Great stuff as always. One reason I'm bullish on the application layer capturing most of the value is because humans hate change. The invisible stuff like the models might be truly interchangeable but Jeff in accounting at an F500 is not going to want to switch software every 18 months.
I think that's probably pretty true but, for the sake of argument, if it's all a text box with little to no interface the change may be basically invisible. or you could imagine that it's a series of agents (provided by different companies) that summon and command through a single, static interface (email, text, etc) such that swapping is invisible
Great post. I would add however, that margins are supported by much more than just switching costs. Yes, it does increase pricing power when switching costs are high (see: ERP, CRM, SCM, etc...). However, pricing power and margin resilience are also anchored in ROI demonstrated to customers, regulatory lock-in, unique data assets, network effects, and the business-critical nature of specific workflows. Not all moats are equally vulnerable to the AI margin squeeze. The bigger risk to 50% software companies is the reduction of headcount needed to access the software to conduct jobs --- zero job growth = fewer seats to sell to and a race to the bottom for growth. The hybrid models will evolve the customer's perception of ROI.
I guess in my construction I'm positing that all of those things roll up to switching costs. If the product is really great, then it's painful/expensive to switch off of it!
the seat point is well put though I'd guess that that is compensated for elsewhere (more total companies and charging for output/value)
100% correct. LLM native companies will need to utilize FDE from day one. Software will get more and more verticalized and specialized. Monday (CRM for everything) will not exist in 10 years.
Great stuff as always. One reason I'm bullish on the application layer capturing most of the value is because humans hate change. The invisible stuff like the models might be truly interchangeable but Jeff in accounting at an F500 is not going to want to switch software every 18 months.
I think that's probably pretty true but, for the sake of argument, if it's all a text box with little to no interface the change may be basically invisible. or you could imagine that it's a series of agents (provided by different companies) that summon and command through a single, static interface (email, text, etc) such that swapping is invisible
Great post. I would add however, that margins are supported by much more than just switching costs. Yes, it does increase pricing power when switching costs are high (see: ERP, CRM, SCM, etc...). However, pricing power and margin resilience are also anchored in ROI demonstrated to customers, regulatory lock-in, unique data assets, network effects, and the business-critical nature of specific workflows. Not all moats are equally vulnerable to the AI margin squeeze. The bigger risk to 50% software companies is the reduction of headcount needed to access the software to conduct jobs --- zero job growth = fewer seats to sell to and a race to the bottom for growth. The hybrid models will evolve the customer's perception of ROI.
I guess in my construction I'm positing that all of those things roll up to switching costs. If the product is really great, then it's painful/expensive to switch off of it!
the seat point is well put though I'd guess that that is compensated for elsewhere (more total companies and charging for output/value)
100% correct. LLM native companies will need to utilize FDE from day one. Software will get more and more verticalized and specialized. Monday (CRM for everything) will not exist in 10 years.
Superb
thanks!