The Battle for AI Dominance: Ecosystems and Innovation

The AI Battle Mirrors Past Format Wars

“History never repeats itself, but it does often rhyme.” — Mark Twain

[TLDR: This week’s Thursday Thought explores the ongoing battle for AI dominance among tech giants like OpenAI, Anthropic, X, Google, and Microsoft, drawing parallels to historic format wars that have shaped various industries. From the iconic VHS vs. Betamax struggle to the intense competition between gaming consoles like PlayStation, Xbox, and Nintendo, and the enduring rivalry between iPhone and Android, these conflicts reveal a recurring pattern. As AI companies follow similar paths, it’s clear that, while technology evolves, the strategic dynamics remain strikingly similar.]

The current battle for dominance between tech giants like OpenAI, Google, Anthropic and Microsoft is not just a race to the top — it’s a modern-day format war. By examining the patterns of previous technology battles, we can gain insight into how this AI competition is likely to play out.

Three key patterns emerge from past format battles that are now being mirrored in the AI space:

1. The Power of Network Effects: Just like previous format wars, the AI battle will be heavily influenced by network effects. (A network effect occurs when a product or service becomes more valuable as more people use it, creating a positive feedback loop that can lead to rapid growth and market dominance.)
2. The Underdog Advantage: History has shown that the winner is often not the one everyone expects — not the biggest company or even the best product. Early market leaders may fall behind as more adaptable or better-networked competitors take the lead.
3. Ecosystem Building is Key: The final battleground is not just the technology itself, but the entire ecosystem built around it. Companies that successfully create a thriving ecosystem of developers, partners, and content will probably emerge as the ultimate winners.

To understand these dynamics better, let’s revisit three strategic battles that shaped the technology landscape: the VCR format war, the console wars, and the smartphone OS wars. Each of these battles offers valuable lessons for understanding the current AI competition.

The VCR War: A Template for Format Battles

(The also-rans in the VCR war (that I know of) included Philips and Grundig’s Video 2000 (V2000), and RCA’s Capacitance Electronic Disc (CED).

The videotape format war between VHS and Betamax in the late 20th century stands as one of the most emblematic battles over technological dominance. Introduced in the mid-1970s, Sony’s Betamax initially captivated the market with its superior video quality and compact design. However, JVC’s VHS, which entered the market shortly after, quickly emerged as a formidable competitor by addressing consumer needs more effectively with longer recording times — up to two hours initially, which was soon extended to four, six, and even eight hours as the technology developed.

The success of VHS was not solely because of its technical merits. JVC employed a strategic approach by licensing its VHS technology to an array of manufacturers, including heavyweights like Panasonic, Sharp, and RCA. This move flooded the market with VHS players, making the format more accessible to the average consumer. To further tip the scale in their favour, during the mid-1970s JVC established VCR supply relationships with leading national consumer electronics companies in Europe and the United States. In supplying Thomson, Thorn, and Telefunken (all independent companies at that time) as well as U.S. partners, JVC was able to gain the cash and the diversity of market experience that ultimately enabled it to outpace Philips and Sony.

Philips developed videotape competencies in parallel with JVC, but it failed to build a worldwide network of OEM relationships that would have allowed it to accelerate the refinement of its videotape competence through the sale of core products.

According to an article from Legacybox, by the mid-1980s, VHS had achieved a 60% market share in the U.S., with over 30 million homes owning a VHS player.

Hollywood’s role in this battle was also pivotal. Movie studios, recognising the growing popularity of VHS, began releasing their films primarily on this format. Movie studios partly influenced this decision because VHS tapes could hold entire movies without requiring multiple tapes — a common issue with the shorter Betamax tapes. Video rental stores like Blockbuster overwhelmingly supported VHS because of its broader availability and the convenience of longer playtimes. A self-perpetuating cycle emerged — a classic example of a network effect: the increased availability of content on VHS led to higher consumer demand for VHS players, which further solidified the format’s dominance.

The death blow for Betamax occurred when RCA, one of the largest electronics companies in the United States, backed VHS. RCA’s decision, coupled with a strong marketing push, helped VHS capture an even larger share of the market. By the late 1980s, despite Betamax’s technical superiority, Sony had to concede defeat. Sony eventually began producing VHS players, marking the end of the format war.

The Console Wars: The Battle for Gamers’ Hearts

The console wars between Sony’s PlayStation, Microsoft’s Xbox, and Nintendo highlight how the best product doesn’t always win. Sony’s PlayStation and Microsoft’s Xbox fought fiercely over processing power and exclusive titles, but Nintendo carved out its niche with innovative gameplay and a focus on casual gamers. Each company’s success depended not only on the hardware but also on the ecosystem of games and online services they built.(Also rans, I know of included: Sega Saturn, Sega Dreamcast, Atari Jaguar, and NEC TurboGrafx-16).

In the wake of the VCR format war, the gaming industry experienced its own version of a format battle, known as the console wars. This battle, primarily between Sony’s PlayStation, Microsoft’s Xbox, and Nintendo, has defined the gaming industry for decades. Each of these companies has sought to establish its console as the dominant platform, employing strategies that echo the VHS-Betamax rivalry.

Sony entered the gaming market in 1994 with the PlayStation, which quickly became a dominant force because of its powerful hardware and an extensive library of exclusive games. Titles like “Final Fantasy” and “Gran Turismo” attracted millions of gamers to the PlayStation ecosystem, establishing Sony as a leader in the industry.

