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AI, and Commoditizing the Complement

AI, and Commoditizing the Complement. Source: DALL-E.

Why AI is Like Electricity

Artificial Intelligence reminds me of electricity. They are both enabling technologies. Thomas Edison is often credited with inventing the incandescent light bulb in 1879, and the expectation was that electricity would offer a competitive advantage. It did at first. But as the reach of power infrastructure grew, more companies saw the benefits of automation, and harnessing electricity became table stakes. Electric power allowed businesses to increase efficiency, productivity, and overall operational capabilities. The manual labor of humans and horses couldn’t compete. By the 1950s, the vast majority of businesses in the United States had access to electricity, and it had become a standard utility rather than a competitive advantage.

As electricity became commonplace, the competitive advantage shifted from simply having access to electricity to how efficiently and effectively businesses could use it. This led to an ongoing focus on innovation, energy efficiency, and the adoption of new technologies that relied on electrical power. The competitive landscape evolved, but the importance of electricity in driving business success remained crucial.

Despite similarities, there are key differences between AIs and utilities. Utilities tend to operate as “natural monopolies” where it is often more efficient for a single company to serve an entire region, rather than having multiple competing firms with duplicate infrastructure. Utilities require land on which to generate power, and a physical grid to transmit and distribute power. It’s uneconomic to build competing utilities and grids delivering power in a particular geography. That’s why utilities often enjoy monopoly power in a specific geography and are regulated as such.

Unlike utilities, cloud-based AIs will face unconstrained competition as they vie for the attention of consumers and businesses. There will be fierce competition among the largest tech companies and startups, and proprietary data will become increasingly important for differentiation. More than compute and storage, data will become the most valuable, scarcest resource. Over time, competition among AIs will largely make the underlying foundation models a commodity, albeit a crucially important product not unlike cloud compute and storage services offered by Amazon, Microsoft, Google, Digital Ocean, and others.

Where Will Value be Created in AI?

With the understanding of these competitive dynamics, where will value be created in AI? At the application level, opportunities are likely to take two major forms: 1/ Task replacement, 2/ Net-new stuff. Task replacement is AI automating tasks currently performed by humans. AI is going to “eat” big chunks of what many skilled people do, and it’s going to drive the costs of those tasks down to almost zero. This will commoditize a large percentage of the value created by skilled people like lawyers, accountants, doctors, engineers, architects, and others. Task-replacement AIs in the short- to medium term will be able to charge for their services – AIs cost less than humans but deliver faster and higher-quality output. However, because AIs are able to deliver high-quality output at almost zero marginal cost, competition will drive prices down towards marginal cost.

By commoditizing significant parts of what professionals do in a highly scalable and high-quality way, AI turbocharges the digital playbook of “commoditizing the complement” [1]. If your industry is going to be commoditized by AI, it will be critical that you identify your profit-generating complement. Commoditizing the complement is a strategy in which a company drives down the price (or makes it free) of a complementary product or service that enhances the value of its core product. This approach can increase demand for the core product while reducing the profitability of competitors that rely on the complementary product as their primary source of revenue. Here are some examples of software companies employing this strategy:

  • Google: Google commoditized various software products and services by offering them for free or at low cost, effectively undercutting competitors that relied on those products for revenue. Examples include Google Search, which commoditized online search advertising; Google Maps, which commoditized mapping and geolocation services; and Google Drive, which commoditized cloud storage.
  • Adobe: Adobe created the PDF format and distributed it for free, making it a widely used standard for document sharing. The adoption of the PDF standard ultimately increased demand for Adobe’s core products, such as Acrobat, Illustrator, and Photoshop.
  • Apple: Apple’s App Store commoditized mobile apps by creating a centralized marketplace where developers could sell their apps at relatively low prices. This strategy increased the demand for Apple’s core product, the iPhone, by making it more valuable due to the vast array of affordable apps available to users.

…the defensibility of businesses that commoditize the complement will primarily come from the proprietary data that they generate and then use to train and further improve the AI on which their product or service relies.

With AI, products and services that had been accessible only to more affluent consumers due to the high labor cost of providing those products and services will now be accessible to everyone through automation. What might be commoditized and what are the potential complements? I’m really interested in this question, and if you’re implementing this strategy I’d love to hear from you. An example of this strategy applied to fintech might be offering a free AI-powered software service (the commoditized complement, traditionally provided by humans or legacy software), that generates revenue through payments, payroll, insurance brokerage, marketplace, premium software services, etc (the complement). As these models mature, the defensibility of businesses that commoditize the complement will primarily come from the proprietary data that they generate and then use to train and further improve the AI on which their product or service relies.

