This week, Hewlett-Packard (where I am on the board) announced that it is exploring jettisoning its struggling PC business in favor of investing more heavily in software, where it sees better potential for growth. Meanwhile, Google plans to buy up the cellphone handset maker Motorola Mobility. Both moves surprised the tech world. But both moves are also in line with a trend I’ve observed, one that makes me optimistic about the future growth of the American and world economies, despite the recent turmoil in the stock market.

In an interview with WSJ’s Kevin Delaney, Groupon and LinkedIn investor Marc Andreessen insists that the recent popularity of tech companies does not constitute a bubble. He also stressed that both Apple and Google are undervalued and that “the market doesn’t like tech.”

In short, software is eating the world.

More than 10 years after the peak of the 1990s dot-com bubble, a dozen or so new Internet companies like Facebook and Twitter are sparking controversy in Silicon Valley, due to their rapidly growing private market valuations, and even the occasional successful IPO. With scars from the heyday of Webvan and Pets.com still fresh in the investor psyche, people are asking, “Isn’t this just a dangerous new bubble?”

I, along with others, have been arguing the other side of the case. (I am co-founder and general partner of venture capital firm Andreessen-Horowitz, which has invested in Facebook, Groupon, Skype, Twitter, Zynga, and Foursquare, among others. I am also personally an investor in LinkedIn.) We believe that many of the prominent new Internet companies are building real, high-growth, high-margin, highly defensible businesses.

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Today’s stock market actually hates technology, as shown by all-time low price/earnings ratios for major public technology companies. Apple, for example, has a P/E ratio of around 15.2—about the same as the broader stock market, despite Apple’s immense profitability and dominant market position (Apple in the last couple weeks became the biggest company in America, judged by market capitalization, surpassing Exxon Mobil). And, perhaps most telling, you can’t have a bubble when people are constantly screaming “Bubble!”

But too much of the debate is still around financial valuation, as opposed to the underlying intrinsic value of the best of Silicon Valley’s new companies. My own theory is that we are in the middle of a dramatic and broad technological and economic shift in which software companies are poised to take over large swathes of the economy.

More and more major businesses and industries are being run on software and delivered as online services—from movies to agriculture to national defense. Many of the winners are Silicon Valley-style entrepreneurial technology companies that are invading and overturning established industry structures. Over the next 10 years, I expect many more industries to be disrupted by software, with new world-beating Silicon Valley companies doing the disruption in more cases than not.

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Why is this happening now?

Six decades into the computer revolution, four decades since the invention of the microprocessor, and two decades into the rise of the modern Internet, all of the technology required to transform industries through software finally works and can be widely delivered at global scale.

Over two billion people now use the broadband Internet, up from perhaps 50 million a decade ago, when I was at Netscape, the company I co-founded. In the next 10 years, I expect at least five billion people worldwide to own smartphones, giving every individual with such a phone instant access to the full power of the Internet, every moment of every day.

On the back end, software programming tools and Internet-based services make it easy to launch new global software-powered start-ups in many industries—without the need to invest in new infrastructure and train new employees. In 2000, when my partner Ben Horowitz was CEO of the first cloud computing company, Loudcloud, the cost of a customer running a basic Internet application was approximately $150,000 a month. Running that same application today in Amazon’s cloud costs about $1,500 a month.

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With lower start-up costs and a vastly expanded market for online services, the result is a global economy that for the first time will be fully digitally wired—the dream of every cyber-visionary of the early 1990s, finally delivered, a full generation later.

Perhaps the single most dramatic example of this phenomenon of software eating a traditional business is the suicide of Borders and corresponding rise of Amazon. In 2001, Borders agreed to hand over its online business to Amazon under the theory that online book sales were non-strategic and unimportant.

Oops.

Today, the world’s largest bookseller, Amazon, is a software company—its core capability is its amazing software engine for selling virtually everything online, no retail stores necessary. On top of that, while Borders was thrashing in the throes of impending bankruptcy, Amazon rearranged its web site to promote its Kindle digital books over physical books for the first time. Now even the books themselves are software.

Today’s largest video service by number of subscribers is a software company: Netflix. How Netflix eviscerated Blockbuster is an old story, but now other traditional entertainment providers are facing the same threat. Comcast, Time Warner and others are responding by transforming themselves into software companies with efforts such as TV Everywhere, which liberates content from the physical cable and connects it to smartphones and tablets.

