The New Business of AI (and How It’s Different From Traditional Software)

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Headings…
The New Business of AI (and How It’s Different From Traditional Software)
Software + services = AI? 🤖
Gross Margins, Part 2: Many AI applications rely on “humans in the loop” to
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AI is showing remarkable progress on a range of difficult computer science problems, and the job of software developers – who now work with data as much as source code – is changing fundamentally in the process.
Many AI companies (and investors) are betting that this relationship will extend beyond just technology – that AI businesses will resemble traditional software companies as well.
However, we have noticed in many cases that AI companies simply don’t have the same economic construction as software businesses.
Lower gross margins due to heavy cloud infrastructure usage and ongoing human support; Scaling challenges due to the thorny problem of edge cases; Weaker defensive moats due to the commoditization of AI models and challenges with data network effects .
Anecdotally, we have seen a surprisingly consistent pattern in the financial data of AI companies, with gross margins often in the 50-60% range – well below the 60-80%+ benchmark for comparable SaaS businesses.
Gross Margins, Part 1: Cloud infrastructure is a substantial – and sometimes hidden – cost for AI companies 🏭
We’ve had AI companies tell us that cloud operations can be more complex and costly than traditional approaches, particularly because there aren’t good tools to scale AI models globally.
As a result, some AI companies have to routinely transfer trained models across cloud regions – racking up big ingress and egress costs – to improve reliability, latency, and compliance.
A number of AI companies that planned to sell pure software products are increasingly bringing a services capability in-house and booking the associated costs.
While it’s not clear whether an AI model itself – or the underlying data – will provide a long-term moat, good products and proprietary data almost always builds good businesses.
The fact that we’re seeing unfamiliar patterns in the data suggests AI companies are truly something new – pushing into new markets and building massive opportunities

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