In the category of totally new stuff, there will be net-new products and services that weren’t possible before AI. In particular, interdisciplinary collaboration seems like a promising way to develop AIs to address climate change, healthcare, education, and other pressing needs. These net-new products and services won’t have close substitutes, and will be priced on the value they deliver. They may also have their own commoditized complements.

Still the emergence of powerful AIs brings many risks and unanswered questions around data collection, use, and security, along with important ethics, bias, and privacy concerns that are beyond the scope of this post. These issues will need to be understood and addressed alongside the enormous potential benefits of this new technology. The long-time promise of AI seems to be on the cusp of fulfillment. As AI commoditizes the complement, high-quality products, services, and advice that otherwise came with significant costs, will be made available at low- or no cost to billions of people, and that will be a good thing.

[1] Joel Spolsky, “Strategy Letter V,” Joel on Software, June 12, 2002,

Note: I used OpenAI’s ChatGPT-4 Mar 23 Version for researching and editing this post.

What a 100 Year-Old Race to the South Pole Teaches Us About Design

Design informs most of what we come in contact with whether it be architecture, mobile devices, cars, software and web services, or a school’s curriculum.  Sentences are designed, edited down so they convey meaning with efficient elegance.  “Good” design delights with its simplicity, its flexibility and ease of use.

Design was on my mind while walking through the Museum of Natural History’s excellent exhibit on the race between Robert Falcon Scott and Roald Amundsen to first reach the South Pole (1911-1912).  Perhaps it’s a strange place to be thinking about design, but expeditions, especially those attempting to first reach the South Pole, are amazing crucibles for design.  Each team had to carefully select its route and take nearly everything with them: fuel, clothing, plenty of food for themselves and their animals, shelter, transportation, etc.  It was critical to design the expeditions so that they would be flexible enough to meet changing conditions.  In fact, Scott didn’t realize he was in a race until receiving a surprise telegram from Amundsen: “BEG LEAVE INFORM YOU PROCEEDING ANTARCTIC — AMUNDSEN”.

It is through this lens that we can see how each team’s preparation, experience, and design choices impacted their efforts.  Ultimately, Scott reached the pole only to find that Amundsen had beat him to it.  Freezing cold, frostbitten, and running short of supplies, Scott and his team lost their lives on the return.  Tragically, the remaining polar team was found only 11 miles short of their main depot’s relative safety.  On the other hand, Amundsen’s team successfully reached the pole before Scott without any loss of life.  How did this happen?  What can design teach us about these outcomes?  How can these lessons be applied to the less lethal, but similar challenges of building teams and operating companies?

Competing Goals vs. Singularity of Purpose
Scott’s Terra Nova Expedition had competing goals.  Not only were they seeking to reach the South Pole first, but also they had various scientific goals requiring additional manpower and equipment.  Scott’s expedition was well-publicized and he knew that the success of the expedition would hang on whether he reached the pole.  While the scientific work was important, it was ultimately a distraction.  Scott setup camp at Cape Evans since it was a better area for the scientific work they planned to complete.  However, it was 60 miles further from the pole than Amundsen’s camp on the Ross Ice Shelf.  Scott had already disadvantaged his team before the journey began.

On the other hand, the Amundsen Expedition designed itself with one, clear goal: reach the south pole first.  The route, equipment, team members’ skills, mode of transportation, food supply – everything – was selected for the sole purpose of reaching the pole first.  Amundsen fielded a small, agile team with only nine men, some with arctic experience and others who were completely green.  But they were built for speed and brought 52 dogs with them.  In contrast, Scott had 65 men (including the ship team) when only five would make the final trek to the pole.  In a showing of Amundsen’s focus, he took only two pictures the entire expedition while Scott’s team extensively documented their efforts and brought 35,000 cigars with them.

Perhaps even more important was that everyone on Amundsen’s expedition understood that there was only one goal.  This likely freed expedition members to make informed decisions without having to weigh any choice in the context of competing goals.  Tellingly, on the return from the pole and nearing exhaustion, Scott’s team added 30 pounds of geological specimens to their sledges.

