Beating the AI Hype

Economies of scale happens when cost per unit of output decreases.

Producing more spreads out your fixed costs over more units of output.

So you can then charge less.

= It’s more difficult for your competitors to take your business

Let’s say you have a nice niche business opportunity. You’ve validated there’s high demand.

If you want economies of scale, this business opportunity better require substantial fixed costs.

Obvious business opportunities with low fixed costs and without other defensibilities quickly become super competitive. All profits get eroded out.

But with high fixed costs you have a chance of attaining economies of scale.

Then it comes down to how quickly you can scale in your niche. The more valuable the business opportunity the faster you’ll have to scale to keep potential challengers at bay.

The obvious high fixed-cost, scalable opportunity for the next wave of products built on AI?

I think it's super niche, extensive, high-quality proprietary data. It's not easy for others to replicate. And it's the foundation for any high-quality niche AI system.

A few notable tech-first examples:

• AWS made a large investment in infrastructure -> lower pricing and reliability
• Netflix / Spotify secured high-upfront cost appealing licensing deals -> lower costs at the consumer scale
• Amazon invested in logistics -> lower shipping costs and friction
  

When your product/business is in a competitive industry or an industry with fast-growing demand, you need to find persistent competitive advantages. Most competitive advantages are only temporary.

Economies of scale is difficult to achieve, and even more difficult to match.