Authors: Jay Mandal (Codex Non-Residential Fellow) and Aparna Sinha (CodeX Affiliate)

Foundation model capability is on an upward trajectory and is enabling a new breed of vertical application-layer companies in areas such as legal, accounting, consulting, financial services, banking, education, healthcare, life sciences, and many other knowledge-intensive industries. A vertical application layer company, referred to as a “vertical application”, is a vertically-focused business that builds the user-facing software experience on top of underlying infrastructure, platforms, or models. This paper analyzes how:

I) A vertical application can now expect to be in competition with a combination of new and old competitors that are enabled by new foundation model capabilities, such as AI-native startups, AI-enabled traditional SaaS businesses, AI-enabled or AI-native services businesses, open source AI applications, and even foundation models themselves.

II) A vertical application can protect itself from this new breed of competitors and build a durable business by developing the right product moats (in ascending order of strength): A) workflows & UX, B) vertical harness & custom tools; C) built-in compliance; D) the “Brain” / data-driven operating system; and E) embedded judgment; and

III) Operational moats such as excellence in distribution, engineering, and operations do not stand alone in providing competitive differentiation, but can serve to strengthen product moats.

This paper provides a guide to vertical applications – that fall into traditional SaaS or the new breed of AI applications – on how to prioritize the right product and operational moats to create competitive differentiation and durable businesses in this emergent environment.