The impact of AI on software has been revolutionary, to say the least. But there’s no clear consensus in the tech community on what that impact means for software development going forward.
We're seeing two main perspectives emerge — one suggesting that AI is so disruptive that we’re seeing the end of software, and another proposing that AI will drive massive growth in software by expanding the total addressable market (TAM).
In this post, I’ll examine each of these viewpoints and give my take on where I think software is headed in this new world of AI.
Disruption: Is traditional software on its way out?
One view of the world is that as large language models (LLMs) are getting better at coding and software development is becoming democratized, the cost of software trends to zero. Everyone just spins up personalized user interfaces using LLMs for the tasks at hand instead. In the interim, companies can build and maintain internal LLM-customized tools for their unique business needs at a fraction of what they'd pay software vendors. Pricing power for those software vendors will be eroded as millions of products flood the market.
In “The End of Software,” Chris Paik likened this to the growth of user-generated content (UGC) in media. He expects a Cambrian explosion in software that can be created at zero cost, meaning that software as a business — that is, software businesses getting to hundreds of millions in revenue — may break down.
An early example of this shift — though perhaps overblown in media coverage — came when Klarna announced plans to replace Salesforce and Workday with AI-powered internal tools. Salesforce and Workday are considered two of the stickiest pieces of software and core systems of record. If they aren’t safe, who is?
My understanding is that the Workday switch was to Deel and not to an internal AI-built tool, but nonetheless, the broader point stands.
Chamath Palihaptiya has also created an incubator that nods to this trend — a version of your favourite SaaS application that’s 80% as good at 10% of the cost, given the declining cost of software development.
Growth: AI agents as market expanders
The more optimistic view on software is that AI isn't just altering how software functions — it's potentially expanding the software market dramatically. We're not merely looking at incremental improvements; we're witnessing a revolution in software capabilities and business applications with AI agents.
In many cases, software (with the help of AI agents) can truly compete not just for software budgets but for labor spend. This shift opens up a whole new swath of addressable market, very conservatively 10-20 times the size of the current software market. Even if software only automates 20-40% of the work currently done by humans, and only captures 10-20% of that opportunity, we could still see a doubling of the aggregate software TAM in many industries.
We’re already seeing real-world examples of this, including from Klarna itself: Their AI support agent can now do the job of 700 employees. Granted, they built the AI agent themselves, but will every company do that? And what’s a piece of software like that worth relative to what Zendesk was worth when it was a tool used by those 700 employees?
This optimistic outlook is one where software, in conjunction with AI, can truly help businesses by actually doing the work of employees — not just as a tool to enhance workflows, but as a substitute for human labor in many cases.
My take: A new frontier for software
Widespread adoption of artificial general intelligence (AGI) would change everything. But that aside, my view is that this is probably one of the biggest shifts we’ve seen in software, and while competition will be intense, I don’t foresee a world where enterprises are using millions of custom-built software tools and bypassing software vendors completely. Instead, AI represents a promising opportunity for many software vendors, old and new, for the reasons I outline below.
1. Ultimately, AI is still software
It's crucial to remember that AI agents are just a new iteration of software and will be made accessible to most end users through software. They're expanding software capabilities, not replacing software entirely. As Satya Nadella noted on Microsoft’s last earnings call, “So to me, look, at the end of the day, GenAI is just software.”
2. New opportunities are emerging and markets will expand
The “do the work” nature of the new generation of software we’re starting to see is going to help the software market. Many new opportunities are opening up that might be slightly orthogonal to or outside the purview of traditional incumbents, and that don’t necessarily compete with systems of records right away.
Instead, these products can sit on top of disparate tools and do the work of people, increasing the value that software provides. As I’ve written about before, we’re already starting to see AI copilots, AI colleagues or coworkers, and AI-native services. While the former may compete with incumbents, the latter two are newer opportunities that allow for companies to go after markets where TAMs were small or unaddressable by typical software.
3. Internal tools will proliferate, but not dominate
While more companies will develop their own tools, particularly as no-code makes it even easier, the idea of creating custom solutions for every single need isn't practical and maintenance costs aren’t quite zero.
There are also benefits to learned interfaces and shared interfaces. We’ve actually seen a lot of enterprises take the “build” approach with AI initially, with many companies rushing to build internal ChatGPT’s and various chatbots. But when I talk to CIOs, it turns out they’re more than open to buying pre-built solutions that can solve their problems, as well.
4. Pricing models will evolve
As I’ve written about before, pricing models for software will evolve. We'll probably see a shift away from per-seat pricing towards models based on usage and work done by the software. Over time, we might even see models based on actual outcomes, to better capture the value that the new age of software may deliver.
The bottom line
AI is undoubtedly reshaping the software landscape in significant ways. But it's not a simple case of AI versus traditional software — rather, it's about AI expanding software capabilities. The advent of AI does mean that the cost of software development is declining, that in some cases more companies are opting for internal tools, that there’s more competition and that the bar is higher for software being sold.
But it also opens up a new frontier of what’s possible with software, and with that comes the opportunity to go after previously unaddressable markets or markets that are 5-10 times bigger than existing markets.
If you’d like more of my analysis and predictions for the future of software and AI, make sure to sign up for my Substack newsletter. You’ll get my take on trends in the industry and the opportunities they present for founders.
