In our last issue, I explained why I don’t think AI is going to wipe out the software industry any time soon.
Despite Wall Street’s fears about a coming “SaaSpocalypse,” software companies are still growing. Many are more profitable than ever, and AI could actually make some of their products more valuable.
But there’s another side to this story that investors can’t afford to ignore.
Until recently, building sophisticated software meant hiring teams of programmers and spending years developing products that people wanted to use. That made it incredibly difficult for newcomers to challenge established companies like Adobe and Microsoft.
But what happens now that AI can tear down those barriers?
Recently, a developer named Brandon Thomas showed us what that future might look like.
Armed with little more than an AI coding assistant, he set out to challenge some of the biggest names in software.
And what he’s creating raises a troubling possibility for an industry worth trillions of dollars.
AI might not end up killing software.
But it could destroy one of the biggest advantages that made software companies so valuable in the first place.
Software Dupes
The first company Thomas decided to challenge was Adobe (Nasdaq: ADBE).
You’ve probably used at least one of its products. Acrobat lets you work with PDF documents. Photoshop edits photos. Illustrator creates graphics and logos. And Premiere Pro is used to edit videos.
Millions of people and businesses pay Adobe to use these programs.
But Thomas wanted to give them another option.
Last week, he introduced seven free, open-source applications designed to compete with some of Adobe’s most popular products, including those I just mentioned, along with Lightroom, After Effects and InDesign.
And he used AI to help build them.
Specifically, Thomas used Anthropic’s Claude to help recreate the functions of software that Adobe has spent years developing.
Image: ArtCraft
He’s essentially trying to reverse-engineer what these programs do, using AI to help recreate their features. It’s like someone taking apart a car to understand how it works, then trying to build their own version of it without using the original manufacturer’s blueprints.
It can be extremely difficult for even the best software engineers to accomplish. But with AI, a layman can now handle many of the tasks that once required programmers to spend countless hours writing and testing code.
Thomas says he’s been coding exclusively with AI tools since February, and he believes the technology will soon make it possible to recreate almost any popular software product.
And he isn’t stopping with Adobe.
This week, he introduced three more free applications designed to compete with Microsoft’s (Nasdaq: MSFT) Word, Excel and PowerPoint programs.
Image: ArtCraft
In other words, a single developer is taking aim at products from two of the biggest software companies in the world.
But there’s an important catch.
You see, his applications are still in the earliest stages of development. Early users have pointed out missing features, bugs and other problems. And there’s a big difference between creating software that resembles Photoshop or Microsoft Word and building something that professionals can rely on every day.
After all, Adobe and Microsoft have spent decades improving their products, adding features and building tools that work together. And Thomas still has to prove that his alternatives can compete.
But I don’t think we should dismiss what he’s accomplished so far just because his products aren’t finished.
And I think the bigger story here is how AI has made it so much easier for one person to build software that once required an entire team of programmers.
That brings us back to the SaaSpocalypse.
Companies like Adobe and Microsoft built hugely successful businesses by developing sophisticated software and charging customers to use it.
Their products are difficult to build, which has helped protect them from competition.
But what happens when that protection starts to disappear?
If you’re paying a monthly subscription for software you use at work, then someone releases a free alternative that handles most everything you need…
Why keep paying?
Maybe the original has more features. Maybe it’s still better. But if a free alternative gives you what you want, then paying a monthly subscription becomes a lot harder to justify.
That’s the problem AI could create for software companies.
And for investors, it could be a very big deal.
Here’s My Take
One reason Wall Street loves software companies is that their products can be sold over and over again.
Once the software is built, adding another customer often costs relatively little. And that’s especially true with subscriptions, where customers pay every month or year to keep using a product.
However, those economics work best when competitors can’t easily offer the same product for less money.
AI threatens to change the equation.
If AI can make it dramatically cheaper to build competing software, established companies could find themselves under pressure to lower their prices just to keep customers.
They might still have the best products, and they might even keep most of their customers. But if they can’t charge as much for their products, their businesses won’t be nearly as valuable as they once were.
That’s a different kind of SaaSpocalypse.
And I think Wall Street is only beginning to understand what it could mean.
Regards,
Ian King
Chief Strategist, Banyan Hill Publishing
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