Ben Thompson had an interesting piece recently thinking through what ingredients make up a “tech” company in today’s market. The term has been used for a long time somewhat interchangeably with “startup” since the 2000 tech boom era. The context of the article was to compare companies in the physical space like WeWork and Peloton to more traditional pure tech like Salesforce or Atlassian. He came up with this excellent list of descriptors to define what classifies a company as “tech”:
- Software creates ecosystems.
- Software has zero marginal costs.
- Software improves over time.
- Software offers infinite leverage.
- Software enables zero transaction costs.
It’s a thoughtful analysis. I liked these comments on the Microsoft’s transformation from boxed software to subscription pricing. They were able to evolve along with shifting sands of the market to stay competitive in software, leveraging all of the points above:
Microsoft, meanwhile, was able to convert its up-front software investment from a one-time payment to regular payments over time that were not only perpetual in nature (because to stop payment was to stop using the software, which wasn’t a viable option for most of Microsoft’s customers) but also more closely matched Microsoft’s own development schedule.
This wasn’t a new idea, as IBM had shown several decades earlier; moreover, it is worth pointing out that the entire function of depreciation when it comes to accounting is to properly attribute capital expenditures across the time periods those expenditures are leveraged. What made Microsoft’s approach unique, though, is that over time the product enterprises were paying for was improving. This is in direct contrast to a physical asset that deteriorates, or a traditional software support contract that is limited to a specific version.
Today this is the expectation for software generally: whatever you pay for today will be better in the future, not worse, and tech companies are increasingly organized around this idea of both constant improvements and constant revenue streams.