Today’s dominant music companies are software companies, too: Apple’s iTunes, Spotify and Pandora. Traditional record labels increasingly exist only to provide those software companies with content. Industry revenue from digital channels totaled $4.6 billion in 2010, growing to 29% of total revenue from 2% in 2004.

Today’s fastest growing entertainment companies are videogame makers—again, software—with the industry growing to $60 billion from $30 billion five years ago. And the fastest growing major videogame company is Zynga (maker of games including FarmVille), which delivers its games entirely online. Zynga’s first-quarter revenues grew to $235 million this year, more than double revenues from a year earlier. Rovio, maker of Angry Birds, is expected to clear $100 million in revenue this year (the company was nearly bankrupt when it debuted the popular game on the iPhone in late 2009). Meanwhile, traditional videogame powerhouses like Electronic Arts and Nintendo have seen revenues stagnate and fall.

The best new movie production company in many decades, Pixar, was a software company. Disney—Disney!—had to buy Pixar, a software company, to remain relevant in animated movies.

Photography, of course, was eaten by software long ago. It’s virtually impossible to buy a mobile phone that doesn’t include a software-powered camera, and photos are uploaded automatically to the Internet for permanent archiving and global sharing. Companies like Shutterfly, Snapfish and Flickr have stepped into Kodak’s place.

Today’s largest direct marketing platform is a software company—Google. Now it’s been joined by Groupon, Living Social, Foursquare and others, which are using software to eat the retail marketing industry. Groupon generated over $700 million in revenue in 2010, after being in business for only two years.

Today’s fastest growing telecom company is Skype, a software company that was just bought by Microsoft for $8.5 billion. CenturyLink, the third largest telecom company in the U.S., with a $20 billion market cap, had 15 million access lines at the end of June 30—declining at an annual rate of about 7%. Excluding the revenue from its Qwest acquisition, CenturyLink’s revenue from these legacy services declined by more than 11%. Meanwhile, the two biggest telecom companies, AT&T and Verizon, have survived by transforming themselves into software companies, partnering with Apple and other smartphone makers.

QuickHoney

LinkedIn is today’s fastest growing recruiting company. For the first time ever, on LinkedIn, employees can maintain their own resumes for recruiters to search in real time—giving LinkedIn the opportunity to eat the lucrative $400 billion recruiting industry.

Software is also eating much of the value chain of industries that are widely viewed as primarily existing in the physical world. In today’s cars, software runs the engines, controls safety features, entertains passengers, guides drivers to destinations and connects each car to mobile, satellite and GPS networks. The days when a car aficionado could repair his or her own car are long past, due primarily to the high software content. The trend toward hybrid and electric vehicles will only accelerate the software shift—electric cars are completely computer controlled. And the creation of software-powered driverless cars is already under way at Google and the major car companies.

Today’s leading real-world retailer, Wal-Mart, uses software to power its logistics and distribution capabilities, which it has used to crush its competition. Likewise for FedEx, which is best thought of as a software network that happens to have trucks, planes and distribution hubs attached. And the success or failure of airlines today and in the future hinges on their ability to price tickets and optimize routes and yields correctly—with software.

Oil and gas companies were early innovators in supercomputing and data visualization and analysis, which are crucial to today’s oil and gas exploration efforts. Agriculture is increasingly powered by software as well, including satellite analysis of soils linked to per-acre seed selection software algorithms.

The financial services industry has been visibly transformed by software over the last 30 years. Practically every financial transaction, from someone buying a cup of coffee to someone trading a trillion dollars of credit default derivatives, is done in software. And many of the leading innovators in financial services are software companies, such as Square, which allows anyone to accept credit card payments with a mobile phone, and PayPal, which generated more than $1 billion in revenue in the second quarter of this year, up 31% over the previous year.

Health care and education, in my view, are next up for fundamental software-based transformation. My venture capital firm is backing aggressive start-ups in both of these gigantic and critical industries. We believe both of these industries, which historically have been highly resistant to entrepreneurial change, are primed for tipping by great new software-centric entrepreneurs.

Even national defense is increasingly software-based. The modern combat soldier is embedded in a web of software that provides intelligence, communications, logistics and weapons guidance. Software-powered drones launch airstrikes without putting human pilots at risk. Intelligence agencies do large-scale data mining with software to uncover and track potential terrorist plots.

Companies in every industry need to assume that a software revolution is coming. This includes even industries that are software-based today. Great incumbent software companies like Oracle and Microsoft are increasingly threatened with irrelevance by new software offerings like Salesforce.com and Android (especially in a world where Google owns a major handset maker).

