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Digitization's tectonic shift in software value

The industry is dramatically changing, just as American industry did in the 1790s. We'll get through this rough patch, just as they did, but it's going to be a tough slog.


Reading T.J. Stiles' excellent "The First Tycoon," I came across a passage that reminded me of the software industry today. Stiles describes the turmoil and opportunity that greeted Cornelius Vanderbilt, the American shipping and railroad magnate, as he navigated the 1790s, a turmoil that has much to say about our world today:

Rochefoucauld-Liancourt noted the progress of this transformation in two telling observations in the 1790s: "They deceive themselves very much who think that pure republican manners prevail in America," he wrote, pointing out how the citizens painstakingly differentiated between the ranks of society. "In balls, concerts, and public amusements, these classes do not mix; and yet," he added in amazement, "every one calls himself, and is called by others, a gentleman."

It is the image of a society in the midst of tectonic change. An older, stratified idea of the world was being torn up by political radicalism erupting out of the Revolution, and by a new social dynamism linked to the surging economy. Once-deferential artisans wanted to serve in public office themselves. Average Americans were less and less willing to passively follow the old elite, as they had for so long.

It was a time when the world lunged forward, but with a foot constantly groping backward to the old-world establishment. We see this in open source as the industry strives toward service-based models but keeps a firm grip on old maintenance revenue models to help bridge the gap between the future and the past.

It's not simply open-source revenue models, but also the sorts of products that we build. IBM's Savio Rodrigues correctly points out that "competing by 'doing what Microsoft does, only cheaper'" is a losing proposition for open-source companies.

Sure, Microsoft got away with creating two massive businesses (Windows and Office) by copying its competitors and out-executing, but even Microsoft doesn't get a free pass anymore. Have you seen how its me-too offerings on the Web have fared? Weak.

This digital upheaval is having a widespread impact beyond software. Record labels, newspapers, health care, and other industries are being overrun by digitization. At some point, we'll get past this in-between phase and a new era of digital prosperity will ensue. As with Vanderbilt, however, we'll need to be careful that our exuberance for income doesn't get carried away into monopoly.

But for now, we may demand to be equals of old-world software businesses but the reality is that very few--Google, and maybe Facebook--companies have figured out how to make a lot of (profitable) money in the new digital economy.

We've still got a tough slog ahead.

Follow me on Twitter @mjasay.