Profile
Software is the largest industry cluster in Silicon Valley, with more than 4,500
firms employing 8% of the region’s workforce and accounting for about 1/3 of all
venture capital investments.
The software industry cluster in Silicon Valley includes companies engaged in software programming, testing and architecture as well as companies delivering IT services such as email, web-hosting, and internet services. Increasingly these two components are integrating in the form of value-added “software as a service” where the functionality of software is hosted offsite. Examples of Silicon Valley companies operating in this space include Salesforce.com, eBay and Google.
Software is embedded in the operations of most technology firms in the Valley, ranging from semiconductor design software, to the electronic games industry, software designed for the health and financial services industries, to software used to design medical devices and biomedical instruments.
Changes driving opportunities
- Faster processing at a lower price: The economics underlying the software industry, and especially Information Technology services, continue to be driven by the rapid growth in processing power predicted by Moore’s law. Because software scales easily and the cost of scaling is becoming less expensive as power increases, firms are better able to grow their customer base cheaply.
- Connectivity: High speed connections enable remote services hosting for software applications. Broadband usage is on the rise; about 30% of Bay Area residents have a high-speed connection.
- Outsourcing the IT function: IT staff, especially within large global companies, is shrinking as companies focus on their core competencies. This IT work is being outsourced to giant Lockheed Martin IT, IBM Global Services and HP Services and many other smaller and medium-sized companies.
- On-demand customization: Customer satisfaction is the highest priority. It used to be that the Independent Software Vendor developed expensive, labor-intensive customized solutions for its customers, with software delivered as a service, that functionality is now built in.
Where the opportunities are
Large firms are consolidating as the industry matures. Two examples in the Valley are Oracle’s purchase of PeopleSoft and Symantec’s purchase of Veritas Software. Consolidation of the larger firms leaves ample room for growth especially among small, niche firms throughout the valley. Opportunity areas include:
- Hosted software or software as a service. Software as a service firms provide a platform upon which customers can run any number of on-demand applications–all of which run on a farm of computers, hosted by the software as a service firm. The client subscribes to the software service, accessing the software’s functionality any time, anywhere and using any platform or hardware. Software as a service firms maintain and update the software regularly. By subscribing to software as a service, customers can avoid the cost and trouble of buying their own software, setting up and customizing systems, and keeping the software running.
- eBay and Google are creating whole economies around hosted software.
- SalesForce.com is a software services company that supplies on-demand customer relations management tools for enterprises.
- Wireless: Wireless software applications are a big source of entrepreneurial activities, including mobile games, wireless infrastructure, and WiFi services.
- Bioinformatics: software applications enable the convergence of research in the life sciences with information technologies. The California Institute for Quantitative Biomedical Research (QB3) is a cooperative effort among three UC campuses to integrate the study of quantitative sciences and biological systems at all levels of complexity. Berkeley’s Center for Information Technology Research in the Interest of Society (CITRIS) is a new $100 million science and technology center that will focus on the application of IT to bioengineering and bio-informatics. Industry partners, including HP, SUN, Agilent, Intel and IBM, have together pledged $170 million.
- Games and game development. The investment community is beginning to invest in the mobile and online games that have taken off in Asia. A big local player is Electronic Arts.
Major labor market trends
Software has become Silicon Valley’s largest industry cluster, making up about 8% of all employment in Silicon Valley. Over the decade of the 1990s, there was a major structural shift in the Valley from hardware to software. Today, software publishing has been declining as a share of Silicon Valley employment while internet service providers and web services are growing again.
Labor market overview
| Software Cluster | 2004* |
|---|---|
| Employment | 93,645 |
| Pay per employee | $ 136,032 |
| Employment Concentration** | 5.46 |
| Share of Silicon Valley Employment | 8.2% |
| Number of Firms | 4,512 |
Source: California Employment Development Department
*2004 is the average of quarters 1 & 2 based on data availability,
**Employment concentration is given in 2003
The largest cluster, software firms employed 93,645 employees in the first half of 2004.
