June 12, 2019

We’re on the Edge a Software Boom. We Owe It to the Digital Products, Not Just the Productivity They Create.

Last week’s article in The Wall Street Journal, “If the Economy Booms, Thank Software,” highlights the rapid shift towards software investment to spur business growth. The article focuses mainly on productivity
as the driver of this growth. In doing so, it misses the point that the
software itself is now the product - the company’s unique value
proposition.

In the first quarter of 2019, the article points out, American
companies’ investment in software exceeded investment in
information-technology equipment for the first time, illustrating a
significant shift from physical to digital products. Software
programming tools and internet-based services have “digitized everything
from phone calls and cars to retailing and film distribution.”
Companies who are selling these digitized products and services are
reaping the rewards.

With a software boom imminent, digital product development and
strategy are top of mind for businesses looking to thrive in today's
shifting economy. The key to driving the exponential growth associated
with this digital age is understanding that the true returns do not come
from improving productivity – in essence, saving pennies. Rather,
exponential returns come from investing in digital products and services
- which create brand new dollars. The characteristics inherent in
digital products, namely their limitless distribution and network
effects, provide for nearly infinite potential. While efficiency is
indeed important for any business, it can’t provide the transformation
that a digital offering can. Companies that view digital products as
goods of value – and leverage their limitless distribution for profit –
will see the greatest growth.

What we can learn from the rising stock prices of tech companies is not a lesson about productivity, as The Wall Street Journal
article implies. The lesson is that the focus is increasingly shifting
to commoditizing digital products versus physical products. Digital
assets (i.e. Apple), digital real estate (i.e. Google) and digital
business models (i.e. Amazon) are driving the economy now. But it’s not
because these digital products and models are making us more productive.
It’s because software is creating new concepts and adding new value
that is creating new markets.

Starbucks, for example, didn’t explode because it saved pennies by
predicting maintenance issues and monitoring coffee machines; Starbucks
exploded because it embraced digital payments and mobile ordering. In
other words, they digitized a physical product and, essentially, devised
a new, mass-market digital coffee-selling model. Netflix, when it
replaced physical DVDs with its movie streaming business model, saw
incredible growth. In fact, CNBC found that a $1000 investment in Netflix stock at the launch of its streaming service in 2007 would be worth more than $90,000 today.

Instead of investing in internal systems that will increase
efficiency, companies should be focusing on customer-facing,
revenue-producing products. The true software boom will happen for the
companies that create dollars, not save pennies – and recognize that
while productivity is important, digital products are the true, and
valuable, “goods of the future.”