Why services are eating the universe

On April 20, 2011, Marc Andreessen penned a seminal Wall Street Journal article entitled: “Why Software Is Eating The World.” This article is continually referenced as one of the most influential business articles of our time. Marc sets out an excellent case for why software is going to be the primary disruptive factor in business in the future. Now that we are a number of years removed from this prediction it has become clear that his predictions were spot on. Software has, and will continue to, eat the world.

In 2015, we saw another disruption that will shape how business and the global economy operates going forward. The concept that software fundamentally changes how business operates is augmented by an idea I call “Services Are Eating The Universe.”

In this new paradigm, software has already changed how we create business value for our customers, and now we are focused on fundamental business model shifts that will again change how businesses execute. Software changes are here, services-based business models are coming.

More simply put, “Services Are Eating The Universe” means that no longer are businesses going to create products, but that going forward, businesses will only create services.

The four horsemen of the services apocalypse

2016 is the right time for services to eat the universe because of Internet of Things (IoT), cloud-based storage and services, always on connections and mobility. The four horsemen of the “services apocalypse” are finally in a state of maturity where if you build a traditional product you are doomed to fail. You are already antiquated. You are building for a legacy buyer that will not be there to sustain your business long term.

These four components that are pushing the change to service-based business models:

Connection of everything (IoT)
 IoT solutions created without a service component aren’t really IoT – they are just “things.” Connectivity of items – from home locks and light bulbs to enterprise heating and cooling systems – are giving businesses new data that will allow them to create additional revenue streams based on data and services instead of just selling “dumb things.” Anyone who is selling a “connected device” that isn’t charging a subscription fee is doing it completely wrong.

Cloud storage and services speed product design requiring a services business model.
It used to take years to create a new business idea and bring it to market. With the advent of 3D printing, cloud based technologies and software as a service, it’s never been easier to build a new business idea from inception to minimum viable product in the blink of an eye. The mantra of “fail fast” has been taken to a whole new level, allowing entrepreneurs to try new aggressive business models such as shifting products to services.

The half-life of markets is so short these days and will fundamentally change how we as a country need to be investing our financial and time-based resources (but this is better left for another post).

Always-on connections eliminate the need for offline modes in most services.
Businesses run as services have been hindered by a need for always-on connections. Connectivity has finally hit the point of ubiquity, enabling service models to overtake product solutions in everything from mobile apps and gaming to traditional markets like taxi services and food delivery.

Not only is this continual connectivity changing the way we deliver products as services, it’s also changing the way we build our businesses that support these new services-based solutions. There is no longer a need for offline mode in any technology – at least not in highly developed countries and target markets. Connectivity will eventually reach third-world countries, to the point that the term “offline” ceases to exist.

Mobility inflates user demands to the moment of need.
Mobility has completely changed the power of the customer. It used to be that customers had little control in the buying cycle. There was an information asymmetry between product manufacturers and product consumers. This inequality has been erased.

In fact, it has actually shifted to giving the customer the power and control of the products and solutions. This power shift has completely changed customer demands. Customers want their value delivered in their moment of need, and the only way to deliver in the moment of need is to sell solutions as a service. The moment of need changes based on location, it changes based on timing and it changes based on user emotion.

Without services-based business models, you cannot possibly meet the changing power structure with your customers.

OPEX overtakes CAPEX

Another way to look at this paradigm shift is the fundamental change from capital expenditures (CAPEX) to operational expenditures (OPEX). Capital expenditures are the purchasing of major physical goods and assets that help a business to expand its revenue and, eventually, its profits. Operational expenditures are an ongoing cost of running and growing your business. The differences may seem minimal, but when applied to enterprise buyers, the benefits of OPEX expenditures are significant.

In contrast to capital expenditures, operating expenses are fully tax-deductible in the year that they are made. This saves money financially right out of the gate. Opex also helps you to smooth out major cash outlays in a time when your small company may not have the excess cash on hand.

OPEX operates in what I call a “pay as you grow” model. As opposed to spending $500K on a rack of compute hardware to create your business, you can now place your business into cloud services for a minimal monthly fee that grows in lockstep with your business profits.

With OPEX models, you no longer have to estimate your future capacity requirements for technology purchases and hope like hell that you don’t over or under guesstimate. You can simply use operational expenditures and not have to face the growth factor until later in time.

Finally, for the consumer, OPEX means you don’t have to outlay cash and commit to a long term investment in products that are being rethought and innovated at the fastest pace in history. Even something as trivial as a television can be turned into a service where users pay a minimal fee for a month’s usage of the content (and get the television set itself for free). An even better example is the Tesla automobile. This automobile is no longer a product – it’s really a service that gets continually upgraded from its manufacturer.

At some point in the future, as the product features are minimized in favor of additional services, it will make a lot of sense to pay a service fee only for a vehicle that is technically owned by someone else.

By this point it should be fairly clear that services are eating the universe. The more important question is, what does this paradigm shift mean to the business (and personal) world that we live and operate in?

As we shift from CAPEX to OPEX and from products to a world in which everything we do is service-based, there will be significant changes in how business and the economy operate.

