Software: Dark clouds on the horizon
In April, after more than six months of decline, the software sector regained its footing. The IGV ETF, which comprises leading U.S. software companies, rose nearly 10%. However, the relief is relative; with semiconductors posting a historic monthly performance of nearly 40%, the gap between the two pillars of the AI story has never been wider.
For software providers, any AI-related news is bad news these days. A new model, a new feature, or an X post from one of the leading AI labs—all serve as negative catalysts that immediately cast doubt on the sector’s future revenues.
A pessimistic investor’s vision might look something like this:
- In the short term, AI coding assistants are upending the labor equation in software development. Where large, coordinated teams were once required, a single developer and a suite of AI assistants may now suffice. As a result, barriers to entry will collapse, and the resulting competition will erode software providers’ pricing power.
- In the medium term, the seat-based pricing model will become obsolete. Software functions will shrink to chat interfaces, and workflows will be executed by agents—even within existing software frameworks—that operate at speeds orders of magnitude faster than human pace. The role of humans will also change. They will no longer operate the software but will supervise agents that navigate the software more skillfully than they do. This will negatively impact any service provider that has built its competitive advantage on the quality of its user interface and will necessitate a forced transition from seat-based to usage-based pricing.
- In the long term, the concept of software will transform. It is not humans who use applications; armies of AI agents will autonomously develop and operate systems on a scale that would have been unimaginable in the era of artisanal software development. The cost of producing software will ultimately boil down to the price of tokens[1], and the primary user will no longer be a human but another agent. Probably not a single software provider today is prepared for this world, and it is difficult to say who will be able to remain relevant in such a future.
However, we are still very much at the beginning of this timeline. Most software companies view the impacts of AI as an existential issue and are among the first to adopt the latest models and features. The minority of software-optimistic investors base their view on the fact that, despite steep price declines, fundamentals remain intact, and the market tends to overreact when projecting the effects of new technologies. The future of the software sector is difficult to predict, but it is clear that the AI trend may remain the most intense battleground in the coming years.
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