Is The Software Industry Like The Pharmaceutical Industry, Or Is Investing In It Like Developing New Drugs?

from the power-laws-baby dept

At a conference on the software industry, a panel of VCs discussed whether or not the industry is beginning to resemble the pharmaceutical industry. The argument is that life is pretty difficult for small players in both industries, as larger firms have it much easier in terms of product development and marketing. But this is true in many industries, as incumbent always players have certain size-related advantages (as well as size-related disadvantages). The defining (and problematic) characteristic of the pharmaceutical industry is that, like the movie industry, it’s hit driven. Pharmaceutical companies large and small are constantly on the lookout for the next blockbuster, and if none can be found before the existing blockbusters come off patent, then they’ll take a major hit to their bottom line. In some ways the software industry does exhibit this characteristic; take for example Microsoft, which has quite a bit riding on the success of Vista and Office 2007. But in many respects, the industry is moving away from the hit-driven model. Increasingly, software is being delivered as an ongoing service, which should smooth out the earnings of many vendors. Even software that’s not delivered this way is sold with a view towards collecting steady support and maintenance revenue in the years following the initial purchase. If you read between the lines of what the panelists are saying, they’re actually not talking about the software industry, but about their own industry, venture capital. That’s the business that resembles the pharmaceutical industry, as it’s marked by a few huge successes, with most investments ending up in failure. For every Salesforce.com that’s made a mint for its initial investors, there are many other software companies that had almost the same idea that have gone nowhere.


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Comments on “Is The Software Industry Like The Pharmaceutical Industry, Or Is Investing In It Like Developing New Drugs?”

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13 Comments
dorpus says:

Fantasy Worlds

The software industry likes to think of itself as the industry with zero startup costs, where two guys in a garage invent something over their pizza-dripping keyboards. In reality, the software industry is increasingly hopeless for anyone who does not have at least $1 million of startup money from VC’s. Also, the software industry depends almost entirely on government contracts to stay in business — but that’s a fact that nobody likes to talk about in Silicon Valley.

Meanwhile, the pharmaceutical industry is increasingly depending on biotech startups for innovation. And pharmaceuticals do have steady revenue from existing drugs. As we saw with the pet food poisoning scandal, drugs cannot just be outsourced to the lowest bidder. Pharmaceuticals have an elaborate certification process for approval to sell in particular countries.

Anonymous Coward says:

Re: Fantasy Worlds

Where do you get the idea that the software industry depend on government contracts to stay in business?

Where do you get the idea that software startup need million of dollars?

It isn’t like the tools are expensive to get. They’re rather cheap. You can often probably get state of the art softwares for zero dollars and start writing programs in no time.

You need a text editor? Use Vi. You need a complier? Use GCC and so on. And oh, did I mentioned that you can get a powerful operating system from one of these linux distribution for free(beside bandwith cost)?

While Free softwares is not about freebies, they’re often freebies. You can get some really good softwares that complete with proprietary softwares.

So yes, two guy in a garage can probably produce something really cool, provided that they have the skills and the time to do it.

dorpus says:

Re: Re: Fantasy Worlds

Where do you get the idea that the software industry depend on government contracts to stay in business?

If you live in the Washington DC area, where local media frequently quotes software industry leaders saying that 90% of their revenue come from government contracts. But I know, they don’t like to admit that stuff outside of Washington — elsewhere, they give their rabble-rousing speeches about “free markets” and “global competition”. My ass.

Where do you get the idea that software startup need million of dollars?

If you live in Silicon Valley and hear all about them VCs pumping millions of dollars into worthless companies where 25-year-olds with rich daddies are paid to goof off. And they will fabricate their rabble-rousing “corporate history” about diligent guys eating pizza and starting a company. Silicon Valley was founded as a government project, owing to a confluence of influences from big-money science projects in Stanford and Berkeley, along with NASA labs and nuclear labs.


You need a text editor? Use Vi. You need a complier? Use GCC and so on. And oh, did I mentioned that you can get a powerful operating system from one of these linux distribution for free(beside bandwith cost)?

While Free softwares is not about freebies, they’re often freebies. You can get some really good softwares that complete with proprietary softwares.

According to the rabble world view, yes. In the real world of government contracts, where reliability is paramount, places like the NSA, FBI, CIA, FEMA, FAA, etc. are not going to depend on amateur freeware. But yes, they may occasionally leak misleading “failure” stories to please the rabble and convince them that there is no all-powerful government with superefficient IT networks that can monitor citizens’ every move.