In some industries, particularly those with a heavy real-world component such as oil and gas, the software revolution is primarily an opportunity for incumbents. But in many industries, new software ideas will result in the rise of new Silicon Valley-style start-ups that invade existing industries with impunity. Over the next 10 years, the battles between incumbents and software-powered insurgents will be epic. Joseph Schumpeter, the economist who coined the term “creative destruction,” would be proud.

QuickHoney

And while people watching the values of their 401(k)s bounce up and down the last few weeks might doubt it, this is a profoundly positive story for the American economy, in particular. It’s not an accident that many of the biggest recent technology companies—including Google, Amazon, eBay and more—are American companies. Our combination of great research universities, a pro-risk business culture, deep pools of innovation-seeking equity capital and reliable business and contract law is unprecedented and unparalleled in the world.

Still, we face several challenges.

First of all, every new company today is being built in the face of massive economic headwinds, making the challenge far greater than it was in the relatively benign ’90s. The good news about building a company during times like this is that the companies that do succeed are going to be extremely strong and resilient. And when the economy finally stabilizes, look out—the best of the new companies will grow even faster.

Secondly, many people in the U.S. and around the world lack the education and skills required to participate in the great new companies coming out of the software revolution. This is a tragedy since every company I work with is absolutely starved for talent. Qualified software engineers, managers, marketers and salespeople in Silicon Valley can rack up dozens of high-paying, high-upside job offers any time they want, while national unemployment and underemployment is sky high. This problem is even worse than it looks because many workers in existing industries will be stranded on the wrong side of software-based disruption and may never be able to work in their fields again. There’s no way through this problem other than education, and we have a long way to go.

Finally, the new companies need to prove their worth. They need to build strong cultures, delight their customers, establish their own competitive advantages and, yes, justify their rising valuations. No one should expect building a new high-growth, software-powered company in an established industry to be easy. It’s brutally difficult.

I’m privileged to work with some of the best of the new breed of software companies, and I can tell you they’re really good at what they do. If they perform to my and others’ expectations, they are going to be highly valuable cornerstone companies in the global economy, eating markets far larger than the technology industry has historically been able to pursue.

Instead of constantly questioning their valuations, let’s seek to understand how the new generation of technology companies are doing what they do, what the broader consequences are for businesses and the economy and what we can collectively do to expand the number of innovative new software companies created in the U.S. and around the world.

That’s the big opportunity. I know where I’m putting my money.

Another contender in the mobile payment space has just upped the ante on Google Wallet. Isis, which counts AT&T, Verizon and T-Mobile as partners, has signed on credit card providers Visa, MasterCard and American Express as confederates as well. In Google’s corner stand Sprint and MasterCard.

Isis, a mobile commerce venture that includes the U.S.’ largest wireless providers, announced Tuesday that Visa (NYSE: V), MasterCard (NYSE: MA) and American Express(NYSE: AXP) will be partnering with the organization.

The agreement makes Isis, a joint venture between AT&T (NYSE: T), Verizon and T-Mobileand supported by Discover at its start, the only mobile payment product that accepts all four major payment networks.

Competitor Google (Nasdaq: GOOG) Wallet has a platform supported wireless carrier Sprint(NYSE: S) and supports payment from Citi, MasterCard and First Data (NYSE: FDC).

MasterCard will continue a relationship with both Isis and Google Wallet.

Both programs would allow consumers to pay for goods and services with a wave of a phone that supports Near Field Communication (NFC) technology.

Technology is developed and in place for the service, but in very limited quantities. Sprint is the only wireless carrier with a phone, the Nexus S 4G, that is enabled right now.

Isis, which was announced last November, will not publicly launch until 2012, when it will do trial runs in Salt Lake City, Utah, and Austin, Texas. Google Wallet is running on a limited basis in New York and San Francisco.

Isis and the credit card companies involved did not respond to the E-Commerce Times’ requests for further comment.

Needs More Elements

Securing major payment networks clears a major hurdle for Isis.

“Isis had to gain the support of all the major credit cards to gain legitimacy with merchants. The early holdup with credit card companies as to fee distribution was settled, no doubt to the benefit of the credit card companies. The carriers need the credit card companies to make Isis work,” Tole Hart, senior analyst at theYankee Group, told the E-Commerce Times.

While it’s a step in the right direction for Isis, it’s just one part of an entire system that needs to be in place for the mobile commerce start-up to catch on.

“Consolidation on the payment side is one step in the challenge, but you have to complete the ecosystem to survive,” Avi Greengart, research director of consumer devices at Current Analyst, told the E-Commerce Times.

