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Estimating the yearly spend on developing software

February 28th, 2017 No comments

How much does a software company spend on developing its software?

The plot below shows revenue vs software development costs for 100 US companies, in industry categories Computer programming services and Packaged software, with revenues greater than $100 million during 2014-2015. The data is from company accounts filed with the government (code+data, plus the Georgia Tech financial analysis lab where I found the data).

Company revenue vs amount spent on software development

A straight line fits very well (a quadratic is slightly better, but let’s keep things simple) and shows companies spending 13% of their revenue on software development. A log-log graph suggests a power law, but in this case the fitted exponent is one, i.e., no power law as such.

If 13% is the figure for companies that would be expected to be spending heavily to develop software, how much do companies in other industry sectors pay? Google and Facebook are media companies (their income is from advertising), do they really spend that much on software?

There are an estimated 3.3 million software developers in the US. What is the average cost of a software developer? If we take an average salary of $80K, and do the usual doubling to factor in overheads, we get $160K. This gives a total software development cost (most of the cost is for people) in the US of around $0.5 trillion per year.

The above plot shows 1.6%0.6%6% of the estimated $0.5 trillion yearly software development costs in the US. Who is spending the other 98.4%99.4%94%? One place to look is the Form 10-K that public companies are required to submit to the Securities and Exchange Commission.

Facebook’s 10-K, for 2015, shows $4,816 million spent on R&D (is this all software?) and $3,633 million on “Computer software, office equipment and other” (I’m guessing almost none of this is capitalized software). Dividing R&D expenditure by number of employees (12,691 at the end of 2015) gives $380K. I know average Silicon valley salaries are high, but not that high. I have enough trouble following my own company’s accounts, so trying to understand Facebook’s is a lost cause before it starts.

Scraping the Form 10-K’s on the SEC site will not provide sensible numbers, they will have to be read and analyzed. There is enough material for several MBA projects…

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