The Wall-less Empire: The Illusion of Open AI Markets

By: Rob Cummins Artificial intelligence appears democratized. Low-cost APIs let anyone build products overnight. Yet, this accessibility masks a consolidating power structure where incumbents—not innovators—increasingly control the market's future.

We’re probably nearing the end of this fad: AI startups that function as product wrappers around foundation models they don't control. They depend entirely on external infrastructure, pricing, and access to dictate the basis of their business model, leaving them vulnerable when platforms decide to compete directly.

In April 2024, OpenAI CEO Sam Altman warned these “wrapper” startups directly: "We're going to steamroll" those building mere wrappers around GPT-4. His message was clear: OpenAI would absorb any feature simple enough to replicate. The threat proved prophetic. Jasper AI, once valued at $1 billion for its AI copywriting tool, saw revenue falter when users realized ChatGPT offered identical functionality.

When a niche becomes profitable, large platforms replicate it within weeks using existing distribution, brand recognition, and infrastructure. If they’re lucky, there’s an acquisition offer. If they’re not, their revenue streams quietly evaporate. The startup's first-mover advantage pales against Microsoft's enterprise contracts or Google's integration depth. Ask yourself: How quickly will I start using the integrated version of this product when it takes 20% less time to find and feed it the data I need?

Google Cloud CEO Thomas Kurian explained the company's integration advantage in an April 2024 interview: "We give you packaged connectors to connect the large language model...to all of your internal systems—Microsoft Office, SharePoint, ERP systems, CRM systems, coding tools—to make it easy. You don't have to do it. We integrate it for you."

Customer behavior reinforces this consolidation. Global enterprise AI spending is forecast to exceed $337 billion in 2025, with IDC predicting Global 2000 organizations will dedicate over 40% of core IT budgets to AI-driven initiatives by 2025. But as markets mature, customers will prioritize reliability and seamless integration with existing tools—even at premium prices—over novelty. The market is shifting from innovation competition to convenience competition, where incumbents hold far better cards.

The paradox in short: the technology appears accessible, but practical benefits concentrate among firms with pre-existing relationships, proprietary data, and infrastructure. The market looks open yet functions like a supply chain dominated by essential hubs.

Success for a startup will demand understanding who controls data access, how integrations create lock-in, and where value accumulates when the models are commoditized. Building viral applications won't create defensible businesses, but controlling the connections between AI and operational systems will. Finding where you as a smaller, nimbler firm can super-serve your customer where Microsoft wouldn’t bother—that’s the essential task.

Image generated with ChatGPT

As Y Combinator partners argued when defending AI wrappers, calling an AI startup a wrapper is "like calling a SaaS company a 'MySQL wrapper'—technically true, but completely missing the innovation happening at the application layer." Yet that innovation only matters if it can't be easily replicated by platforms with superior distribution and existing customer relationships.

The empire has no visible walls. Worse, the barriers are made of institutional momentum, digital enterprise budgets, a maze of integrations, and data privacy controls. AI startups will need to fit in or find out. Read More Tech Talks: The SpaceX Diaspora: How Rocket Science Is Transforming Startup Culture