ChatGPT and moats

Emmanuel Maggiori writes one of the best tech-industry blogs out there. His ‌I’ve been employed in tech for years, but I’ve almost never worked is brutal, a truly paradigm shifting read.

But today, I’d like to draw your attention to his latest post, ‌Technological superiority is NOT a competitive advantage:

In May 2023, a leaked Google memo said, We have no moat and neither does OpenAI. […] The uncomfortable truth is, we aren’t positioned to win this arms race and neither is OpenAI […] While our AI still holds a slight edge in terms of quality, the gap is closing astonishingly quickly. Open-source AI is faster, more customizable, more private, and pound-for-pound more capable.”

Technological superiority, however, is not a competitive advantage, or a moat,” meaning a feature that protects a business from profit-eroding competitors. Unless the company has access to an exclusive resource to build that technology, which is not available to others, then competitors will most likely catch up with it at some point, just like the Google memo explained.

Technological superiority, 10x or not, is an example of an illusory moat that has become all too popular. In reality, if a company has technical superiority, it still needs to find a way to build a true moat. An example of this is the network effect” enjoyed by social networks and marketplaces. This effect benefits businesses which provide value to users through the size of the user base itself, which makes it hard for new, smaller entrants to gain customers.

Internet search is still revolutionary, but that didn’t save AltaVista or even Yahoo!. My guess is that ten years from now, LLMs and the companies behind them won’t look anything like they do today.