Having a payment network in place is futile if the other elements aren’t in place.

“You need devices that work with NFC, and the single phone that does that is at Sprint and works with a totally different system. You also need the merchants, the payment terminals, and finally, arguably the most important or overlooked, is the consumer,” said Greengart.

Although many predictions for the future of mobile commerce are entirely optimistic and foresee widespread use within a few years, some remain hesitant about the service. Just because technology is new and compelling, they say, doesn’t necessarily mean it’s unquestionably going to be something consumers will rush to adapt to.

“There’s a reason predictions are so high, and that’s because consumers are increasingly using smartphones. The notion that your phone can be a computer or camera is there, so that it could be a wallet doesn’t seem like that big a stretch. From a behavioral perspective it doesn’t seem like a stretch either, but you still need to give people a reason to do that,” said Greengart.

Offering Incentives

Since consumers will most likely still be carrying around wallets for items like a personal ID or payment forms for merchants that don’t accept mobile payments, incentives and promotions will be essential, at least at first, for reeling in consumers.

“Improved customer experience via targeted discounts and promotions and easy payments will go a long way toward making NFC a reality,” said Hart.

“I’ve yet to see a compelling reason for customers to jump on board, but Google Wallet gets the closest. It’s not the wallet that’s the most interesting part of their program, but Google Offers, which gives them some actual reason to do this,” said Greengart.

Until then, the business model may not be fully complete.

“This has always been technology that’s just around the corner, but until you all the ducks up in a row, you have to hit every piece of the puzzle,” said Greengart.

Turntable.fm is climbing the charts. According to a story from Betabeat, theFacebook phenom has hit 140,000 active users after just one month. Not a bad showing for a semi-closed beta with a spotty security record.

The popular service effectively combines (free) music-streaming, chat rooms, and voting, all through a Facebook portal. It’s similar to Web apps such as Pandora. Turntable.fm allows you to discover new music and create your own custom playlists, only that playlist isn’t just for you—you’ll share it with other Facebook users in real time.

Add to the exchange a note of gameplay. After you create your DJ avatar, you can create your own room or enter someone else’s (if you get overwhelmed there’s a randomizer) and interact with other avatars through a chat feature. Each room supports up to five DJs. Take a seat on the stage to share your playlist, created from your own uploads or from the Turntable.fm library.

Finally, voting plays a huge part in the experience. Everyone in a given room listens to the same track simultaneously, with the option to chat in real-time or simply vote it up (via an “Awesome” button) or down (via a “Lame” button). For every vote the DJ racks up points to be spent on new, snazzier avatars. The more favorable the response, the more avatars pack the room; the less favorable, the more apt your track will get skipped.

If this sounds like your kind of scene, the service is still (as of today) accepting new members throughturntable.fm , which will prompt you to login through Facebook.

Search on Google for any domains that match [site:co.cc] and you will find no matches.

That is right, Google has removed, deindexed, banned and penalized any site using a co.cc subdomain. Why? As I noted, Google’s Matt Cutts explained on Google + that Google reserves the right if they “see a very large fraction of sites on a specific freehost be spammy or low-quality, we do reserve the right to take action on the freehost as a whole,” Matt said.

And it not only happened to a free host but a free domain name register and host, co.cc. It is not the first time Google banned a whole free-host, they did so back in May, a couple months ago.

That being said, Google’s JohnMu did offer some advice for those who were hit why they feel they should not have been:

If you feel that your particular site is in line with our Webmaster Guidelines, I would recommend submitting a reconsideration request. Additionally, if you use a subdomain on a widely used domain name, and feel that your subdomain provider is not up to par with regards to preventing and handling abuse quickly – be it webspam, phishing, or malware – you may wish to look into ways of remedying that.

Ever since Google started to roll out its Google+ project on Tuesday, many of its users have been particularly excited about its group video chat service Hangouts. I agree, but not just because it’s fun and easy to use. The real kicker is the technology that powers the service. Even in its infancy, Hangouts is an interesting cloud service. But in the not-so-distant future, it could evolve into a standards-based video conferencing solution that runs natively in many browsers and on a whole range of devices.

Google has been quiet about its plans for Hangouts, and hasn’t revealed all that much about some of the components powering the service either. However, there have been some key developments in recent months that indicate what makes Hangouts work and where things are going:

The cloud

Making video chat work at scale can require a lot of resources, which is why there has been a movement towards peer-to-peer (P2P) solutions to offload video and signaling traffic between the clients involved. Skype makes use of P2P for that very reason, as does Chatroulette. However, P2P can introduce latency, which can be especially bothersome if you chat with 10 people at a time. That’s why Google went down a different route for Hangout.

