse" the investor money flows may dry up relative to today. However, I think the industry has a greater focus on real profits today, which will buffer the industry substantially vs. 1999. Yeah, we talk about the hyper-growth eyeball-selling companies, but we talk about they partially because they are the exception; there's a lot more "real value" companies out there right now.)
I'm not sure that we're in a "bubble" in the 1999 sense
that people worry about,
I think the scale may be different but we definitely are in an artificially stimulated economy. The effects will only be seen post Fed's interest rate hike. And the way they are shying away from doing so makes me feel that the market is not ready to stomach that.
The access to cheap money has brought in a lot of players into the market who otherwise would have been sidelined. I think it's not only evident in the startup/unicorn sector but quite so in the building/construction sector as well. I see all around me skyscrapers & apartment complexes being built in an unprecedented rate and people buying half a million dollar+ houses where quarter of a million was too high (as you can see I'm not in Cal).
* In that sense, oil companies have more in common with independent nations than with other companies.*
This is no joke. I grew up around big Oil coming from Houston. There was a joke that Chevron effectively had the second largest combat navy in the world because of how many resources they devoted to platform and tanker defense.
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.
I think you are correct relative to each specific industry, i.e software projects require more developers and server space at scale so they cost more to run BUT, that opex is low relative to the energy industry.
Tools and automation get better while all computer resources become less. oil operating costs likely dwarf a comprable SASS conpany in operational expenses.
edit
to clarify, opex in software becomes more expensive in aggregate. i can't think of a good business that has dropping opex as it scales except maybe Enron or a chainmail referral company. Energy companies do have high barriers to entry with a much lower opex after infrastructure has been developed, but software isn't neccesarily the opposite. If we compare a built out production application, outside of beta, with a decent userbase and its core purpose/features implemented, with a nuclear plant or oil refinery, the costs to rub the app is almost certainly lower than the energy comps and could possibly have opex held fairly linear relative to growth.
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.
> 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.
The other significant difference is that oil can be owned by corporations (around the world) or sovereign states. Whereas software is almost exclusively owned by a couple big corporations out in California.
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.
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.
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.
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.
Yes and right now the industry is trying to create more and more programmers by pushing schools, promising riches, etc. just like the oil industry has been experimenting with various ways of extracting as much oil as possible. Wondering what the side effects equivalent to environmental pollution are in this case...
>Wondering what the side effects equivalent to environmental pollution are in this case...
Just like pollution from the fossil-fuel industry, you can pick high-intensity problems that are restricted to the areas nearest the source, or low-intensity problems spread over the whole country/world. For example, the housing pressure in SF/SV is very high intensity but affects only a small part of the world; non-STEM high school and university departments losing prestige and/or funding is less intense in any one place but more widely distributed.
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.
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.
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,
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.
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.
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.
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.
Sure, but the debate is about software as critical value generator versus software as a cost center.
It's like starting with observation that no business nowadays can run without email, and therefore building an email client and a server for business is the way to make it big in the software industry.
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.
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.
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.
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.
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.
> AWS reported an operating income of $521m during Q3, which is almost on a par with the amount brought in by its parent company’s entire North American online retail business ($528m).
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.
this is not amazon strategy to ever get rid of the ecommerce business.
Amazon strategy is to become a leader in many fields, they got lucky and envisionned the potential of cloud early, for commerce of goods it is a thousand year old industry with big competition from all other the world, their goal is to cut costs, not to care about short term returns and once other businness collapse due to prices cuts that they cant folllow, then amazon will be the only leader in commerce and will rule the price of pretty much everything that is traded in the world.
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.
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".
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).
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.
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.
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.
> 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.
I guess saying 'oil' is being a bit too specific. It is more like the 'energy' that drives the modern economy? and that is sold and you find new avenues everyday of collecting(producing) it. But yeah, it digresses a bit too much from this post I guess.
Yeah but we then assume the data is there and exists with all the context intact too. Big Data is a one way mirror into what's happening, but this just results in watching but not being able to take part. It's a one-way operation like calculating a prime
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.
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).
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.
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.
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.
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.
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.
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."
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.