The rise of the software conglomerates.
Software is eating the world. Over the past decades, software markets have proved to be immense and the barriers to creating new software have gone to zero; still, reaching scale has stayed as difficult as before. This will lead to a new breed of companies: software conglomerates.
To reach massive scale as a software company you need to:
scale engineering and infrastructure
scale an international sales organization
The very few organizations that are able to build these two assets will then aggregate other products.
Conglomerates nailed the 20th century.
In the old world, the formula to build a product was "easy". Start with an idea, get money from banks, manufacture your product, advertise via mass media, sell through retailers, make a profit, repeat. Banks, the media and retailers were the gatekeepers and they became incredibly rich.
For those making products, becoming huge meant needing to master production at scale and international logistics, as well as finding leverage to use on the gatekeepers. That led to conglomerates.
P&G is the best at producing and selling household goods
L'Oréal is the best at cosmetics
Nestlé is the best at food
ABInbev is the best at beer
LVMH is the best at luxury goods
Aggregating more brands under one roof led to a positive flywheel. The larger your distribution network, the higher the prices you can afford when buying new companies (especially because you’ll increase revenues more than any other potential buyer). Plus, within a conglomerate your companies share the same culture, seeing as they already sell similar products: it becomes a no-brainer for smaller brands to accept being acquired.
The Software House of Brands.
I believe the same consolidation is going to play out in the software industry. Companies will execute buy & build strategies and leverage their incredible access to the market:
Microsoft is the best at scaling and selling enterprise software (Github)
Salesforce is the best enterprise SaaS (Slack)
Twilio is the best at APIs (Sendgrid, Segment)
IBM is the best at software servicing (Redhat)
Stripe is the best at payments
Facebook is the best at social
Looking at it like this, it’s no surprise that Microsoft rather than Google bought Github.
Even companies that only have good market access will also start aggregating software products - for example, there’s now McKinsey which has built a portfolio generating $100M in annual recurring revenue. But that kind of player will be restricted to sub-scale software, simply because they don’t have the knowledge regarding infrastructure and scale and so their acquisition press releases don’t get to include things like “will get access to Azure”.
The future of software
No-code, new coding languages, better frameworks, open source libraries, low initial infrastructure costs, and compounding knowledge on how to build software products have empowered millions to build new software products.
Large organizations no longer have an edge over those millions of entrepreneurs when it comes to finding product market-fit. They will focus their efforts on infrastructure and distribution, aiming to buy them out instead. Again, this is already happening: the last non-infrastructure product Google built was Gmail; but they acquired Android, Youtube, Nest and others.
Buckle up, because these organizations will keep getting larger and larger.
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