Will Open AI become the new Microsoft?

Will Open AI become the new Microsoft?

In the race to dominate the AI industry, OpenAI appears to be the best positioned to become the leading player, much like how Microsoft, Google, and Amazon achieved dominance in their respective fields.

A successful competitive strategy

The rise of OpenAI has followed a competitive playbook similar to that of many successful companies that have become market leaders and thrived over time. In its early stages, OpenAI managed to stay relatively under the radar while developing its solutions, despite having high-profile investors like Elon Musk. For a while, its most well-known product was DALL-E, an AI-based image generator.

Then, it successfully launched ChatGPT, an AI-based chatbot that quickly became a market success, embraced by millions of users. OpenAI strengthened its position with a strategic move by forming an unexpected alliance with Microsoft, which integrated OpenAI’s product into its operating system. This partnership helped OpenAI gain greater recognition and fueled speculation about the future of AI, driving up valuations of AI companies.

Now, OpenAI is working to consolidate its leadership and suffocate its competitors by pursuing a "winner-takes-all" strategy. Its goal is to establish an overwhelming market presence by turning ChatGPT into a dominant design, one that will be adopted by a vast number of customers and become the de facto industry standard.

This strategy involves fostering a network of partners and complementors (such as Microsoft, Apple, etc.) that use the software, which in turn translates into strong brand value actively promoted to the end-user market. In a market driven by network effects, this will increase the appeal of the software to both new complementors and users, with the ultimate goal of making ChatGPT the standard and pushing alternative software out of the market.

Obviously, this strategy is costly. However, OpenAI recently raised $6.6 billion at an impressive $150 billion valuation, in addition to a $ 4 billion credit facility. Sam Altman, CEO of OpenAI, also made an unusual request to investors not to back rival startups, a clear attempt to limit competitors' access to funding. Whether this request will be followed remains to be seen, but it signals that OpenAI is still striving to secure a dominant position in the AI landscape.

Challenges ahead

The company faces numerous challenges, both internally and externally. Internally, it is burning through approximately $5 billion in cash per year. AI development, particularly at the scale of companies like OpenAI, requires massive financial investment in computational power and infrastructure, data acquisition, curation and storage, R&D to develop new models and algorithms, product development, and scaling to integrate AI into platforms like Microsoft. Additionally, the company must comply with regulatory and safety standards. ChatGPT also needs to act quickly to become a market leader, as aggressive scaling, brand building, and ecosystem development demand substantial cash.

A second challenge is attracting and retaining the right level of AI expertise and talent within the company. In recent months, OpenAI's corporate governance has experienced turbulence. Current CEO Sam Altman was ousted by the board in November 2023, only to be reinstated days later. Since then, Altman has consolidated his control over the company and shifted its status from a non-profit to a for-profit entity. However, during this time, there has been a significant exodus of talent: nine of the 11 founders have left the company in the past two years, with many joining AI rivals like Google or Anthropic, or founding their own AI startups.

Externally, OpenAI needs to consolidate its market position by expanding and solidifying its customer base if it aims to achieve $100 billion in revenue by 2029, as Sam Altman recently stated. OpenAI’s revenue is about $3.7 billion in 2024 and is projected to reach $11.6 billion in 2025, meaning it would need to achieve a 71% compound annual growth rate (CAGR) to meet its goal by 2029 — a steep, but not impossible, challenge. This will likely require a shift in its business model. Currently, OpenAI relies on a $20 per month subscription model. The company claims it has 250 million weekly users, but the vast majority use the free version of ChatGPT. To boost revenue, it may need to pivot to targeted advertising.

But in this field, OpenAI is already competing with digital titans that have also developed their own AI-based applications, namely Google with Bard and Meta with Meta AI. These companies can quickly leverage their captive user bases of millions to drive adoption of their AI applications, while benefiting from established advertising businesses. In addition to these two giants, Microsoft must also be considered a potential competitor. Although it currently has a partnership with OpenAI, it is also collaborating with other AI startups to develop its own offerings

These startups also pose significant threats to OpenAI, as many new entrants have recently joined the fray. Currently, there are an estimated 800 to 1,400 generative AI startups (depending on sources like CB Insights or DealRoom), which collectively raised about $25 billion across more than 420 deals in 2023, with the trend accelerating in 2024. In the U.S. alone, 39 AI startups raised $100 million or more in 2024, according to TechCrunch, including OpenAI itself. This influx of new entrants not only signals a strong investor appetite but also suggests that the industry is far from mature. AI applications are still in their infancy, as evidenced by reports of 'hallucinations' from various AI programs.

Coda

A key driver of mass adoption for any software is its effectiveness, as shown by the success of companies like Google, Amazon, and Meta. Whether OpenAI or a currently unknown startup will deliver the breakthrough program remains to be seen. We may need more time to determine whether OpenAI's lofty valuation is a smart prediction or just another investor 'hallucination.'"

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For more information go to https://link.springer.com/book/10.1007/978-3-662-54489-1

Strategically yours!

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