Digging a Moat in the AI Age

How to defend your business from the future

Happy Saturday to all 9,511 of you.

Let’s get right to it.

Last week I commented on the frantic pace of innovation in the AI space.

One of the consequences of AI is that it will be harder to defend market share in some areas.

In business, a moat refers to a sustainable competitive advantage, which makes it difficult for competitors to challenge you. The term is inspired by the concept of a medieval castle's moat, which served as a protective barrier against invaders.

Similarly, a business moat acts as a buffer to protect a company's market share, profitability, and long-term success.

Today we’ll look at which moats may be less effective and which may be more defensible amid the flourishing of AI tech.

Today’s growth strategy is digging a moat.

Growth stage: Any

Difficulty level: Hard

"A truly great business must have an enduring 'moat' that protects excellent returns on invested capital."

Warren Buffett

Need to Know

🦄 Venture firm NFX revealed their list of the 75 most promising early stage companies in the AI space.

🦄 Here’s a rare look at a $20k/mo programmatic SEO one-man show and his approach to building out programmatic sites in scalable niches.

🦄 Fascinating thread where a guy builds an entire YouTube keyword research app with ChatGPT. This is the way.

🦄 Google Search Console is dropping the Page Experience report.

🦄 How to use ChatGPT for keyword research. I particularly like the “onion” idea to combine effective prompts into a series of steps to produce a result.

🦄 Problem > Cause > Solution. This twitter thread has me rethinking my whole newsletter approach. More to come.

🦄 Stripe reports a 10.5% revenue uplift from CRO improvements to their checkout flow. Really interesting read.

Weak Moats in the AI Age

Two of the immediate impacts of AI are clear:

  • Consumers and businesses can do more with less.

  • They can do it faster.

This means that certain moats will lose their effectiveness.

Low-level technology: copying simple tech is becoming easier. You can now use AI to generate a functional web application in minutes with very little technical knowledge. In many cases, consumers will do for themselves what they once had to pay someone else for.

Creative technology: Tools like Midjourney are empowering a new generation of creators. But when anyone can create fictional worlds as vivid as Star Wars, it will become more difficult to produce something unexpected and captivating.

First-mover advantage: because AI enables quick replication of low-level tech, it will be harder to sustain an advantage by simply being early. Competitors can quickly catch up and improve upon your initial offering.

Labor arbitrage: AI and automation may lower production costs in many industries, making low-cost labor less of a competitive advantage.

Basic technical expertise: As AI tools become more user-friendly and widely available, basic technical expertise may no longer be a significant barrier to entry. Companies will need to develop more advanced or specialized skills.

In other words, the bar is getting higher.

So what are some of the sustainable advantages that you might pursue?

Defensible Moats in the AI Age

Intellectual property: patents, trademarks, copyrights, and trade secrets can provide a legal barrier that prevents competitors from replicating a company's products or services.

Network effects: companies with a large user base or ecosystem can benefit from network effects, which make them more valuable as the number of users or participants increases. Because network effects compound, it’s very difficult to displace an incumbent.

Amazing brands: thanks to the familiarity effect, people are inclined to prefer what they know. Having an awesome brand may be an even bigger differentiator than ever as AI enables a flood of mediocre and generic content.

Specialized tech: complex stuff that’s hard to replicate and requires more domain expertise will remain defensible.

People and culture: the best want to work with the best. This will probably never change.

Regulatory expertise: established companies in highly regulated industries will continue to benefit from the barriers to entry for new companies that need to develop compliance and know-how.

Economies of scale: large companies will continue to have cost advantages over smaller companies in many areas.

Distribution: as Matt Gray has popularized, “attention is the new oil”. Companies with large existing audiences will have an easier time getting their message out.

Sticky products and services: these can be really annoying, but that’s precisely why they’re effective. It’s hard to change from them.

Geography: local businesses will remain protected from many competitive factors, but that’s not to say that more AI-savvy local providers can’t displace them.

My takeaways:

Most of these moats are timeless.

Not much has actually changed.

  1. Be awesome.

  2. Do something hard and valuable.

  3. Avoid areas where AI will accelerate commoditization.

The rest should take care of itself.

✨ That’s it for today!

I hope this helps you in your growth journey.

Btw - this is the 26th edition of Unicorn Growth Strategies. I’ve officially made it 6 months without a single lapse. Don’t forget to check out the archives on the site.

-Brian 🦄

PS - I’ve been blown away by the response from people using my new SEO tool. Building something useful is truly a joy. 🙏 

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