Building Moats by App-Level AI Startups
The AI landscape is dominated by foundational model providers (e.g., OpenAI, Google, Anthropic). These companies create core models that power many of today's AI applications. A significant challenge exists for AI Software as a Service (SaaS) companies, which build applications on top of these foundational models. The central question is: How can these "up-level" companies build a sustainable business and defend their market share against the very platforms they rely on?
This is not a new problem in business. We can observe similar patterns in other industries where a platform owner eventually competes with the businesses built on their platform.
Supermarkets and Store Brands: Large supermarkets, like Walmart, provide a platform for various brands to sell their products. Over time, the supermarket identifies popular products and introduces its own "store brand" alternative, often at a cheaper price. Since the supermarket controls the shelves and the customer's shopping experience, they can easily promote their own brand, putting the original proprietary companies at a disadvantage.
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Amazon and Private Labels: A similar dynamic exists on Amazon's e-commerce platform. When a third-party seller has a hot, successful product, Amazon may introduce its own private-label version. Because Amazon controls the search and discovery process, it can prioritize its own brand, effectively pushing the original product out of the customer's view and taking over the market.
Twitter's API and App Developers: In its early days, Twitter provided an open API that allowed third-party developers to create auxiliary apps and features. As these features became popular and widely adopted, Twitter began to incorporate them directly into its core platform. This led to the decline of nearly all the third-party apps, as their core functionality was now a native part of Twitter's service.
The lesson from these examples is clear: relying solely on a larger platform's infrastructure can expose a company to existential risk if the platform decides to compete directly.
In the latest Tekedia Daily podcast, hosted by Blucera, I provide how AI app-level SaaS companies can overcome this problem and build real moats in the fledgling AI era. At Tekedia Daily, I podcast revelations on business, daily.