Anonymous Coward says:

Re: Re: Re: Fantasy Worlds

They’re not “unreliable” softwares, nor are they’re “freeware”.

And they’re called Free softtwares, although they are often called open source(same softwares, different descriptions and corresponding different definitions.)

See http://www.gnu.org/philosophy/free-sw.html for more details.

And also they’re not excatly amatuar either. Some developers are PAID to work on linux where they help develop the Linux kernel. The Linux kernel, GCC, and other projects all recevied commercial help from the like of IBM.

Lawrence D'Oliveiro says:

Open vs Closed Source

It is true that things are getting harder for the closed-source software business. Not only are products getting more expensive to develop, their quality also seems to be going down–look at all the problems that Microsoft Vista adopters have been reporting.

Open Source, on the other hand, is not just surviving, but thriving, and gradually encroaching into new application areas. It manages to amortize the high fixed costs of software development over a larger community, and manages to achieve scalability of support in the same way. This makes it possible to address very small markets, that are not worth the while of closed-source vendors. And in the future I think it will be shown to scale to very large markets as well.

Want an example of this in operation? Look at the transition to 64-bit platforms. The closed-source market is stuck in the chicken-and-egg situation–users don’t want to buy 64-bit operating systems without 64-bit drivers and applications to support them, but the vendors can’t be bothered spending the money needed to create those 64-bit drivers and applications until they see significant user demand.

Whereas in the Open-Source world, 64-bit software has been available for the better part of a decade, and all the portability issues are now well-understood. For typical software packages, it’s simply a matter of choosing a compilation option.

alternatives says:

Dorpus shows she's an idiot again.

In the real world of government contracts, where reliability is paramount, places like the NSA, FBI, CIA, FEMA, FAA, etc. are not going to depend on amateur freeware.

Guess that is why the Feds have dumped money into SELinux, just to waste tax dollars.

And the known reliability of Windows is why places like the Senate had machines used as part of a spam bot-net and the security reviews are all a+ ratings, Right?

Antoine Clarke (user link) says:

Drug industry is becoming several sectors

“The pharmaceutical industry” isn’t. I don’t know about software, but I do know about the cracking up of the drug sector.

There are biotechnology firms (some of them quite big), but they are looking at other markets than just drugs: biofuels and genetically-modified foods are just two examples. BTW some of these guys are playing up global warming/ecofascism issues one day (biofuels) and downplaying them the next (GM foods).

There are “blockbuster” seeking firms, but many of them are looking at a more Long Tail R&D model, with larger numbers of niche products. They have to, the ROI is getting worse and a huge slice of patents is due to expire by 2011, with nowhere near enough new blockbuster to keep the revenue stream (and R&D investment) going.

There are generic giants, who fund consumer groups in the USA and often charge higher margins than patented manufacturers do (and complain of lack of transparency!). A couple of the biggest of these in India are actually starting to invest in innovation themselves, hence the (quiet) support for Novartis’ patent fight in the Indian courts by one of the biggest generic drug firms.

Finally, you have the same break-down in the over-the-counter industry, where the major customer is not the government, or insurers, but patients themselves.

And of course, some firms cover several of these bases.

Yogesh Gupta says:

A valid analogy that offers much insight...

It was interesting to see a discussion of whether the software industry is like phrama at the Software 2007 conference. I wrote an op-ed piece (http://www.sandhill.com/opinion/editorial.php?id=113) on this topic just six months ago which was published on the Sand Hill site (the same folks who organized Software 2007).

I believe that much can be learned about the way the software industry will evolve by studying the evolution of the pharma industry. The way the eco-system of pharma has evolved, provide real insight on how the software eco-system could evolve and lets companies decide what role they want to play in it.

Alexander Werner (user link) says:

Pharmaceutical Software

As a person working for company writing custom software for US pharmaceuticals, I can comment that finding a project with pharmaceuticals is as difficult or as easy as finding project with any other company.

The point is, that IT manager risks big when giving a project to a small company even though their product is better than a big one: in any case of trouble he is an easy victim to blame. While picking up a brand name consulting -he is safe in any event.

See our products at http://www.relasoft.net/FunctionalApplications.html, they work for several clients for many years. And still, proving that they work fine is a huge challenge.

My email is on the page, please contact me with any questions.

Alexander Werner
Project Manager

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