Market expansion theory is a mental model that tells you the difference between a gradual technology and a paradigm shift.
A paradigm shift happens when a technology works as a layer on top of everything built before to expand it to new heights.
Several consequences are attached to the market expansion theory.
For instance, market expansion theory tells you that you will see this happening in three phases or macrocycles:
- Phase 1: A layer on top of every existing industry (known knowns) – defined by linear technology and market expansion.
- Phase 2: An enhancer for many developing/complementary industries (known unknowns) – defined by linear technology expansion, only partially linear market expansion, and non-linear market expansion.
- Phase 3: The foundation for creating whole new emerging industries viable (unknown unknowns) – defined as fully non-linear technology/market expansion.
For this issue, I’ll focus only on Phase 1. The interesting aspect here is phase 1 predicts incumbents will initially make the most of this first wave. De facto, turning themselves into the primary beneficiaries of this wave. But this might be mostly a temporary effect.
Over time, native companies of this new paradigm will dominate the market. Some incumbents will survive only because they have embraced the new paradigm.
Back to AI, this is a paradigm shift, in line with market expansion theory, because AI will work as a “computing layer on top” of every industry created throughout the web era.
The interesting take here is that the Web had to go through a cycle of development that lasted 30 years.
Yet, the AI cycle might probably last 30-50 years. For a simple reason, this might be more powerful to the web cycle, as it might be more similar to the “microprocessor,” which transformed everything it touched from the 1970s to the 2010s (the CPU is still a core component of your smartphone).
With a core difference, this will be an “Intelligence Revolution,” where AI, as the “computing layer on top,” will enable a sort of “Cognitive Automation,” which will be imbued initially into a few core industries at lower value-add first, like customer support, and move its way up from there!
That doesn’t mean all incumbents will disappear.
It simply means we’ll see a reshuffling of the competitive landscape (in 10-30 years), with new players dominating the market, incumbents who will have changed skin (e.g., Google might be around as Alphabet but dominating a different industry than search); and new industries which will have expanded the previous ones by many times over.
