Commoditize Your Complement

The fundamental idea of commoditizing your complement is that a value chain acts like a water balloon.

If you commoditize one layer of the chain, you squeeze all the value out of it (no profits), and that value flows to the rest of the value chain.

Google owned search, expanded to Android and gave it away for free.

Nvidia owned the GPU, expanded to CUDA, and gave it away for free.

Meta opensources Llama. They already have a distribution network to profit from. They aim to make as good of a model as possible and use the open-source community to make it even better. They then profit through advertising to their network of over 3 billion users.

Strategy Letter V

Every product in the marketplace has substitutes and complements.

• A substitute is another product you might buy if the first product is too expensive.
• A complement is a product that you usually buy together with another product.

All else being equal, demand for a product increases when the prices of its complements decrease.

For example, if flights to Miami become cheaper, demand for hotel rooms in Miami goes up — because more people are flying to Miami and need a room. When computers become cheaper, more people buy them, and they all need operating systems, so demand for operating systems goes up, which means the price of operating systems can go up.

In general, a company’s strategic interest is going to be to get the price of their complements as low as possible. The lowest theoretically sustainable price would be the “commodity price” — the price that arises when you have a bunch of competitors offering indistinguishable goods. So:

Smart companies try to commoditize their products’ complements.

Microsoft’s goal was to commoditize the PC market.

Very soon the PC itself was basically a commodity, with ever decreasing prices, consistently increasing power, and fierce margins that make it extremely hard to make a profit. The low prices, of course, increase demand.

Increased demand for PCs meant increased demand for their complement, MS-DOS. All else being equal, the greater the demand for a product, the more money it makes for you.

Commoditize your complements.

Understanding this strategy actually goes a long, long way in explaining why many commercial companies are making big contributions to open source.

Commoditize Your Complement: Meta AI Edition

Generative AI is the perfect complement to Meta’s family of apps…apps that are built around connecting with other people on the one hand, and creating content, following content creators, and sharing that content with the world on the other.

What Zuck has realized is that Meta’s products will be much more enjoyable (and more valuable) with generative AI sprinkled throughout. And he doesn’t need to own the model for that to be true. So if he can drive down the cost of inference, Meta benefits big. And he’d rather be the one that sets the global standard, because, as we’ve learned, that’s what market leaders do.

The last thing I’ll note is that Meta’s open source strategy is perhaps even more disruptive than any of us yet realize. How many companies focused on generative AI security, safety and evaluation will go up in smoke now? What is the business model for a company like Mistral moving forward? OpenAI may still own a vibrant customer-facing product moving forward (“chatGPT” does seem to have staying power), but who will pay for their models?