Winning in the age of AI

How moats have changed over time

Winning companies have a durable competitive advantage (or moat) that allows them to achieve above average returns in their industry. Historically, such advantages usually involved having unique access to a natural resource such as high-grade ores or a low-cost power source: For instance, by consolidating 90% of diamond supply De Beers were able to exert significant influence over the diamond market in the 20th century.

In today’s connected world, it is not about what you own, but about the number of customers you can engage. The focus of competition has shifted from exclusive access to physical assets to ‘owning’ a community’s interactions.

User engagement is core to the success of platforms like Facebook and Google. The most powerful platforms are built around high-frequency needs (i.e. daily or weekly use patterns) and very high repeat use (e.g. taxis, meals). And the more users Google, Uber and Facebook amass, the more relevant they become and the better the service becomes. It creates a virtuous circle (‘network effect’).

By claiming the attention of a massive user base of frequently used apps, companies such as Facebook, Amazon, Netflix and Google have been able to commoditise their suppliers, from publishers to merchants and content producers — basically anyone who needs to be found on the internet.

Intelligence as the new moats

With the arrival of Artificial Intelligence, we may well be entering a new phase of competition. The rules of engagement are shifting yet again and this time from ‘owning natural resources’, to ‘earning users’ to ‘deploying intelligence’.

As Artificial Intelligence will become an integral part of everything we do, companies will need to compete on three fronts, namely (1) data scale, (2) scale in infrastructure and engineering capacity to process all that data and (3) the ability to apply AI to solve specific customer problems.

AI looks tailor-made for the incumbent tech giants. They have quickly moved to put AI at the center of their strategies. Aware of its massive potential, they have started to invest appreciably in AI talent, data infrastructure and even their own dedicated chips.

Given their wealth of data, computing power and human talent, it seems likely that they will capture a substantial proportion of AI’s gains.

But even though the global titans employ thousands of data engineers and operate networks of server farms that smaller rivals cannot match, AI will give smaller tech companies a new arsenal of tools to win. While the tech powerhouses certainly have most of the data now, their Achilles heel may be a lack of deep domain expertise. Many new winners can be created by applying AI to distinct problems in the titans’ blind spots. As such, integrating AI very tightly into your business processes should also allow companies to compete with the giants previously thought to be invulnerable.