7 Powers Framework Applied To OpenAI

What makes OpenAI so insanely dominant when it comes to AI?

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Hello friends,

OpenAI is seeking a valuation of $80-90 Billion in its new funding round. It has become one of the most iconic companies of our generation! As it grows rapidly, I wanted to view it from the lens of Hamilton Helmer’s 7 Powers Framework. Why is OpenAI insanely dominant when it comes to AI? Let's dive in:

1. Scale Economies

OpenAI has access to vast amount of data and compute power. It's not enough to just have access to a lot of data. You need corresponding compute power to process all that data to train a model. OpenAI's ability to team up with the right corporate partners, hire the right talent, and raise large amounts of capital has allowed it to leverage these scale economies. This has been pivotal in developing models like GPT-4.

2. Network Economies

OpenAI has a large user base. And this user base brings a substantial network effect with it. This creates a barrier to entry for new entrants because everyone goes to ChatGPT first. More developers and companies are incorporating OpenAI's models into their product offerings. This tends to increase OpenAI's value and creates a virtuous cycle to strengthen the company’s competitive position.

3. Counter-Positioning

When it first came into light, OpenAI counter-positioned itself as the young non-profit upstart that's aiming to bring AI to the masses. Obviously now it has become a big for-profit behemoth. But the counter-positioning when it launched ChatGPT worked really well. It occupied a lot of mindshare and got people to try out the product. This power seems to be waning as it gets bigger.

4. Switching Costs

OpenAI's products are expensive. Companies that integrate their APIs incur significant costs in terms of time, effort, and resources. The process of switching is not that difficult (it's just an API call that can be replaced with another API call). But other paid models don't quite do the trick, at least based on their current performance. The models that are open-source and free need a lot of engineering work. This makes switching costs high and makes OpenAI's offerings more sticky.

5. Branding

OpenAI has done a phenomenal job establishing a brand. And they have done it across all the segments such as consumers, developers, researchers, and big companies. This brand helps them attract top-tier talent, corporate partnerships, and investors.

6. Cornered Resource

OpenAI certainly has access to resources, but they are not really cornered at this point. Other companies with capital can also access those resources. But the key differentiator comes from being able to raise enormous amounts of capital and have access to virtually unlimited resources. On top of that, the best AI researchers want to be at such a place. These unique assets are not easily replicable and provide OpenAI with a considerable competitive edge. But looks like they cannot hold on to this power for 4 reasons (i) the world keeps producing more compute capacity (ii) data owners are suing OpenAI for how they access data (iii) lot of capital is flowing into the AI sector (iv) top researchers are embarcing open source

7. Process Power

OpenAI is dominant when it comes to process power. OpenAI's infrastructure to train the models, fine-tune them, and deploy them are proprietary and highly specialized. The optimized workflows and extensive knowledge base create a formidable process power that is hard for competitors to replicate.

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