Why AI Moats Still Matter (And How They've Changed)

The software itself can actually do the work, and therefore the market opportunity for software today is no longer just IT spend, it's largely the work.

While it is important to understand model capabilities and what's happening in the frontier, you still need to figure out how to apply that technology.

Everyone's saying that AI killed a concept of most.

So why are software companies potentially more defensible today than any other time in history?

The counterintuitive reality is this.

We've spent a lot of time talking about moats and how moats have evolved and are there still even moats in this new era?

Can build something at small scale. And a lot of the, I wouldn't call them network effects, but some of the defensibility modes only become apparent at large scale.

And the same argument would apply. It's like, oh, like I've seen four customers. David's seen three.

But that's at scale.

And that has gotten arguably harder because you have a larger end count of potential competitors.

Let me talk about what's different about defensibility for even the bigger players today in the AI era than it was in, let's say, the web two era.

Number one is that if you're doing per-seat pricing, like, how do you come up with a pricing model that people feel is fair?

But to answer your question, does defensibility change?

One is that, this is kind of like Clay Christiansen theory, it's like, the incumbents overshoot the market.

So it's actually, why don't you grow your own food or weld your own aluminum or build your own house?

And the flip side to that too is that while there will be more software and again, the marginal cost of producing software is declining asymptotically towards zero.

Well, part of it is just like the Goldilocks zone of pricing.

So a lot of the strategy that we talk about internally is Greenfield.

On the other side, I had a lot of companies coming out of 2022 where the market really went through a downturn.

And they didn't do that for their payroll spent.

So I'd say like Salesforce type stuff, some of the creative tools.

Whereas for things where inextricably the delivery and the payment are linked, right, which is very, very different than pricing for software.

Yeah. So you mentioned earlier that we've seen, you know, basically you mentioned there's this concern that maybe instead of Zendesk, it will, you know, there'll be a five coded version of it, but we've seen none of that so far.

What's your mental model for the types of software that we'll replace?

So I think that, you know, trying to pick on one space of electronic health records or electronic medical records.

So I think both of those need to be sure like the right type of entrepreneur who's willing to be patient.

So we're talking about how modes still matter and in many ways they look pretty similar.

Let's see on the other side for a second.

What's the seal of the argument?

And so I think, you know, one of the things that's changed, I think, that's been really interesting in this sort of current wave of, especially vertical applications that we've seen is the type of founder.

You know, I think founders today are often younger and more technical than we seen in prior generations And so they less often native to the particular industry but they fluent in the tool set.

A good example of this that I said on the board was a company called EVE.

And so again, it's sort of this tension of like, you know, building a brand, having momentum, understanding what's happening on the frontier, and yet, you know, figuring out ways to apply that technology in the context of your specific customer.

You know, I'd love to find other examples of businesses where the technology reinforces their business model.

The other steel man is if you believe that brand matters.

I'm going to have these compounding advantages just in terms of economies of scale, right?

So if you can move the fastest, right?

But if you don't do that, by contrast, you're just gonna get eaten alive.

So what is the trajectory?

One of the questions for flexibility in two companies was, hey, would Google, will they someday build this or Facebook or name your company?

You know, I mean, it's funny.

If they're very overlapping, I think you're in a risky spot.

But the reality is that there's so many, I think one of the remarkable things that's happened is there's so many markets that were never particularly interesting to sell software into.

The companies are doing incredibly well.

that the company is getting a lot of revenue from this customer.

And what's the difference between the three?

You know, a product would be like, oh, I built my own browser.

But the difference again is that the feature, that the revenue for the feature is just so high.

Like, that's the feature.

And or will another company show up that just says, hey, we're going to sell the green field with a new product that kind of has this feature set embedded.

But the revenue for the feature is just so high and the demand for it is so high because, again, in many cases, you're just responding to help one of that effectively.

And then that functionality has to, that feature has to backfill product, backfill company as quickly as possible.

I think the other thing that we should anticipate we're already beginning to see from some of these big model companies are like what are the big horizontal applications that they can likely sell to every large enterprise?

Well, I think that, you know, if you kind of think about this versus other platform companies.

So this week it's 10% taxes.

Because why is it, I published this graph of VisiCalc versus Lotus 1-2-3 versus Excel.

Like, the problem with Windows was that it was, like, 95% of the market.