Destruction of the concept of ownership

The first issue that comes to mind is the destruction of the concept of ownership. When I start to think about the future – in a services-based world – I no longer see a chance that my son (he’s 11) owns a car, a home or even many of the products he uses on a daily basis, when he comes of age.

The concept of ownership has always been directly tied to self-worth and status within society. As you get older, you accumulate “stuff” that you own and that nobody else can take away from you. Some people choose to own a lot of things and others choose to own less, but at the end of the day many people believe that what you own defines you. (I’m not going to get into existential debates on this topic, so I’ll leave it at that).

What matters to me isn’t the materialistic issues, but instead how a lack of ownership fundamentally changes our economy. Ownership directly impacts things such as net worth and financial leverage capability (via loans and collateral). Those that stop owning items in favor of the new services-based world will be at a disadvantage in the long term in investing and generating additional cash flow. This will drive a continued wedge between the “haves” and “have nots” of the world. Society must consider the implications of the shift of ownership from a political vantage point.

Products cease to exist

When services take over, products will eventually cease to exist. Everything from appliances, computers, televisions, coffee makers, home automation, beds and even thermostats, will eventually be 100 percent services-based offerings, commoditizing products and eventually racing them to a zero dollar value.

Consumers will pay a service fee for products that give them value-added services instead of paying for the product itself. They will pay by cash, and they will pay with their personal and private data. Examples include: Uber (replacing cars), Zipcar (also replacing cars), Spotify (replacing CDs), Netflix (no more DVDs), Rent the Runway (dresses anyone?), TurningArt (artwork rentals) and Pley (toys and Legos as a service?!).

Businesses will do the same. Instead of paying for computing hardware, they will rent it in the cloud (think Amazon, Rackspace and Azure). Instead of buying software, they will just use a service in the cloud, such as Expensify (expenses in the cloud), Zenefits (benefits in the cloud), Salesforce (CRM and sales management in the cloud) – I could go on forever. The point is that business will continue to engage the shift from capex to opex and, in doing so, will thoroughly embrace services eating the universe as products cease to exist.

Businesses adapt to new internal and external service models

Not only will the way businesses consume products and services shift, but the way businesses choose to create their outbound products must also adapt. The benefits of having services instead of products is in the area of real-time data and analytics on usage and metrics that will help enterprises to make strategic decisions.

Businesses will embrace shifting their outbound products to services for a couple of key reasons:

Services provide better understanding of your business trends, what sells, and where to invest in business growth.
When your customer buys a product from you there is no way to understand how they use that product, what type of emotion that product drives within the customer or even if they like the product at all.

Shifting to a services-based business model gives you insight into all of these data points and many, many more. By selling a service attached to – or, better yet, in place of – your product, you get continued engagement with your customer and a data-driven business.

Feature usage is key to investing on future product and business success. 
If you properly instrument your product and service, the insights you gather will help you continue to improve your business over time. Products include a range of features. Without a service, how do you know which features were successful and which aren’t used by your customers? What is it specifically about your product that drove its success or failure in the market?

Services business models around connected products give you insight into the usage details of your solution, which helps you better understand and empathize with your customer. You must have this capability to be successful when delivering on your customers’ needs.

Services models with low churn are an annuity; products are a one-time fee.
Money people love annuities. Would you rather invest your retirement money into an investment that will return a 50 percent increase one time in five years, or would you prefer to have a 10 percent return on your investment compounding over that same lock-up time window?

Now push that concept into infinity. The longer you plan to run your business, the better an annuity-based business model will be for you and your investors. By using a service-based business model to track the service around your offering you can keep the user churn quantity very low, essentially creating an annuity for your business.

Recurring revenue streams are valued higher by the stock market than one-time revenue models.
As an extension to the annuity-based discussion above, the stock market – and investors in general – value recurring revenue streams and annuities way higher than they do one-time sales based models.

No matter what the end goal for your business might be – acquisition, IPO or riding your lifestyle business into eternity – the valuation of your business will be important to its success (and your eventual exit). Having a multiple on revenue that is based on a services model will increase the value of your business and return a lot more money in the long term.

The change is coming… are you prepared?

The shift from products to services isn’t going to come easily. It’s not going to come quickly. It’s going to be a fundamental transition that small business, large business and even the global economy will have to come to terms with.

“I will study and get ready… and perhaps my chance will come.”Abraham Lincoln
There will be challenges along this long road to services, and these challenges will cause growing pains. Many companies will not understand the fundamental business shift until it is too late – thus fading into oblivion – while other firms will be born from their ashes and take over to continue pushing the markets forward.

I don’t pretend to know exactly what “services eating the universe” will mean to global society, the economy or specifically and directly to you, but rest assured that this shift is coming – and it’s going to change everything. Always be prepared, always be open to change and never stop learning. Do this and you will excel no matter what challenges come your way. Good luck.

By Tyler Shields (EMBA ’12), vice president of marketing, partnerships and strategy at Signal Sciences Corp.

This post was republished with permission from the author. View the original post here.