Software Is Becoming a Commodity Implications & Moats

Software Is Now Cheap, Fast, and Easy to Build

AI-powered development tools have drastically lowered the cost and time needed to build software. Platforms like Replit, Cursor, and Loveable.dev allow a single person (even a non-developer) to create full applications via natural-language prompts. An early-stage founder recently built a SaaS product with zero developers in two weeks using AI coding tools – reaching $5K in monthly revenue immediately. Even complex platforms can be replicated with shocking speed. For example, an AI agent on Replit cloned a functional LinkedIn prototype from a single prompt. As investor Andrew Wilkinson put it, “Replit is a god damned miracle... I’ve tried them all (Lovable, Bolt, Cursor, v0) ... they are all converging”. In short, what once required large engineering teams and R&D budgets can now be achieved by “vibe coders” with AI assistance. Software that used to take months and millions to build can often be recreated over a weekend. This new reality is flooding the market with apps – many targeting niche problems that previously “would never warrant VC money or a dev team”.

Legacy SaaS Without Moats Are Vulnerable

For the last few decades, SaaS companies thrived on high margins and limited competition. That era is ending. If a product has no hard-to-copy moat, it’s now ripe for disruption. Competitors (or open-source communities) can rapidly replicate your core features using AI-driven development. In the next 1–2 years, expect intensified competition in every software segment, and commoditization of all “table-stakes” features. A previously “safe” niche tool (say, a simple workflow or CRUD app) can suddenly face five lookalike competitors – or be rendered obsolete by a free AI-powered script. One SaaS CEO warns that “every business that we know and think of as a good business may not be a good business [soon]”. The competitive advantage of simply having built a product is near zero when “entire products can now be cloned en masse, without requiring engineering teams or R&D budgets”. In other words, your codebase is not a moat; your UI is not an advantage. Any software that isn’t truly differentiated will be quickly undercut by cheaper or free alternatives that are “90% as good for 90% less”.

The Six Moats Left Standing

If software functionality alone no longer defends a business, what does? The consensus is that only a handful of durable moats remain in this new landscape. Unless a product is protected by one (ideally several) of these, assume it will be commoditized. The real moats in software today are:

• Network Effects (Community) – A product whose value grows with its user base or ecosystem. If your users are the product (e.g. social networks, marketplaces, communities), it’s far harder to replicate. Wilkinson notes “software where the value is the people” will be among the safest. Competitors can clone features, but not an engaged network of users.
• Proprietary Data – Exclusive datasets or usage data that improve the product (e.g. AI models trained on unique data, or years of user analytics that new entrants lack). This is the “software where the value is the data” that remains defensible. A rival can copy your app, but not your trove of high-quality data.
• Complex Tech (Short-Lived) – Deep technical IP, algorithms, or AI models that are hard to build today. This can provide an edge (e.g. a cutting-edge AI feature or patented engine). But tech-based advantages are often short-lived now – competitors can catch up or open-source alternatives appear within months. The ability to build complex code is no longer the moat it used to be, so consider this a transient moat at best.
• Hardware Integration – Tight coupling with specialized hardware or infrastructure. For example, software that runs on a proprietary device (Apple’s iOS ecosystem, or Tesla’s car software) or that requires unique hardware expertise. This creates a barrier beyond pure software. Wilkinson’s team will still consider software plays when “there’s a hardware component” involved. Competitors can’t clone your product unless they can also replicate the hardware environment.
• High Switching Costs – Products deeply embedded in workflows, with significant data, customizations, or compliance hurdles that make it painful to switch. Enterprise software often falls here – even if a clone exists, a customer won’t switch due to migration cost, training, or risk. Wilkinson similarly favors software with “some kind of lock-in” for users. Think of an ERP system that runs a company’s operations – replacing it is a last resort.
• Brand & Reputation – Trust and brand equity in the market. In a world of infinite alternatives, customers stick with names they trust for security, reliability and support. Brand is a durable moat earned over years. As one industry analyst wrote, “Trust is the most durable moat…[it] takes a long time to earn and can’t be taken away”onlycfo.io. A strong reputation (e.g. “Microsoft” in enterprise, “Palantir” in government, or “Apple” with consumers) lets you retain customers even when cheaper options appear.

If your software business does not leverage at least one of these moats, assume that its days of high margins are numbered. Nearly everything outside these categories is becoming a commodity service that anyone can spin up. Most standalone apps will be “features, not products” in the long run – easy to copy and bundle into larger offerings. The safe harbors are those that are irreplaceable or deeply entrenched in ways beyond just the feature set.

“Pricing Power Is Dead” – Great for Consumers, Brutal for Investors

A direct consequence of this commoditization is the collapse of pricing power for undifferentiated software. When five competitors offer similar functionality, pricing inevitably races to the bottom. We’re already seeing downward pressure on SaaS pricing “(great for consumers, challenging for companies)”. Customers can often find a free or open-source alternative for basic apps, or use an AI agent to DIY their own tool. This is fantastic for end users and businesses who benefit from lower software costs.

For software vendors and their investors, however, the picture is bleak. Many legacy SaaS companies have been hiking prices in recent years – an unsustainable move as they now face a flood of cheap substitutes. High gross margins will erode for products that lack a moat to justify a premium. Revenue multiples and valuations for no-moat software firms are poised to fall as the market wakes up to the new reality. The only way to maintain healthy pricing and profits is to offer something competitors can’t (see moats above). Otherwise, prepare for margin compression or customer churn. In short, great for consumers, brutal for incumbents. The era of easy ARR growth by feature-differentiation is over; value will accrue elsewhere.

Value Will Flow to the Meta-Layers

If individual apps become commoditized, where will the value concentrate? Likely in the meta-layers above the apps – the aggregators, orchestrators, and AI “agents” that help users navigate a world of countless software options. When there are 10 apps for every niche, the platforms that index, search, or integrate them gain power. We anticipate growth in:

• Discovery & Aggregation – Tools that help users find the best commodity software for a given need (think marketplaces or AI-driven search that can pinpoint “the right tool for the job”). With thousands of micro-SaaS offerings, curation is valuable. