While prior research has examined the role of Information Technology (IT) investments in the process and performance of innovation, there is relatively little research on the business value of software innovation itself. In particular, whether a firm’s software innovation affects the market value of the firm’s rivals, and whether the capabilities of a focal firm and its rivals matter remain unexplored. In order to advance our understanding of the value implications of software innovation, we investigate the impact of a firm’s software patents on both a firm’s own market value and rivals’ market value using data from IT industries in the US. Specifically, drawing on the resource-based view (RBV) and the dynamic capability perspectives, we conceptualize two capabilities of a focal IT firm – operations and marketing capabilities – that may enhance the potential value of software innovation by increasing the likelihood of success in commercializing the innovation. Further, we also identify a capability of rival firms – RD however, rivals’ R&D capabilities mitigate the negative impact of a firm’s software patent stock on their market value. We discuss implications for research and practice.