[DigitalToday reporter Chi-gyu Hwang] Mike Vernal, an investor and engineer at venture capital firm Conviction, has drawn attention by comparing the future of the software industry to changes that hit the newspaper business after the internet.

In a recent post shared on social media platform X (Twitter), he said the software industry could split into two extremes, much like newspapers did in the 1990s.

Before the internet, he said, newspapers were local monopoly businesses. It was not easy to send a newspaper made in New York to other places such as Des Moines. That allowed local papers to generate stable profits. That was also why Warren Buffett liked the newspaper business.

The internet changed things sharply. As distribution costs nearly disappeared, the market structure itself was reshaped. New York Times subscribers rose to about 13.4 million now from 1.11 million in 2002. Over the same period, subscribers to the Chicago Tribune, the LA Times and the San Francisco Chronicle fell 70 to 90 percent. By contrast, subscribers to the personal newsletter "Lenny's Newsletter" surpassed 1.2 million.

Vernal said, "The middle ground disappeared. Now you either become a top newspaper in the world, or you remain a sole proprietor."

He said the same rules of the game could apply to the software industry. Vernal pointed to Amazon as an example.

In its early days, Amazon was merely a company that sold books on the internet. It bought books in bulk from publishers, repackaged them and shipped them. It was a business anyone could copy.

Vernal said, "The secret that let Amazon change from the most vulnerable company into a solid company with high barriers to entry was constant execution and reinvestment." He said, "Building something for more than 7,500 days and using the profits to build something else is itself the moat."

In the software industry, moats typically come from 3 things. They are development costs that are hard to copy, switching costs and network effects from ecosystems. But with AI, those rules of the game may struggle to carry the same meaning as before. Vernal said, "If AI drives software development costs close to zero, all 3 moats are shaken." He said, "Software copying speeds up, migration is automated, and AI can handle integration work better than people."

So what should software companies do? Vernal raised Amazon again.

In its first year, Amazon was easy to catch. The same was true in its second year. But by its 10th year, the story changes. A company trying to fight Amazon had to replicate 9 years of work Amazon had built up.

Vernal said, "If the amount of software made per day increases 1,000-fold, and you keep that pace for 10 years, moats do not disappear even in the AI era." He said, "Competitors would still have to pour in several years of time and billions of dollars to catch up to that volume."

Vernal said that among the 'Seven Powers' laid out by Hamilton Helmer, the weight of switching costs and network effects will shrink, while the power of economies of scale and brand will grow. He said, "In the end, the strategy that survives will be to build an overwhelming amount of software every day and reinvest the profits."

He said that is not very different from the path the newspaper industry has taken. He said, "Large companies will use just one AI-native system for each department such as sales, marketing, finance, HR and IT. Small and midsize companies are likely to converge on a single all-in-one system. In industry verticals such as law, finance and healthcare, one leading software company each is expected to take root. It is similar to a structure where one leading trade publication remains in each industry."

He also said small software will grow explosively. Examples include software individuals make for themselves and small software businesses targeting niche markets. Vernal likened it to the D2C (Direct-to-Consumer) boom led by Shopify and others in the 2010s. He said if tools such as Lovable create 100,000,000 apps, some of them will grow into solid small and midsize companies.

For software startups that take venture investment, he said the move to make in this situation is clear.

Vernal stressed, "You have to build everything. The moat comes from everything you have built so far and from taking over the entire procurement department. There is no safe zone in the middle." He added, "We still do not know how the software era and the market will unfold. Like D2C commerce, it seems both Meta-like aggregators and platforms like Shopify and Substack will exist."