More than a decade ago, Internet entrepreneur and venture capitalist Marc Andreessen proclaimed that “software is eating up the world.”
Winner, Andreessen I have written In The Wall Street Journal, it will primarily be “an entrepreneurial technology company that has invaded and overturned an established industry structure.”
His essay was a distillation of articles of faith that have been held for many years in Silicon Valley.
Obviously, some traditional businesses such as advertising and retail are backed by software-fueled companies such as the new giants of the corporate environment, Google, Facebook and Amazon.
But according to James Bessen, executive director of the Boston University School of Law’s Technology and Policy Research Initiative, the story of software is very different.
In his new book, Mr. Bessen disagrees with what he calls the “destructive myth.” He claims that large companies in an industry are building complex software systems to manage sales, marketing, operations, and product offerings that are essentially competitive.
He argues that the acquisition of this software by large corporations helps explain increased economic concentration, increased inequality, and slowed innovation.
“This is a wide range of economies, far beyond the handful of big tech companies in Silicon Valley,” said Bessen. “Software has advantages that economists haven’t really considered yet. Today, software isn’t accelerating creative disruption. Software is suppressing it.”
Mr. Bessen brings a different perspective to his economic analysis. A former software entrepreneur in the personal computer era, he founded and ran an early desktop publishing software company for 10 years. He made millions of dollars when he sold a venture to a large company in 1993. It was a pocket change by the standards of today’s tech start-ups, which meant Mr. Bessen’s career freedom.
Later, Bessen contacted Eric Maskin, a former roommate at Harvard University who became a professor of economics at his alma mater. Mr. Bessen explained that economists have ideas about the software industry that might be of interest to him, Muskin recalled. They also wrote a research treatise on why patents often oppose software innovation, an industry that thrived when information was shared.
The collaborative research helped Mr. Bessen begin his scholarly career. His research focuses primarily on the economics of innovation and the broad impact of technology. The title of his book, “New goliath: How Companies Use Software to Dominate the Industry, Kill Innovation, and Undermine Regulations ”(Yale University Press) suggests harsh critics. But his past research extends to the technical side as well.
In 2015, amid growing concerns that automation was a job killer, Bessen published a treatise investigating the impact of computer automation on 317 occupations from 1980 to 2013. “
Bessen himself is an entrepreneurial outsider in the field of economics. He has built an unorthodox career in academia, gradually becoming more prominent over the years, doing one interesting research project at a time. He became respected in the business world without his PhD.
“Jim is not a professionally trained economist, so he has his own perspective,” said Muskin, a former college roommate who won the 2007 Nobel Prize in Economics.
The fusion of data analysis and narrative case studies is a hallmark of Bessen’s work. He is a business historian and a fluid writer. His book includes a description of the evolving use of software in many industries, including automotive, banking, retail, insurance, garbage transportation, logistics, and trucking.
Mr. Bessen’s view Increased market concentration, Increasing inequalityAnd delay innovation, Productivity Echo the ones of other researchers. However, most of these surveys are high-level economic surveys.
His focus is to explore the industry and individual companies in more detail in search of the underlying technology engine behind a wide range of economic trends.
Chiara Criscoolo, an economist at the Organization for Economic Co-operation and Development, said: “It provides far more mechanics of why we got to the place we got.”
The mechanism is what Bessen calls “proprietary software.” He broadly defines it not only as code, but also as organizational changes that companies make to leverage the data, employee skills, and technology they collect about their customers and businesses.
His proprietary software measurements do not include spending on standard business software from companies such as Oracle, SAP, and Salesforce. Instead, companies invest in custom software from those suppliers and other suppliers, as well as their applications. He states that some software may be open source code that is available for free, but the entire system is closed.
Bessen’s analysis is based on government and industry data and is supplemented with information on work and salary estimates from Lightcast, a labor market research firm recently renamed from Emsi Burning Glass. Total investment in proprietary software increased 74% to $ 239 billion over the decade to 2019, the latest government statistics. According to Bessen, large companies are using this technology to manage complexity and gain a competitive advantage.
Large banks use software and customer data to customize the provision of credit cards to individuals in ways that small rivals cannot. Wal-Mart and Amazon use their own software to streamline logistics and personalize marketing. Google and Facebook use it to target ads.
Insurance companies use this to tailor and sell health insurance to the individual. Pharmacy benefit management companies use this to navigate the complexity of drug reimbursement plans. And the list goes on. In Bessen’s view, the evidence of the benefits of proprietary software is abundant and compelling.
Bessen estimates that software-enabled winners in the industry are more productive than their smaller rivals and pay an average of 17% more for the same job.
But they claim that their success comes at a huge price. The competition is suffering. Since the late 1990s, the chances of dismissing a dominant company (usually one of the top four companies by industry sales) have been cut in half. And he argues that technology is spreading and being adopted throughout the industry more slowly than before, exacerbating the trend of inequality and market concentration.
The answer to his policy is not to dissolve the dominant companies, but to open them up little by little or forcibly. For example, IBM separated software from its hardware business in 1969 under antitrust pressure. The move has led to the prosperity of the software industry, Bessen wrote.
He argues that today’s proprietary platforms can be opened through software platforms and access to collected customer data. This is a prescription that European and American policy makers are considering.
Mr. Bessen refers to the seemingly unlikely protagonist, Amazon. By opening up the computing infrastructure, he said, the cloud computing industry was born. “In a way, Amazon is a model of what we want other companies to do,” he said, but with proper regulatory oversight.
One of the criticisms of Mr. Bessen’s analysis is that he is observing a wave of technology adoption that still has a long way to go, and his concerns are exaggerated.
“These superstar companies are very productive,” said President Robert Atkinson. Information Technology Innovation Foundation, Policy Research Group. “The question is why other companies are still less productive,” he added, adding that they are likely to catch up.
And companies that seem to be well-established are unaffected by truly innovative, tech-savvy newcomers. For example, Amazon will challenge Wal-Mart in retail, and Tesla will take over the Detroit car maker.
Both are exceptions, but Bessen argues that they partially support his claim. He said both are strong companies, primarily because of their excellent design and use of complex software.
“Technology,” says Bessen, “playing a different role than ever before. It’s less confusing than trenches.”
