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.”