Why We’re Entering an Enterprise Tech Arms Race
By ffVC Founding Partner John Frankel
My good friend, Lou Kerner, recently posted an article called The Profound Implications of 5 Increasingly Dominant Tech Companies, highlighting Alphabet, Amazon, Apple, Facebook and Microsoft. It is a good piece and I suggest you read it.
Lou highlights that these five stocks as a percentage of NASDAQ 100 market cap now top 40%. Their growth in ad revenue is faster than Internet advertising overall — they are sucking revenue from everyone to their left and right. And, they can dominate adjacent markets. All this makes sense.
I think the trend of these tech giants’ dominance will continue for some time, and want to address why this time is different. We have seen many times over strong tech companies that seemed to be unstoppable, being, well, stopped in their tracks and overtaken — remember Sun Microsystems, Wang, and Borland?
To me, the answer has a lot to do with the current state of artificial intelligence: the application of algorithms to the massive, and mainly proprietary, data sets that these tech giants have amassed. Each is approaching their opportunities in different ways, based on their assets, culture, and market opportunities, but each is becoming increasingly dominant. What is key is that they have network effects — their products/services gain more value as more people use them — that are being extended and protected by AI. This will help them remain dominant for many years to come.
What does the application of AI to these massive data sets do for these companies? It allows them to make their offerings a little more “magical”—to be more appropriate, more tailored and more customized to what a consumer is looking for. Look no further than the surge of voice-enabled, AI-powered virtual assistants like Apple Siri, Google Assistant, Amazon Echo, and Microsoft Cortana. According to ITProPortal, public awareness of Amazon Echo rose from 20% to 70% in about a year and analysts estimated that up to 12 million voice-operated virtual assistants were sold in the 2016 holiday season alone.
This is just one example of how these five behemoths are making it tougher for competitors to offer something similar. It raises the bar, and not just in one way, but across the board: Apple uses it to tune the sound you hear, the way its AirPods can receive signals over longer distances, and to make micro-suggestions in your email and calendar, not just in the increased accuracy in Maps and Siri. The barriers in consumer tech are much higher, and growing; there is a moat that will protect, each in its own way, the businesses of these companies.
Simply put, it is far harder today to start a consumer tech company than it used to be. We have seen some interesting approaches, such as with our own Clarity Money, which is using the same AI toolset to give the consumer insights into their finances that would otherwise be beyond them — but such companies are few and far between.
At the same time, AI-powered agents and applications are educating the consumer on what to expect, not only from other consumer-facing businesses, but in the workplace.
A similar thing happened with web user experience a decade ago, which bled from consumer to enterprise. Many non-tech enterprises know they have to catch up, and yet do not have the internal capabilities to adapt. This is creating a long-term and growing demand for AI-powered solutions: solutions that are both internal and customer-facing. Here there is a strong opportunity for startups, and it is where we are seeing many opportunities. These companies will have products and solutions that enterprises will use, integrate, and, perhaps, acquire.
As CB Insights recently reported, new corporate players are entering the fray to snap up private AI companies, like Ford, Samsung, GE, and Uber to name a few. In Q1 2017 alone there were more than 30 acquisitions of private companies employing proprietary AI algorithms.
There is an enterprise arms race for AI capabilities. Everyone will participate. Even if they’re not yet aware.