Start Simple and Iterate
Scott’s team also had a complex transportation plan that involved ponies, dogs, three motorized sledges, and “man-hauling” (like it sounds: hauling your own supplies).  The motorized sledges cost 7x what the dogs and ponies cost combined, although three-quarters of the distance was completed with man-hauling.  The ponies were only used for the first 25% of the trip as the ponies were not suited to travel up the Beardmore glacier.  In an inauspicious beginning for Scott, one of the motorized sledges fell through the ice while being unloaded from the ship, and the remaining two were abandoned due to mechanical failures.

Amundsen’s team kept things simple.  They relied exclusively on dogs for transportation, calculating correctly that dogs would be able to make it over any terrain they would encounter.  Despite their affection for the dogs, Amundsen’s expedition relied on weaker dogs for food, both for the dog team and themselves.  Scott was reluctant to use dogs in this way although he didn’t shy from using the ponies for food.  Scott also ignored the expert advice of Fridtjof Nansen, the famous Norwegian explorer, who told Scott to bring “dogs, dogs, and more dogs”.  Scott received this advice while trialling his new motor sledges in Norway and, likely feeling the momentum of the sledges’ expense and the effort involved in developing them, decided to continue using them.  While Amundsen fed his dogs with seals and penguins, Scott was forced to bring the ponies’ food from England and carry the extra weight during the expedition.

Upon reaching Antarctica, Amundsen’s lead skier, Olav Bjaaland, redesigned the sledges, tents and footwear.  While Scott’s team used the same sledges, Bjaaland shaved the Norwegians’ sledges down, reducing each sledge’s weight from 165 pounds to 48 pounds.  Further, the boxes hauled on the sledges were designed so that their contents could be accessed without unloading them.  The Norwegians also soldered their fuel cans closed to eliminate evaporation.  Scott knew of the evaporation issue from his experience on an earlier expedition with Shackleton, but Scott’s expedition used cork plugs anyway, and were dismayed to find that significant amounts of fuel had evaporated by the time the team reached the depots.  Lastly, Amundsen outfitted his men with loose-fitting fur clothing that kept them warm and dry, a technique he picked up from his experience with the Inuit.  Scott selected closer-fitting windproof materials that trapped perspiration, leaving his team wetter and colder.  Amundsen enabled the innate talents of his small team to run while successfully drawing on his experience and the advice of others.  These were all fairly small design choices that, in combination, had a very positive impact on Amundsen’s chances.

A Grand Vision and Practical Steps to Achieve It
The grand vision was to achieve the pole first, but each expedition sent teams ahead to lay necessary route markers and set up depots.  The markers made it easier to navigate their respective routes and the depots provided food, fuel, and equipment in the field.  During critical stretches, Amundsen’s team methodically laid markers every mile, using pre-painted black food containers to show the way.  Closer to the pole, he erected 6-foot cairns every three miles which included a note indicating the cairn’s location, the direction to the next cairn, and the distance to the next supply depot.  These cairns acted as effective milestones for the team, aiding navigation and providing much-needed signals of progress.

Scott’s depots were laid out less regularly and were marked with one flag each.  Walls used to protect the ponies during lunch and night stops were used as markers, so there was no regular spacing to help with navigation.  Unlike Amundsen’s markers, Scott’s were laid further apart making it impossible to travel on inclement days that had poor visibility.  With a simpler and more structured design for route-marking, Scott’s team would have traveled regardless of most weather, and might have been saved.

Building a Team
Building an effective expedition team meant finding the right balance of skills and personalities.  In preparation for the expedition, Scott hired an engineer, Reginald Skelton, to create the motorized sledges.  However, when it came time to choose the expedition members, Scott bowed to the demands of his second-in-command, “Teddy” Evans, who objected to Skelton’s selection.  Evans took issue with the fact that Skelton out-ranked him in the British Navy – Evans did not want a more senior officer to overshadow his position.  Allowing this issue to become politicized seems to be a clear lack of Scott’s leadership, who should have found a place for Skelton and dealt with Evans’ concerns.  Without Skelton’s skills, two of the three motorized sledges had to be abandoned after running into mechanical issues that Skelton likely could have fixed.

The Norwegians were also accomplished skiers and were able to keep up with the dogs pulling the sledges.  The Norwegians knew how to care for their dogs as well, keeping track of mileage and being sure not to overwork them.  Amundsen even brought Bjaaland, a champion skier, to pace his team.  While Scott also brought a Norwegian skier to train the rest of the men to ski, Scott didn’t require his men to train.  This became a major hindrance as most of his British teammates had very little or no experience on skis.  This hampered Scott’s progress as the men awkwardly learned to ski while on the expedition, while hauling their supplies, too.  Scott’s lack of leadership and seeming willingness to let politics impact his selection of individuals with the appropriate skills put his whole expedition at a disadvantage.

