KSG ExecBrief: Enterprise AI Path Dependencies and Lock-in

Preserving optionality with walled-garden security and open-source AI capabilities

Insight

How you acquire or integrate AI capabilities now may lock you, limiting optionality and flexibility to leverage more effective and secure solutions.

The keyboard on your computer is inefficient. Companies and researchers have developed many different letter configurations that are proven to enable faster typing, and yet QWERTY reigns supreme. This is path dependency—a system trapped by inertia and first mover advantage. Whether they know it now or not, firms will face a similar issue with enterprise AI integrations.

As the marketplace for AI applications and services rapidly develops, some first-mover firms will accrue a critical mass of your company’s data and product dependencies. The efficiency and capability advantages will drive you to deeply integrate their infrastructure, models, and/or applications into your corporate business processes and services. If successful, some third-party AI services and applications could become systemically, even existentially, critical to your business.

And yet, given the pace of technology change there is strong potential for novel solutions to emerge outside of current incumbent offerings. At this point, dissatisfied with your current provider’s lagging performance, you might look for alternatives in the marketplace, only to find out that your firm is too structurally and technologically dependent to switch over.

Some companies selling AI want this to happen.

The landmark case against Microsoft for its actions to crush Netscape Navigator—a competitor to Internet Explorer—paints the picture well. A firm with an incumbent lead in another technology (e.g., operating systems) used its platform to make using Netscape difficult. Fake error messages would redirect consumers to use Internet Explorer and, after a while, many did. It’s been a long time since Microsoft gave MBA students this case study, but history often rhymes.

Companies are still early to understand and adopt AI. Right now, crucial acquisition and product development decisions (or mistakes) can be made to prevent path dependency and lock-in. A keen sense of what AI can offer your company will help the C-Suite guide purchasing, development, and deployment. In particular:

• Entertaining bids from many, competing companies for one or two year contracts to provide those same services can help prevent lock-in.

• Demanding that your data and business processes integrate with each company will keep the market fresh.

Incumbents with big investments in AI will make successful integration with other companies difficult. Don’t back down. Corporate leadership should feel empowered to throw their weight around and make sure that insurgent firms get a fighting chance to integrate with other company’s products and services.

For more information or assistance on these issues, please reach out to intel@ks.group.

---

Forwarded this ExecBrief by a friend? Click below to sign up for our weekly dispatch.

---

Global Scan

Geopolitics

1. Beijing Calls for ‘Solid’ Security Barrier for China’s Internet: President Xi Jinping’s charge for security enhancements follow updates to counter-espionage legislation from earlier this year, which banned transfer of national security information and broadened the definition of spying. Many analysts deemed the updates deliberately vague and difficult for companies to decipher.

2. Taiwan Seeks European Digital Support against China Threat: Taiwanese officials visited UK and EU capitals in June looking for help in making its digital infrastructure more resilient and designing fallback options—including cybersecurity and satellite internet. The move comes amid allegations that a Chinese vessel severed two subsea communications cables.

3. China Invites Global Investors as Economy Sputters: A meeting in Beijing this week will focus on the current conditions of dollar-denominated investment firms in China and the main challenges facing them, particularly as confidence in China's economic outlook wanes.

Cybersecurity

1. 0-Day Vulnerabilities Exposed in Adobe, Citrix Products: The companies issued patches, but not before hackers had exploited the vulnerabilities, which can be used to execute remote code without authentication.

2. Microsoft to Decrease Premiums on Security Services: Following a major breach of its authentication protocols over previous weeks, the company responded to criticism by extending some digital auditing services to lower-tier customers.

3. Ransomware Attacks Cost Financial Sector $32 Billion in Downtime Since 2018: Research from Comparitech found that 225 global financial organizations are confirmed to have been hit by a ransomware attack in the last five years, with the average downtime stretching from 10 to 14 days.

Strategic and Emerging Technology

1. Hydrogen is the Future—Or a Complete Mirage: Specific geographic regions and sectors in the United States and China hold promise for breakthroughs in hydrogen power. Major investments elsewhere may not yield the same benefits, says Adam Tooze.

2. Chipmaker Nvidia Accelerates Startup Investments: The company is prepared to take an equity stake in Lambda Labs, a startup competitor to Amazon Web Services and other cloud hyperscalers.

Policy/Regulation

1. US Outbound Investment Screening to Take Narrow Focus: Limitations will center around chips, AI, and quantum computing—but will spare biotech and energy, and won’t likely take effect until 2024.

2. The World is in the Grip of a Manufacturing Delusion: European economist Christian Odendahl argues that as the West rediscovers industrial policy, the competition for manufacturing is looking increasingly like a zero-sum game for a shrinking slice of global output.

3. White House, FCC Roll Out Labeling for Smart Devices: The “U.S. Cyber Trust Mark” is designed to signal to consumers that connected devices have met a standard set of criteria, such as unique and strong default password requirements, stored and transmitted data protections, regular security updates, and standard incident detection capabilities.

---

Bookmarks

1. International Energy Agency: Electricity Market Report – Update 2023

2. New York Times: ‘An Act of War’: Inside America’s Silicon Blockade Against China