Software is Eating Labor

Full Title

Software is Eating Labor

Summary

The episode argues that software's next major frontier is the $13 trillion U.S. labor market, a prize significantly larger than the current SaaS market. This shift is driven by AI's ability to move beyond digitizing processes to performing end-to-end tasks, enabling outcome-based software and new pricing models.

Key Points

• The U.S. labor market, valued at $13 trillion, represents a vastly larger opportunity for software than the current $300 billion SaaS market, signaling a fundamental shift in software's target.
• Historically, software's progress involved digitizing analog processes, like converting filing cabinets to databases for travel, sales, manufacturing, and healthcare records, but humans still performed the core tasks.
• The advent of AI is enabling software to move from merely organizing information to performing entire jobs, leading to a potential disruption of traditional SaaS business models that rely on per-seat pricing.
• New outcome-based pricing models are emerging, where software companies are paid for the results they deliver rather than the number of users or features, as seen in pilot programs like Zendesk's in New Zealand.
• AI is significantly expanding the market for software in industries with intermittent demand or demoralizing jobs, such as customer support during peak seasons or collections, where human labor is impractical or undesirable.
• AI-powered software can handle complex tasks like multi-language support, compliance, and even basic negotiations, transforming previously human-centric roles and creating new market opportunities.
• The lower cost and enhanced capabilities of AI are making previously unviable business models, like an "Airbnb for bicycles," feasible by drastically reducing customer acquisition costs and operational overhead.

Conclusion

Software's evolution from digitizing records to performing entire job functions, powered by AI, is opening up vast new markets and requiring a shift in business models towards outcome-based pricing.

The significant economic potential lies not just in replacing expensive human labor but in enabling new services and markets that were previously impossible due to cost or logistical barriers.

Venture capital's focus should be on identifying companies that leverage AI to fundamentally transform industries and make software's impact far larger than previously imagined.

Discussion Topics

• How will outcome-based pricing fundamentally change the relationship between software providers and their clients?
• What are the most significant ethical considerations as AI increasingly performs tasks traditionally done by humans?
• Beyond cost savings, what are the primary benefits and opportunities that AI-driven software offers to businesses and consumers?

Key Terms

SaaS

Software as a Service: Software licensed on a subscription basis and is centrally hosted.

AI

Artificial Intelligence: The simulation of human intelligence processes by machines, especially computer systems.

ARR

Annual Recurring Revenue: The predictable revenue a company expects to receive from its customers over a year.

CRM

Customer Relationship Management: A strategy and technology for managing all of a company's relationships and interactions with customers and potential customers.

ERP

Enterprise Resource Planning: Software systems that integrate core business processes such as accounting, procurement, project management, risk management and compliance, and supply chain operations.

Timeline