Making Your Own Luck
These two expeditions captured my imagination with the details we have from Scott’s diary and Amundsen’s own account.  It’s a fascinating piece of history that offers some interesting lessons on how to design and lead teams in conditions harsher than most of us will ever experience.  In his book The South Pole, Amundsen concludes:

I may say that this is the greatest factor – the way in which the expedition is equipped – the way in which every difficulty is foreseen, and precautions taken for meeting or avoiding it. Victory awaits him who has everything in order – luck, people call it. Defeat is certain for him who has neglected to take the necessary precautions in time; this is called bad luck.

— Roald Amundsen

The defining principle I take away from Amundsen’s success is that if something can be done simply, it’s almost always preferable to a complex solution.  So, the next time someone offers you three motorized sledges (and nobody to fix them) for your polar expedition or 52 dogs, take the dogs.

Track Changes to Privacy Policies and Any Webpage with Google Reader

The Google Reader team recently announced that Reader now allows you to follow changes to any web page, even if that page doesn’t support RSS.  I am a heavy Google Reader user (particularly on my iPhone) and this is a great tweak that has some interesting applications.  For example, eBay sellers could subscribe to eBay’s User Agreement to keep track of any updates that might impact sellers’ businesses.  Or, Facebook’s most recent privacy dust-up might motivate others to create a subscription to Facebook’s Privacy Policy.  Journalists probably have the greatest use for this feature, enabling them to track everything from TOS changes to new product launches, site redesigns, etc.

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Go Into the Garage

I met with a VC named Jim Millar a number of years ago, and he made a great observation:

If you want to be at the right place at the right time, you need to be in as many places at once as possible.

It’s a twist on the “you make your own luck” adage, but I like its emphasis on effort and the reality of probabilities.  Of course, being at the right place at the right time is only part of the answer.  If you don’t recognize that you’re at the right place at the right time, you might as well not have been there!  Or if you realize you’re at the right place at the right time and you don’t take action, the same is true.   So, even though “luck” is a requisite ingredient for making the most of a situation, you need two other critical ingredients: 1) pattern-recognition abilities (experience) and the smarts to spot luck when you visit with it; and 2) the wherewithal to take action and follow through.

The nice thing about our modern world – with technology enabling instantaneous communications, global travel and capital flows – is that it’s never been easier to be at the right place at the right time.  It’s just gotten a lot more competitive because it’s easier for everyone else, too.  But “being in as many places at once as possible” is unfocused and can be hugely unproductive, so it’s important to balance a frenetic pace with some discipline.

To impose some order, I like to schedule meetings in blocks so that I can reserve time to do other work that requires uninterrupted thought.  It can be challenging to get things done if your day is chopped up into interminable 15-minute sprints (although necessary).  If a day has a morning meeting scheduled, I’ll try to block future meetings in the morning, leaving part of the afternoon free to do more involved work requiring bigger chunks of time.  Similarly, if that day has a single afternoon meeting, I’ll block future meetings in the afternoon.  Blocking meetings together just gives me more time to focus on getting real work done.  Oftentimes this strategy goes out the window, but it’s a good framework.

In order to stay focused on the real work I need to do during these “free” blocks, I compile a list (usually the night before) of the 3-5 substantial things I want to accomplish the next day.  If I get through my list, then it’s been a productive day (thank you to Marc Andreesen’s (now dormant) blog for putting me on to this.  If you haven’t already, do yourself a favor and read Marc’s fantastic post on personal productivity tips).

Nonetheless, I try to connect with as many people as possible and I like to cast a wide net.  I frequently get more inspiration and ideas out of meeting folks who do not work in the technology world I inhabit (one of the benefits of being a NYC-based entrepreneur).  Similar to any industry, the technology community can become a bit of an echo chamber, so it’s beneficial to dig into how other industries and disciplines operate.

So, don’t let opportunity pass you by.  Renowned Bessemer VC David Cowan knows this best: in 1999 while leaving the house of a friend who was renting her garage to two smart Stanford guys named Larry Page and Sergey Brin, Cowan said, “How can I get out of this house without going anywhere near your garage?”  Inspiration can be found in unexpected places, so I’ll be going into the garage and won’t mind if I sometimes find it empty.