Leveraging Network Effects to Safeguard ChatGPT's Market Share: How OpenAI Does It

Since the release of GPT-3, OpenAI has been carefully building a business model centered around large language models (LLMs). The release of ChatGPT has demonstrated the enormous market potential of these models.

The unprecedented growth of ChatGPT has made it the fastest-growing application in history, sparking intense interest in LLMs and triggering a wave of competition, including numerous open-source alternatives.

To solidify its position in this emerging market, OpenAI has employed various strategies. These strategies include introducing innovative features and providing free access to less advanced models, thereby expanding its user base. At the recent DevDay conference, OpenAI revealed its latest strategy, which is to leverage network effects to dominate the LLM market. Whether good or bad, this approach will significantly impact the trajectory of the field in the coming months or even years.

Network Effects

Network effects refer to the phenomenon where the value of a product or service to its users increases as each additional user joins. Take messaging apps as an example: the convenience of using it depends on whether your friends and family are also using it. The more contacts you have on the platform, the more likely you are to use it. This is a direct network effect.

However, some network effects are more complex and involve multiple types of users. In the case of online shopping platforms, merchants tend to sell their products where potential customers are. Correspondingly, customers are more inclined to choose platforms that offer the products they need. This interdependence makes creating new online shopping platforms challenging, especially when large platforms like Amazon already dominate the market. This is an example of a two-sided network effect.

Creating the right network effects requires quickly capturing market share before other players establish a foothold. That's why companies often adopt aggressive growth strategies, even if it means significant financial losses for several years.

The goal is to establish their network effects quickly and firmly. Once these network effects are in place, it becomes extremely difficult for competitors to erode their market share.

While this strategy is risky, it can lead to market dominance, making the initial losses a worthwhile investment. Network effects are one of the most effective "moats" for protecting a company's market share from competitors.

Network Effects of ChatGPT

Large language models like GPT-4 do not inherently possess network effects in their basic form. Each user's interaction with the model is independent and not influenced by other users. This lack of network effects makes it easy for users to switch to another LLM that offers similar features and accuracy or better pricing. Therefore, there is a risk of commoditization for LLMs, and their competition will depend on factors such as pricing and availability.

Initially, due to the superior performance of its models and the ample financial resources provided by Microsoft, OpenAI had an advantage in the competition. This allowed OpenAI to invest significant funds in improving its models and offer free access to a portion of the models, attracting a wide user base.

However, without a moat, OpenAI runs the risk of losing market share to other competitors. In March, OpenAI introduced the ChatGPT plugin, planting the seeds of network effects. This move allows developers to integrate ChatGPT into their applications, expanding the use cases of the model.

Now, there are two key players: users and developers. As users discover more applications for LLMs, they will seek service providers that offer more tools. At the same time, developers creating plugins or LLM tools will be inclined to turn to services with more users. This dynamic lays the foundation for network effects similar to those seen in the Apple App Store and Google Play Store.

However, creating network effects is not a one-time effort. OpenAI must continue to enhance its models and introduce new features to attract more users and developers. To complete the loop of network effects, OpenAI unveiled two important features at the DevDay conference: the GPT Store and the revenue-sharing program.

The GPT Store provides developers with a platform where they can offer their LLM applications to ChatGPT users. These can be application integrations, assistants, or other innovative applications that we will undoubtedly see in the coming weeks and months. The GPT Store is a strategic move that reflects the familiar patterns of the Apple App Store and Google Play Store.

The revenue-sharing program provides further incentives for developers to stay on the OpenAI platform. However, its success depends on users' willingness to pay for using GPT assistants. The amount users are willing to pay for GPT and their willingness to create their own GPT will be interesting factors to observe.

OpenAI may also consider limited-time incentive programs, such as paying developers to create GPT agents on the platform to generate momentum. Once the platform reaches a critical mass and establishes a complete ecosystem, it will naturally attract more users and developers, just like the App Store. It can also trigger data network effects, where OpenAI can access exclusive high-quality user interaction data, enabling it to train better models. If this strategy succeeds, it could solidify OpenAI's position in the LLM market.

What Will Happen Next

The ultimate form of the AI assistant experience is uncertain. Will it exist as a browser-based assistant seamlessly integrated into all your applications, from email and shopping to health? Or will it manifest as AI agents embedded in every application interface? Or perhaps it will take a completely different form, such as Humane's wearable AI Pin or a dedicated phone developed in collaboration with John Ive, former Chief Design Officer of Apple, as OpenAI has done? While the answers to these questions have yet to unfold, one thing is clear: with Microsoft's support, OpenAI is strategically positioning itself to control the entire AI assistant experience stack.