“To support Hangouts, we built an all-new standards-based cloud video conferencing platform,” explained Google Real-time Communications Tech Lead Justin Uberti in a blog post on Tuesday. He added that Hangouts uses a client-server model which “leverages the power of Google’s infrastructure.”

Browser integration

Hangouts currently requires you to download the same plugin that also powers video chat within Google Talk. However, Google is working on making both Hangouts and Google Talk itself work in the browser, without the need for any plugins. This will be done in part through a new framework for realtime communications (read: text, voice and video chat) dubbed WebRTC that the company open sourced in May. WebRTC is supported by Mozilla and Opera, and Google started to integrate the framework into its Chrome browser earlier this month. “Work has started to move Google Talk completely to WebRTC,” it says on the project’s web site.

At that point, users won’t need a plugin anymore to use Google Talk, and the same should eventually be true for Hangouts. Here’s what a Google spokesperson told me via email about the connection bewteen the Google+ video chat service and the framework: “A lot of the technology in Hangouts feeds into the WebRTC, and we contribute a lot of feedback to help shape the WebRTC interface. At this point though, our plug-in and the protocol are different efforts.” He refused to reveal any future plans, but trust me, the writing is on the wall…

Open codecs

Google Talk and Hangouts currently use technology Google is licensing from Vidyo to facilitate video chats. Video is transmitted in H.264/SVC, with H.264/AVC and H.263 being used as fallback solutions. However, there are strong sings that Google will eventually switch to open codecs.

Google open sourced its VP8 video codec last year as part of the new WebM video format, and real-time communications were one of the big issues that VP8’s programmers wanted to improve with the codec from the onset. In fact, VP8 is already being used by Skype for its group video calling feature, and Google’s WebM project manager John Luther wrote in February that VP8 is an “exceptionally good codec for real-time applications like videoconferencing.”

So when will Hangouts be switching from H.264 to WebM? Google+ Project Lead Bradley Horowitz indicated on This Week in Google on Wednesday that his team is already testing alternatives to the current codec. A Google spokesperson didn’t want to discuss any future plans for Hangouts when I asked about the codec issue, but here’s a clue: WebRTC is based on the VP8 codec, which means that H.264 could get displaced as the default codec for Hangouts as soon as the video chat service rolls out its native browser integration.

Device integration

This is where things get really interesting: Hangout’s cloud-based architecture and its upcoming browser integration will eventually make it possible to deliver an optimized group video chat experience to a whole range of devices. Desktop users will get to view full HD video, users on mobile devices will receive optimized streams to deal with bandwidth issues. And Google TV users could see Hangouts appear on their TV sets sooner than they think, thanks to the fact that Google TV in fact comes with a full-blown Chrome browser.

A few companies have started to bring multi-person video chat to mobile devices, but cross-device video conferencing is still in its infancy, and Google could have a good chance here to capture the market early on. Of course, the company didn’t want to comment on the specifics of bringing Hangouts to mobile devices, but what Google’s spokesperson told me wasn’t exactly a denial either:

“Again, we can’t comment on future product plans. However, Google Plus heavily invests in mobile products as we believe you should be able to share and communicate, whether you are on the web, tablet, or phone.”

“Google + “launched this week and we have invites.  I’ve been playing around with it for the last day and the one frase that keeps popping up for me is “The Empire Strikes Back!”  They still have a lot of room to make up, and there is no telling where Google will take this and how web users will react to a new social hub, but if Google puts its money where its mouth is ( and all indications is they are doing exactly that) this could be the first serious threat to the Facebook empire.

If you’d like to receive an invitation simply leave a post or begin following this blog and we’ll send you an invitation within the next 24 to 48 hours.  Once you’ve had a chance to register and try it out leave me a comment about what you think of it.

Americans are increasingly aware that online reputation matters, but the full scope of its influence is difficult to assess.

While roughly four in ten internet users in the Millennials cohort and Gen X had used these sites in 2007, by 2010 Millennials had pulled ahead: 64% of internet users 18-33 have used a classifieds site, versus 58% of those ages 34-45 having done so. Younger Boomers have also seen drastic growth, with 49% currently using these sites, up from 27% in 2007. Even 17% of the online G.I. Generation has used a site like Craigslist, up from only 8% three years ago.

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