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Welcome to Thoughts on the Market. I'm Sienth, the US Software analyst at Morgan Stanley. Today, How AI is transforming software and what that means for developers It's Friday, October 24th at 10:00am in New York. There's been a lot of news stories and anecdotal accounts about AI taking over jobs, especially in the software industry. You may have heard of Vibe coding, where people can use natural language prompts, guiding AI to build software applications. So yes, AI is creating a world where software rights itself, but at the same time, the demand for human creativity only grows. The introduction of AI coding systems has dramatically expanded what software can do, fueling a surge in both the volume of code and the complexity of projects. But instead of shrinking the developer workforce, AI is actually supporting continued growth in developer headcount even as productivity soars. We're estimating that the software development market will grow at a 20% compounded growth rate per reaching 61 billion by 2029, and that's up from 24 billion in 2024. And in terms of the developer population, firms like IDC expected to jump from 30 million paid developers in 2024 to 50 million by 2029. That's a 10% annual growth rate. Even the most conservative estimates, like Those from the U.S. bureau of Labor Statistics, see developer jobs growing at roughly 2% per year through 2033, outpacing overall employment growth. So what does this mean for people behind the code? AI isn't replacing developers, it's redefining them. Routine tasks are increasingly handled by AI agents, and this frees up developers to become curators, reviewers, architects, and most importantly, problem solvers. The upshot? Companies may need fewer developers for repetitive work, but the overall demand for skilled engineers remains robust. As AI lowers the barrier to entry, the pool of people who can build software applications expands dramatically. But at the same time, the complexity and ambitions of projects rise, keeping experienced developers in high demand. No doubt AI coding tools are delivering real productivity gains. Some teams are reporting nearly doubling their code capacity and cutting pull request times in half. After adopting AI code assistance, Test coverage has increased sharply, resulting in 20% fewer incidents for some organizations. But there is a catch. With all this AI generated code, it's creating significant new bottlenecks downstream. An example of this is code review, which is becoming a major pain point. Many organizations are experiencing pull request fatigue, with developers rubber stamping changes just to keep up. Some teams now require three reviewers for AI generated change compared to just one before. In terms of automated testing, systems are getting overwhelmed because every change made with AI sets off a complete round of test. Now we estimate productivity gains from AI and software engineering at about 15 to 20%. But in complex projects the gains are much lower, as the volume of new code often means more bugs and more rework and hence more human developers. So where do we go from here? In our view, the future isn't about fully autonomous software development. Instead, large enterprises will likely favor an integrated approach or where AI agents and human developers work side by side. AI will automate more of the software development life cycle. And that only includes not just coding, which coding typically accounts for 10 to 20% of the software development effort, but other areas like testing, security and deployment. But humans will remain in the loop for oversight, design and decision making. And as software gets cheaper and faster to build, organizations won't just do the same work with fewer people, they will likely do more. In short, the need for skilled developers isn't going away, but it's definitely evolving. And in the age of AI, it's not about man versus machine, it's about man. With machine, and so with more software, we see more developers. Thank you for listening. If you enjoy the show, please leave us a review wherever you listen and share thoughts on the market with a friend or a colleague today.