If you’re just waking up from a coma and haven’t spoken to anyone in tech for the last 5 months you’ll be shocked by how Artificial Intelligence and large language models (LLMs) like ChatGPT have taken the world by storm.
AI and LLMs have drastically altered the way the tech industry approaches all sorts of problem-solving, and their impact will be enormous. Think of how the development of the internet and the wide adoption of smartphones slowly but suddenly changed the world as we knew it. AI’s impact will be of a similar magnitude!
In this article, we’ll explore how these technologies are revolutionizing the software landscape, touching on the reduced costs and time of software development, the importance of network effects, and the new differentiators in a world where AI is abundant and intelligence is a commodity.
1 – Seek network effects
AI-powered tools like GitHub Copilot reduced the cost and time required to build software. As software development becomes faster and more accessible, we can expect a surge in competition for established players. Newcomers will quickly replicate core functionalities and leverage AI to develop new features.
As one way to protect current and future market share, entrepreneurs must focus on building products with embedded network effects.
Network effects occur when a product or service becomes more valuable as more people use it. Here are the most powerful network effects and some companies consciously using them for their benefit:
- Direct network effect: The value of a product or service increases as more users join, e.g., social media platforms such as Facebook and Instagram
- Indirect/platform network effect: The value increases due to complementary goods or services offered by 3rd parties that enhance the product’s usefulness or appeal, e.g., operational systems for smartphones such as iOS and Android
- Two-sided network effect: Both users and providers benefit from increased adoption, e.g., marketplaces like Airbnb or Uber.
- Data network effect: More users generate more data, that will be used to improve product functionality or performance, e.g., AI algorithms, recommendation systems.
- Compatibility network effect: A product becomes more valuable as it’s compatible and integrated with others, e.g., hardware and software interoperability.
(Yes, this summary section was almost all written by ChatGPT by asking it to list and summarize the most powerful network effects in less than 20 words each according to James Currier.)
By achieving a state of network effects protection, companies can buy time to leverage AI to their advantage. As new competitors emerge with innovative features, you’ll have time (and user revenue) to react and develop features “inspired” by your competitors’ to maintain your edge and market share.
Just don’t get too comfortable within your moats
No moat is ever deep enough and impenetrable: as the Bing vs. Google battle unfolds, we’re witnessing the most impenetrable “Maginot Line” in tech being debunked.
November 1939 was 6 months before Hitler (successfully) invaded France through Maginot Line’s weakest points
Quoting Gilberto Mautner, Locaweb’s founder and chairman: “Tech companies must continuously reinvent themselves in order to survive and thrive”.
2 – The commoditization of AI-powered features and the remaining differentiators
As AI capabilities become more specialized and accessible, even small companies will be able to embed AI-powered features that previously required multiple squads of experts to develop. Functions like automatic sentiment analysis and customer feedback categorization will no longer be exclusive to industry leaders.
In this new era, where the cost of integrating AI capabilities into products is near zero, user experience (UX) and prioritization will become the key differentiators. Companies that can effectively prioritize the most relevant features and create intuitive, user-friendly experiences will have a competitive edge in the feature-abundant market.
Another side effect I dare to foresee is the quality gap between solutions that were created to serve the US market and Latam, for example, will shrink. Regional players, who typically played the localized-copycat strategy will require less resources and time to build a close-enough product and pose significant competition in their geographies.
Vertical SaaS and other niche solutions will also become much better for their customers. But this is a topic to explore in another essay…
In conclusion, I’m certain that despite big media negativity, the future is bright, and those who embrace AI and its transformative potential will undoubtedly be at the forefront of the new digital economy. So, I wholeheartedly advise you to embrace the inevitable AI revolution with open arms.