Microsoft joined the fray in 2001 with the launch of the Xbox. The Xbox was innovative with its built-in storage and the introduction of Xbox Live, a comprehensive online gaming service that revolutionised multiplayer gaming. Microsoft also secured the exclusive rights to “Halo,” which became a defining franchise for the console and significantly boosted its popularity.

Nintendo, a veteran in the gaming industry, pursued a different path. While Sony and Microsoft competed on hardware performance and exclusive titles, Nintendo focused on creating unique gaming experiences. The Nintendo 64 and GameCube had their own dedicated followings, but it was the Wii, launched in 2006, that truly set Nintendo apart. The Wii’s innovative motion controls and broad appeal to casual gamers made it a global phenomenon, outselling both the PlayStation 3 and Xbox 360 in several markets.

The console wars mirror the VHS-Betamax battle in that the competition wasn’t just about selling hardware; it was about creating a compelling ecosystem. Sony and Microsoft invested heavily in securing exclusive games, building online communities, and expanding their platforms. Meanwhile, Nintendo focused on innovation in gameplay, drawing in a diverse audience that included non-traditional gamers.

The Smartphone Wars: iPhone vs. Android

(The smartphone OS wars, primarily between Apple’s iPhone and Google’s Android, show the power of ecosystem building. Apple’s closed, tightly integrated ecosystem appeals to a loyal base, while Android’s open platform and wide availability have made it the dominant mobile OS worldwide. This battle underscores how creating a broad and adaptable ecosystem can lead to long-term dominance.)

(Also rans included: BlackBerry OS, Windows Mobile/Windows Phone, Symbian, Palm OS/Garnet OS/webOS, and Tizen).

The smartphone industry has also witnessed a fierce format war, this time between Apple’s iPhone and Google’s Android (also rans included Nokia’s Symbian). Apple revolutionized the mobile phone market in 2007 with the launch of the iPhone, which combined sleek design, intuitive touch controls, and an app ecosystem that redefined what a smartphone could be. The iPhone quickly became a status symbol and set the standard for mobile devices.

Google’s Android, launched shortly after, took a different approach. Rather than producing its own hardware, Google made Android an open-source operating system that could be used by any manufacturer. This strategy led to a flood of Android devices from companies like Samsung, LG, and Motorola, covering a wide range of price points and appealing to a broad audience.

Much like VHS, Android’s strategy of widespread availability helped it capture significant market share. By offering a variety of devices at different price points, Android became the dominant mobile platform worldwide, despite Apple’s continued success with the iPhone in the premium segment.

The iPhone vs. Android battle still rages on, with each platform boasting its own loyal following, exclusive apps, and unique features. Apple’s closed ecosystem allows for tight integration and a seamless user experience, while Android’s open platform offers more flexibility and customisation, catering to a diverse range of users.

The AI Wars: Following a Familiar Pattern

The key players in the AI format war include OpenAI (GPT series), Google(Bard), Microsoft (Copilot and Azure AI), Anthropic (Claude), Meta (LLaMA series), and Elon Musk’s xAI , which includes several engineers who previously worked at OpenAI.

Now, as we watch the AI giants battle it out, familiar patterns from past technology wars are emerging. OpenAI’s GPT series first captured attention with its revolutionary language models, reminiscent of how Betamax had an early advantage in the VCR wars. However, Google’s Bard and Microsoft’s AI, deeply integrated into their expansive ecosystems, are gaining significant momentum by offering broader applications and seamless integration across platforms, much like how VHS expanded its reach through strategic licensing and partnerships.

Just as JVC licensed VHS to multiple manufacturers, AI companies today are aggressively expanding their reach through partnerships, developer support, and widespread accessibility. For example, Microsoft has strategically integrated its AI models across its software suite (e.g., Copilot in Microsoft 365) and through its Azure AI platform, making it easier for businesses to adopt and integrate AI into their operations. Similarly, OpenAI has partnered with major platforms like ChatGPT and various APIs, encouraging developers to build on top of its models, thereby driving adoption and entrenching their platforms as potential industry standards.

These companies are not just building AI models — they are creating vast ecosystems where businesses and developers can build upon their AI technologies. For instance, Meta’s LLaMA series, though primarily research-focused, aims to foster an open AI research community that can contribute to and expand its capabilities, positioning Meta to influence AI’s future directions.

As more businesses adopt these AI technologies, a feedback loop of innovation and usage is forming — just as it did with VHS. The more widespread the adoption, the more developers and companies are incentivised to build on these platforms, further solidifying their dominance. This cycle not only accelerates innovation but also entrenches these platforms in the market, making them more difficult to displace. The outcome of this battle will likely shape the future landscape of AI, much like VHS shaped the video industry, determining which platforms become the standards and which fall by the wayside.

History Doesn’t Repeat, But It Rhymes

As the AI battle unfolds, it’s clear that the strategies that determined past technology winners are still at play. The power of network effects, the advantage of underdogs, and the importance of building a comprehensive ecosystem are as relevant today as they were in the past. In the end, the winner of the AI wars will be the company that understands these lessons and applies them most effectively.

The future of technology isn’t just about who has the best idea — it’s about who can bring that idea to the most people in the most powerful way. Interesting times awAIt.

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Speaking of which, the latest episode of the show feature three forthcoming guests who will be speaking at The Reinvention Summit, Alexander Osterwalder, Rita McGrath and Ryan Shanks. We explore the Future of Consulting in an Age of Ai.