Software Industry Outlook: Growth Drivers and Risks in 2025 (2025)

Software is truly everywhere in the modern world. From streamlining workflows to making phone calls to following navigation routes in a car, the list continues—and so does the industry’s growth.

By understanding top trends, asset managers can make more informed investment decisions. Our 2025 Software Landscape report delves into the software industry, specifically market share and concentration, competitive advantages across different firms, the role of generative AI, and more.

It’s All About Switching Costs

Moats in the software industry are primarily driven by switching costs, with occasional support from network effects or even intangible assets. Once an application is installed, employees become proficient in the software, and the client builds business processes around it. Modern IT infrastructures are also highly complex—a classic example of this is a customer relationship management, or CRM, system, which must integrate with the marketing system, e-commerce, inventory management, email, and more.

In other words, changing software applications is more complicated than swapping vendors. This decision could involve significant time and expense to retrain employees, reimagine entire business processes, rebuild connections between applications, and possibly hire an outside consultant to complete any implementation. As a result, the process can be disruptive, expensive, and even compromise customer data.

SaaS Is the Dominant Software Delivery Model

Since its introduction in 2000, the software-as-a-service model has become the most pervasive software delivery mechanism. This is mainly because SaaS delivers better service for the customer via continuous and rapid updates to the software that are instantly available to all users. SaaS also offers superior economics through lower upfront costs for the customer and a more consistent and valuable revenue stream for the software provider.

From a cash flow and profitability standpoint, it takes several years for a software-as-a-service model to equal and eventually surpass an on-premises model. Although SaaS payments start smaller, the model is more profitable, stable, and predictable over time.

Generative AI Will Help Drive Software Growth

Generative AI is expected to support revenue growth over the next five years, with the biggest use cases being in the customer service and software development areas. Both markets are already large, and efficiencies gained from generative AI make for a compelling value proposition.

Despite SaaS as the preferred software delivery model, consumption-based pricing is on the rise with the help of AI and other analytical tools. With that said, we believe a hybrid pricing model will gain popularity as it allows for elements of predictable pricing while not overburdening all users with expensive features.

Data Security and Privacy Are Likely to Remain an ESG Issue

Most software companies have either low or medium environmental, social, and governance risk, which suggests that the industry is less risky than other sectors on average. The areas of increased risk relative to overall market ESG Risk Ratings include human capital, data privacy, and security.

Human capital

The software industry’s exposure to this material ESG issue is high, owing to the complexity and skill that software engineers must possess to develop advanced capabilities such as AI.

Data privacy and security

Because software houses and uses data, cyberattacks often target vulnerabilities within the code or design of the application itself. While there’s a risk that the software company suffers reputational damage, we haven’t seen this result in lasting financial damage to the vendor thus far.