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.