Comment by jofer | Hacker News Reader

Comment by jofer | Hacker News Reader

If software is the new oil, be prepared for a wild ride. The oil industry is notorious for decade-scale cycles of over-hiring and then layoffs and under-hiring, rinse-lather-repeat.

Regardless, it's a good analogy, but be careful how far you take it. There's a _very_ important difference between the energy and other major industries. It's a difference that the software industry shares, but in the opposite extreme: The amount of capital needed to do business.

The energy industry is notoriously capital intensive. For my employer, a project has to be over 250 million to be considered a significant project. We have a _lot_ of those, including multiple projects in the 10-50 billion range. Sure, I work for a very large company, but even a "mom and pop" oil company (there are a lot, actually) needs tens to hundreds of millions to get started.

By contrast, the software industry prides itself on being able to get an initial product out the door with essentially no other investment than time.

At any rate, it's a fine analogy, but keep in mind that the oil industry is _very_ focused on building _big_ infrastructure. In that sense, oil companies have more in common with independent nations than with other companies. It's something to think about, at any rate.

"If software is the new oil, be prepared for a wild ride. The oil industry is notorious for decade-scale cycles of over-hiring and then layoffs and under-hiring, rinse-lather-repeat."

We've already been through one. We may be on the high side of another right now. I think the mechanisms are sufficiently different from the oil world that comparisons aren't too helpful, though; the presence of some form of negative feedback in the system is often sufficient to produce oscillations. The negative feedbacks are quite different in character even if the results are the same at a sufficiently high level of abstraction.

(I'm not sure that we're in a "bubble" in the 1999 sense that people worry about, but still, if the economy ever becomes healthy again and interest rates go up, software will cease to be the only investment people can make that has any chance of paying of, which will mean that even without a "collapse" the investor money flows may dry up relative to today. However, I think the industry has a greater focus on real profits today, which will buffer the industry substantially vs. 1999. Yeah, we talk about the hyper-growth eyeball-selling companies, but we talk about they partially because they are the exception; there's a lot more "real value" companies out there right now.)

  I'm not sure that we're in a "bubble" in the 1999 sense 
  that people worry about,

I think the scale may be different but we definitely are in an artificially stimulated economy. The effects will only be seen post Fed's interest rate hike. And the way they are shying away from doing so makes me feel that the market is not ready to stomach that.

The access to cheap money has brought in a lot of players into the market who otherwise would have been sidelined. I think it's not only evident in the startup/unicorn sector but quite so in the building/construction sector as well. I see all around me skyscrapers & apartment complexes being built in an unprecedented rate and people buying half a million dollar+ houses where quarter of a million was too high (as you can see I'm not in Cal).

* In that sense, oil companies have more in common with independent nations than with other companies.*

This is no joke. I grew up around big Oil coming from Houston. There was a joke that Chevron effectively had the second largest combat navy in the world because of how many resources they devoted to platform and tanker defense.

Oil is high cap-ex, low op-ex, as labor costs are relatively cheap. Software is low cap-ex, but once you've created a prototype and need to hire people to build a business on top of it, op-ex becomes expensive.

I think you are correct relative to each specific industry, i.e software projects require more developers and server space at scale so they cost more to run BUT, that opex is low relative to the energy industry.

Tools and automation get better while all computer resources become less. oil operating costs likely dwarf a comprable SASS conpany in operational expenses.

edit

to clarify, opex in software becomes more expensive in aggregate. i can't think of a good business that has dropping opex as it scales except maybe Enron or a chainmail referral company. Energy companies do have high barriers to entry with a much lower opex after infrastructure has been developed, but software isn't neccesarily the opposite. If we compare a built out production application, outside of beta, with a decent userbase and its core purpose/features implemented, with a nuclear plant or oil refinery, the costs to rub the app is almost certainly lower than the energy comps and could possibly have opex held fairly linear relative to growth.

Oil is low op-ex compared to its cap-ex. I don't have numbers to back it up, but I'd argue software companies' op-ex is still far cheaper than oil's.

Oil production and infrastructure maintenance aren't cheap. It's not like we just turn on the taps after the wells are drilled. However, labor is cheap, even in the software industry.

> However, labor is cheap, even in the software industry.

I think by this point we're accustomed to dealing with large software players who have scaled their businesses to the point where labor cost is indeed marginal to overall profit picture.

Back in the days attempts to build a small-scale software company (local Web design firm) or even a medium-scale software business (seller of compilers, industry-specific tooling, shareware) basically broke down because of unfavorable economics.

So we're dealing with a bit of survivor bias here - smallish and medium software firms for whom labor was a major cost center are either out of business, commoditized or both. In energy business, while the large companies still enjoy large budgets and economies of scale, it's still quite possible to be a small to medium size player and enjoy a steady cashflow.

The other significant difference is that oil can be owned by corporations (around the world) or sovereign states. Whereas software is almost exclusively owned by a couple big corporations out in California.

Reply on news.ycombinator.com