Marc Andreessen famously said that “software is eating the world.” While I certainly agree with Marc that software companies are redefining our economies, I believe that much of that technological shift is being driven by data. So, is the value of a business in the data, or in the software? I believe the value is increasingly more in the data, and not the software. Let’s investigate why:
Netflix provides a great example of a data-driven, customer-centric company. By introducing streaming video, its software “ate” the traditional DVD business. But Netflix soon realized that its future wasn’t in the medium of delivery — it was in the wealth of data generated simply by people using the service. The day-to-day data generated by Netflix viewers provides a crucial ingredient to competing in the marketplace and defining the company’s mission: Improving the quality of the service.
To that end, Netflix uses passive data — the information gathered quietly in the background without disrupting users’ natural behaviors — to provide TV and movie recommendations, as well as to optimize the quality of services, such as streaming speed, playback quality, subtitles or closed captioning. Of course, Netflix subscribers can contribute active feedback to the company, such as movie reviews or feedback on the accuracy of a translation, but the true value of Netflix’s data is in the quiet, zero-effort observation that allows the company to optimize experiences with no friction or disruption to regular user behavior. In fact, the company even hosted several competitions to invent better algorithms for user ratings, with a winning prize of $1 million.
Within very saturated marketplaces, data is also becoming a key differentiator for some companies. For example, when Google first started, its value was almost entirely centered around the quality of its PageRank algorithm, or its “software.” But Google did not rest on the laurels of having good software, and it prioritized data-driven insights as the future of the company.
Consider Google’s Waze, the world’s largest community-based traffic and navigation app. Waze relies heavily on both active consumer input and passive location-based data, combined with a sophisticated routing algorithm. The routing algorithm alone would not be enough to differentiate Waze from the other navigation systems of the world. Consumers are demanding more accurate maps and real-time traffic information, which could not happen without the use of data.
The future of software
There is another element in the rising importance of data: Not only is the sheer amount of consumer data growing, but software is simultaneously becoming much easier to build. Developers can leverage new software programming tools, open source and Internet-based services to build more complex software in less time. As a result, the underlying intrinsic value of software companies is diminishing.
Netflix and Google are still disruptive companies, but no longer primarily because of their software — it’s their ability to use the data their customers produce to extend their engagement with customers. Their actual software is increasingly being commoditized; recommendation engines and navigation software both exist in open source, and are no longer trade secrets. Customer data has proved itself immutable and irreducible as it comes more clearly into focus through interactive application usage.
Tomorrow’s applications will consume multiple sources of data to create a fine-grained context. They will leverage calendar data, location data, historic clickstream data, social contacts, information from wearables, and much more. All that rich data will be used as the input for predictive analytics and personalization services. Eventually, data-driven experiences will be the norm.
And this basic idea doesn’t even begin to cover the advances in machine learning, artificial intelligence, deep learning and beyond — collectively called “machine intelligence.” Looking forward even more, computers will learn to do things themselves from data, rather than being programmed by hand. They can learn faster themselves than we’d be able to program them. In a world where software builds itself, computers will only be limited by the data they can or cannot access, not by their algorithms. In such a future, is the value in the software or in the data?
As value shifts from software to the ability to leverage data, companies will have to rethink their businesses, just as Netflix and Google did. In the next decade, data-driven, personalized experiences will continue to accelerate, and development efforts will shift towards using contextual data collected through passive user behaviors.
Companies of the future have a lot on their plates. More than ever, they’ll need to adapt to all types and formats of data (closed, open, structured and unstructured); leverage that data to make their product or service better for users; navigate the gray area around privacy concerns; and even reconsider the value of their intellectual property derived from software. They’ll have to do all this while providing more contextualized, personalized and automated experiences. In the future, “data-centric” will spell a win-win situation users and businesses alike.
Dries Buytaert created Drupal, an open source content management platform, in his dorm room. The platform has since grown to power one in 50 of the world’s websites, and has captured a passionate and active developer base. Dries is also co-founder and CTO at Acquia, a company providing enterprise software for websites and commerce. Reach him @dries.
This article originally appeared on Recode.net.