A Review of ‘Why Software is Eating The World’: How have the companies fared?

Six and a half years ago in his seminal essay “Why Software Is Eating The World”, Marc Andreessen theorized “…software companies are poised to take over broad swathes of the economy.” This theory has indeed proven out. Andreessen also stated that “Many of the prominent new Internet companies are building real, high-growth, high-margin, highly defensible businesses.” This statement has held not held up as well outside of the famed FAANG.Below, we synopsized how FAANG and 5 other one-time (and a couple still) high fliers have fared since 2011.CAGRs based on growth from 2011 to 2017. Sources: Statista.com, Macrotrends.net A Review of ‘Why Software is Eating The World’

Industries Eaten

High Growth

High Margin

Defensibility

Completed:

• Preceding social (Myspace)
• Traditional advertiser platforms

In Process:

• Snapchat via Instagram
• Skype via Whatsapp

Predictions:

• Whoever starts challenging in psychographic data
• 49% global revenue CAGR
• 118M subscribers growing at 25% YoY
• 35% of 2017 subscriber growth came in a record Q4 of 8.3M new subscribers
• Absolutely crushing the net margin game at 39% and improving
• 10.4% net margin expansion CAGR
• Very profitable growth at scale
• Product diversification across B2C and B2B
• Choice Acquisitions: Instagram (success), WhatsApp (TBD), Oculus (TBD)

Industries Eaten

High Growth

High Margin

Defensibility

Completed:

• Borders/Barnes & Noble
• Niche big box retail

In Process:

• Traditional groceries via Whole Foods acquisition
• Last mile delivery via Prime, Shipping, Lockers

Predictions:

• Gobbling up any retail(like) purchasing opportunity for its customer base
• 24% global revenue CAGR ($48 to $178BN)
• 8.5x Amazon Prime member growth from 2013 to 2017
• 1.7% net margin in 2017 (after years of intentional losses)
• 4.5% net margin expansion CAGR at massive scale with the addition of higher margin offerings beyond B2C online retail
• Bezos’ Flywheel of Fury: E-commerce, Digital Infrastructure, Membership, Content, Logistics/Fulfillment, Health Insurance (?), Space

Industries Eaten

High Growth

High Margin

Defensibility

Completed:

• Personal computing: Dell, Gateway
• Tradition music distribution

In Process:

• Uncertain

Predictions:

• Netflix acquisition for continued content moat, which has been threatened
• $239BN in revenue growing at 11% a year
• It may be unfair to give Apple an X, but the truth is iPhone sales growth has stalled
• 21% net margin and a free cash flow generating machine
• (3.2%) net margin contraction CAGR
• $163BN in cash to put to work
• Years of product design, manufacturing and supply chain experience at enormous scale
• Fanatically loyal customer base and premium product positioning

Industries Eaten

High Growth

High Margin

Defensibility

Completed:

• Blockbuster

In Process:

• Traditional production studios and cable service providers

Predictions:

• Netflix will face continued competition for in-house developed and owned content. Apple acquisition makes sense for budget and scale.
• 24% revenue CAGR
• Global ad revenue grew from $3BN to $40BN
• DAU growth from 457M Q3 2011 to 1.4BN Q4 2017
• 5.7% net margin on almost $12BN, not shabby.
• Net margin has contracted significantly since peak of 8.65% in Q2 2011.
• Leader in content creation in the new content world
• Ability to increase pricing for future margin expansion
• International customer base now >50% of total
• Brand: Who doesn’t think Netflix when they think watching shows/movies?

Industries Eaten

High Growth

High Margin

Defensibility

Completed:

–Preceding search engines

-Traditional advertiser platforms

In Process:

– Apple’s smartphone dominance via Android

Predictions:

• 19% revenue CAGR, topping $100BN
• 1.2BN Gmail users in 2017, 23% CAGR, 20% of global email market share
• Generating more than $10BN in annual profit
• Significant net profit contraction, (12.6%) CAGR as the ads business competition has heated up and Google has been displaced by FB, also shift to mobile
• Search dominance: 87% web share; 53% mobile share, up from 43% 2015
• Android is the OS for mobile. Great second act to search/ads.
• G Suite in the small business hizzy
• Market and tech ready for Waymo to prove its potential

OTHERS MENTIONED

Industries Eaten

High Growth

High Margin

Defensibility

• Checking in was a concept they created.
• Years of place and intent datamay eat traditional consumer behavior research.
• 50% YoY revenue growth 2015-2017
• 3BN monthly visits, more than double over last year
• Not profitable as of 2017
• Foursquare has shifted nicely from a B2C “toy” into a 3-headed B2B offering spanning advertising, enterprise data and developer tools (Pilgrim SDK)

Industries Eaten

High Growth

High Margin

Defensibility

• Groupon ate daily deals, then the whole industry got spit out.
• 10% global revenue CAGR
• Global revenue grew from $1.6BN to $2.8BN
• Net margin of 0.5% for 2017, so Groupon made $14M on $2.8BN in revenue
• Easily replicated. Think we all know what happened with daily deals and flash sales
• Scale didn’t help as was race to the bottom without any sort of vendor or user lock-in

Industries Eaten

High Growth

High Margin

Defensibility

• Came to market after iTunes, Pandora. Delighted users with discovery.
• Could eat traditional record labels, booking, and ticket sales platforms.
• 46% global revenue CAGR. 1.7x more revenue than Twitter.
• 68% paid subscriber CAGR, now at 70M
• 21% gross margin
• Ability to control and expand margins not proven. No natural economies of scale.
• Apple, Amazon, Google all want this. Question is: how badly?
• How far ahead is Spotify algorithmically for its users and musicians?

Industries Eaten

High Growth

High Margin

Defensibility

• First to do real-time, many to many communication, but that didn’t eat anything.
• 69% global revenue CAGR
• Global revenue grew from $106M to $2.4BN
• Stalled MAU growth over last 3 years
• Net loss of $110M in 2017
• Has not proven out. Widely noted that Twitter is looking for its next act and has been for a few years now.

Industries Eaten

High Growth

High Margin

Defensibility

• Ate platform-driven gaming. Got served by mobile. Now, back in the fray. That said, Nintendo and PlayStation are still very much a thing, so there’s no Blockbuster story here.
• (5%) global revenue CAGR
• Global revenue has dropped below $1BN
• 14% EBITDA margin in Q2 2017, halfway to 30% margin target
• The dangers of being reliant on one platform (Facebook) almost killed Zynga.
• They’ve shifted to mobile, which now accounts for ~90% of sales, and is growing 30% YoY. How defensible their offerings are long-term is still undetermined.

ConclusionsFAANG have sharpened themselves into market dominating growth machines with highly diversified offerings and business models across multiple billion dollar opportunities. They are ever-evolving while continuing to improve their core businesses.  In 2017, FAANG stock gains ranged from 33% (Google) to 56% (Amazon), compared to a 28% gain for the Nasdaq at large. FAANG-themed ETFs popped up in earnest 9 months ago. ETFDB.com now lists 35 ETFs describing themselves as such.The other companies Andreessen referenced have been a mixed bag, with Foursquare and Spotify being the exceptions. When written, many of the companies mentioned were still heavily B2C and early in their B2B business model and platform diversification lifecycles. The core commonality is their shared struggle to find and seize upon their “Second Act”.