Pay per Employee
| Software Cluster | 2001 | 2002 | 2003 | 2004* |
|---|---|---|---|---|
| Pay per employee | $ 120,222 | $ 114,462 | $ 123,191 | $ 136,032 |
Average pay per employee rose from $120,000 in 2001 to about $136,000 in 2004.
There were approximately 4,500 software firms in the region in the first half of 2004.
Major segments (from San Jose MSA NAICS data)
- Software Publishers: 8,400 employees in 2004
- Internet Service Provideres: 9,300 employees in 2004
- Computer Systems Design: 42,000 employees in 2004
Silicon Valley Firms
| Example Firms | Software Products/Services/Applications |
|---|---|
| Salesforce.com, NetSuite | Software subscription services |
| Electronic Arts | Creative Services |
| Symantec, McAffee | Security Software |
| Intuit | personal financial software – operates as a service and as a traditional take-home package. |
| Siebel systems | sales, marketing software |
| Cadence systems, Synopsys | electronic design software |
| Hyperion Solutions | enterprise applications software |
| Borland | software development tools (programming tools for writing software, programming tools for writing C++ or Java) |
| GetSilicon | web-based enterprise-class Supply Chain Collaboration to serve one-to-many or many-to-many collaboration in the semiconductor industry. |
Venture Capital Investment
Software and IT Services capture about one-third of Silicon Valley Venture capital investment.
Software firms captured 26% of all Silicon Valley venture capital
investments in 2004. IT services captured 5% and, when taken together, the two were 31% of all venture capital
invested in Silicon Valley firms.
The total number of dollars invested in software firms declined over the 2002
to 2004 period, from 1.7 billion dollars in 2001 to 1.3 billion in 2004.
Venture Capital Investment in Silicon Valley Software and IT Services Firms
| Software | Software Share | IT Services | IT Services Share | Software and IT Services | Software and IT Services Share | |
|---|---|---|---|---|---|---|
| 2002 | $ 1,203 | 24% | $ 486 | 10% | $ 1,688 | 33% |
| 2003 | $ 1,129 | 26% | $ 207 | 5% | $ 1,336 | 31% |
| 2004 | $ 1,067 | 26% | $ 201 | 5% | $ 1,267 | 31% |
| Grand Total | $ 3,398 | $ 894 | $ 4,292 |
Dollars in Millions
Source: PricewaterhouseCoopers/Thomson Venture Economics/National Venture Capital Association MoneyTree Survey
Cluster Infrastructure
SD Forum: The Software Developers Forum is a not-for-profit organization providing a venue for engineers, executives, researchers, technology leaders, and venture capitalists to exchange information on emerging technologies and best practices. More information: http://www.sdforum.org/SDForum/
San Jose Software Business cluster: An incubator for software start-ups and emerging
businesses providing entrepreneurs with access to resources, a “know how” network, and shared
services.
More information: http://www.sjsbc.org/
Information Technology Association of America: The ITAA is the leading trade association
serving the information technology industry. It supports the health, prosperity and competitive nature
of the information technology industry, advocating on legislative and regulatory issues, compiling
studies and statistics, and promoting the industry nationally and internationally.
More information:
http://www.itaa.org/eweb/StartPage.aspx
Software & Information Industry Association: The SIIA is the principal trade association for the software and digital content industry. SIIA provides global services in government relations, business development, corporate education and intellectual property protection to the leading companies that are setting the pace for the digital age. More information: http://www.siia.net/
Research Universities
Stanford University
UC-San Francisco
UC-Berkeley
UC-Santa Cruz
Detailed Software Industry Cluster Components
| NAICS Code | Description |
|---|---|
| 334611 | Software reproducing |
| 511210 | Software publishers |
| 518 | Internet service providers, websearch portals, and data processing services |
| 541511 | Custom computer programming services |
| 541512 | Computer systems design services |
| 541519 | Other computer-related services |