If you are Warren Buffett and you are thinking of buying a business you worry if that enterprise has a moat. A moat is a deep defensive barrier around a business that keeps competitor away from getting into your business and therefore stops them having a chance at scaling your corporate walls and pillaging your treasury.
For some its brand. Lets have a for instance. Rolex is a watch and a watch tells the time and an excellent time telling watch costs $20, not the $10,000 Rolex charges at the get go. The Roles brand and marketing is their moat and it is wide and deep and impregnible.
Businesses where the moat is shallow and narrow are not only vulnerable but also not especially highly valued. I’m struggling to think of a big company with a little moat and that might just be because you can’t get big if you don’t have at least a reasonable one. Mobile carriers are thought of as having little in the way of moats, but their moats are certainly too big for me to get to their walls and try to compete. However, for other mobile carriers and their prospective investors, their collective moats don’t seem anywhere near defensive enough to attribute a fat valuation metric.
So lets look at AI.
AI is a truly big deal, driven by AI models that are just simply incredible. But it turns out that any given model barely has a moat at all. Anyone with a bit of money and a lot of cunning and some AI guru’s can copy/paste the best of your model and ingest it into theres for a fraction of the cost you ponied up to train the beast.
AI frontier models therefore seem practically moat less, at least as the industry and the law stands.
‘Ooops,’ so many are saying.
Yet here is the thing, old AI already does most of the things users want, and though the frontier does amazing stuff, most don’t need and won’t pay for it. 98% of the userbase don’t want to vibe code and never will. That doesn’t mean frontier AI can’t be massively monetised or have a deep and wide moat.
Lets go back to Rolex. Its marketing and brand spinsup a $20 watch functionality from nothing to a $10,000 price ticket. It gets also get certain price ticket to $20,000 and beyond yet the alleged primary functionality is still available for just $20 or for free on the front of your mobile. As the dealer told me when I asked him how long it takes to sell a $50,000 Gold President said. “It takes 10 minutes when the right customer comes through the door.’ Its about want the customer wants and needs, not about what you think its worth.
There is no doubt of the incredible value in LLM’s all the while the sort of people who said the internet would never catch on now pour scorn on AI. Productivity can skyrocket and will in the generation of companies who can restructure their processes to leverage it. The tail will perish.
People who think AI has no moat and therefore has a broken business model are missing something. Access will soon not be universal.
Increasingly people will lose their access. People are used to free access online. While we all notice this been increasingly going away, this trend will be extremely accelerated for AI. Initially as of now, it will be created by premium services and pricing teir that vget eyewatering quickly. Soon enough you will need to KYC to get access to certain models. Ultimately you will need a license and accreditation to use AI models of a certain strength, at all. (You cant fly a plane or drive a car without a license, why should you be able to use an AI that can hack a government without your face on a government issued plastic card?)
Leading edge models will always get bigger, better, more powerful, more valuable and more dangerous. The simplest way to protect them from being ripped off by a cunning adversary is to get the customer in a queue and serve them your special magic on your terms. Ah, we are once again back at Rolex.
Functionality, will be segmented, access will be controlled and IP will be protected and low and behold there is the moat.
Of course AI is a weapon and like a weapon at some point at some level of strength it is quite likely only government will have the privilege to use the most powerful models. We get to drive a car, not a tank.
Will this cramp or limit the AI business model?
No.
Will Anthropic and Openai be worth a trillion?
Yes.
Is there a second place in AI for you, your company, your country?
No.
Is there a limit to demand
No
Is there a limit to supply
Yes
So rather than roll those binary axioms up into a conclusion there is an easier way to judge the scale of future of AI, even if not its shape.
If the world’s most successful billionaire entrepreneurs are going all in on AI, that is more than a hint on how it is going to pan out.
It Rolex can engineer an incredibly deep and wide moat, AI most certainly can.