Essay · ~20 min read

The New Business of AI (and How It's Different From Traditional Software)

Martin Casado and Matt Bornstein · Andreessen Horowitz (a16z) Free Intermediate

This is the essay to read when you want to know whether a trend can carry a real company or is just a feature riding on someone else's model. Casado and Bornstein show why AI economics often look more like a services business than clean SaaS: lower margins, real infrastructure and human-in-the-loop costs, and moats that are shallower than the hype suggests. It is from 2020, but the core question (where does durable value actually accrue) is exactly the one to ask about any new AI wave.

• AI companies often run at 50 to 60 percent gross margins, not the 60 to 80 percent of classic SaaS, because compute and human review are real recurring costs.
• Model access is commoditizing, so defensibility comes from owned data, a narrow workflow, and real switching cost, not from the model itself.
• Before betting on a trend, ask whether it supports a standalone business or is a feature a bigger platform will absorb.