AI Disrupts Vertical Markets

Andrew Wilkinson believes that software businesses, particularly in vertical markets, will become less profitable over the next few years due to AI disruption. His perspective is rooted in how market competition affects business value, and how AI might dramatically change the competitive landscape.

• Competition Defines Business Value:

  • A monopoly business (like a single restaurant in town) can maintain high margins
  • Lack of competition allows businesses to charge premium prices
  • Quality becomes less important when there's no alternative

• Historical Software Business Success:

  • Vertical markets (niche industries) have been highly profitable
  • Examples include:
    • Funeral home management software
    • Golf course management software
    • DAM and infrastructure software
  • These succeeded because:
    • Limited competition from talented developers
    • High switching costs for customers
    • Ability to maintain premium pricing

• Current Market Leaders:

  • Constellation Software built $70B business buying vertical software companies
  • They:
    • Acquire ~100 companies per year
    • Increase prices systematically
    • Maintain rather than significantly improve products

• Future Concerns:

  • AI could disrupt this model within 2 years, not 10
  • Mass disruption expected in terms of:
    • Jobs
    • Traditional business models
  • Previously "good" businesses may struggle
  • Vertical software markets may lose their protective moats

• Investment Implications:

  • Traditional software investments becoming less attractive
  • Need to look for businesses that maintain competitive advantages
  • Consider hedging against AI disruption
  • Look for misunderstood or miscategorized opportunities