Seven Categories of Software

After looking at all the major RDBMS companies and the entirety of their businesses, I'm ready to expand my working definition of the "software industry" and its major elements.

Consider four categories of "general purpose" software:

1. Software that companies use (example: SAP's R/3)
2. Software that individuals use (example: Microsoft Word)
3. Software that entertains people (example: Guitar Hero)
4. Software that makes other software work (example: VMware's products)

And three categories of "specialized" software

1. Custom software (example: Accenture's consulting engagements)
2. Embedded software (example: Boeing's avionics systems for its aircraft)
3. Proprietary software (example: D.E. Shaw's trading algorithms)

A software company may participate in one or more of these categories. By my initial count, Microsoft participates in five of these categories, IBM in four, Oracle in three, SAP in two, and Activision in one.

This categorization may help with industry analysis in several ways.

First, the cost structures of companies within each category may be fairly similar, whereas the cost structures of companies across categories may be radically different.

Second, the marketing strategies of companies within each category may be fairly similar, whereas the marketing strategies of companies across companies may be radically different.

Third, each category of software is likely to exhibit its own unique business trends. For example, "software that individuals use" has been undergoing a major shift from consumer-pays to advertiser-pays, thanks mainly to Google. Another trend in this category is for businesses to adopt personal software to improve the way their employees interact with each other, with their suppliers, and with their customers.

Fourth, the answer to "what does it take to succeed?" may bear similarities within each category but differences across categories.

Fifth, this categorization provides a language for describing and analyzing the strategies of companies who participate in multiple categories. For example, it allows the assertion, "Company X believes that to be successful in Category Y, it must also participate in Category Z." Or, "Company A believes that it must grow beyond Category B in order to be successful, and the most attractive avenue is Category C".