Now, there are five model companies, or more, like when you include all the Chinese models and whatnot, open source, like I don't have to worry about that.

This changed my outlook on life when I pitched this guy, Dan Rose at Facebook, who was running business development there.

But the nice thing is that these are gold bricks.

On that note, if you were running OpenAI and you were thinking about which gold bricks, how do you think about what are the things that you should be doing first versus things that maybe let other people do?

I mean, I think a lot of it is where, well, it's two things.

And this is part of why Microsoft crushed Apple in the 1980s.

And it's like, how do you afford that?

But I'd say two things to answer your question.

And this is why like, you know, Workday beat PeopleSoft or that's why, you know, Salesforce beat Siebel.

I think there's also, to some degree, and I think this has been earlier to sort of play out, it's sort of the Palantir opportunity.

At the same time, you know, unlike prior product cycles, you know, like the cloud, if I'm the CEO of a large public company and I'm asking myself, do I need to be in the cloud?

enterprise from some of these big model companies.

And then they'll probably choose, you know, a few sort of like lighthouse customers to build, you know, largely bespoke kind of custom integrations into these, you know, bigger enterprises.

In Web2, there was a lot of winner take most.

Well, I think if you have 20 companies that are all doing the same thing.

It's like all this is approved because it's not like you're taking, this is like orthodontic clinic answering software or something.

Whereas if you, this is not saying you want to go build a monopoly in orthodontic answering software or something.

And sometimes you just need these markets to work themselves out.

were really subsidizing everything and that does not get a good market.

What does become a good market at the end?

So I think that will probably play out the same way here?

Because you just can't have a market where you have everybody lost leading.

Is there going to be a world where the 19th player survives?

but there's a long tail of things that people haven't heard of where it's like they've raised lots of money.

So that game is super cutthroat.

I think one area where that may have diverged, and Martin talks about this a lot, is like, you know, when markets are growing so quickly, you end up having specialization.

But maybe that's the optimistic take that early on everything looks overlapping and competitive, but the market is growing that everything can expand and people can specialize over time.

Earlier when you were talking about the feature of this product, didn't Steve Jobs once tell Drew Houston that Dropbox was just a feature?

That's the danger of building on somebody else's platform is that, you know, I'm going to build this thing that they should have had, right?

And there's a lot of other things. Like, once you build that feature, you can backfill with all sorts of other products, which is what Dropbox has done a pretty good job of.

outcompete the platform, but, like, you have to be careful because it's, like, obviously the platform owner is going to go compete with you.

It's like, no, they're not. These companies, if they get their act together, they will marshal a lot of resources to go compete with you It might take them five years but they will 100 do it.

and it's just this idea that you hook into a bunch of different unstructured data sources.

for that feature is interesting in large part because it lives up funnel from software, right?

Well, I think this is the thing that in my mind is very dramatically different than every other platform shift is that it is just so consensus.

And this is why like, you know, Workday beat PeopleSoft or that's why, you know, Salesforce beat Siebel.

There's no version of that for AI.

So like they're just kind of gold bricks everywhere.

But the challenge though is that there isn't this kind of white space to occupy in the same way that there was for cloud or for mobile or for a lot of the web 2.0 things where it's like you just like the incumbents screwed up.

They weren't paying attention. They scoff at this new technology.

the business impact of the AI era, what's your model for thinking about the incumbents versus startup or kind of net new company in terms of, you know, value capture?

I mean, there probably are some things, like, you know, take like one example of, and this kind of goes back to distribution versus technology, like all of these business process outsourcing companies, these BPO's, they're the largest employers on the planet.

And it could go either direction. I think a lot of these things are really up for grabs.

but there's an alternative case, which is like, if you operate in the right Goldilocks zone and you have the right momentum to actually build these things and embrace these new technologies, you'll maintain all of your customer relationships and you're just going to have a more profitable business.

The most compelling thing I think about AI that almost everybody gets wrong is like, oh, it's going to destroy all the jobs.

It's not like all the jobs will go away.

So a lot of these tasks, like, you know, look at how many people took taxis post Uber, right?

and then the value is probably low.

And as soon as you can bring the cost down to zero, now you're going to start hiring AI in all of these different areas that you just would never bother hiring a human for because it's just like you can't train the human, you can't find the human, and the human's too expensive.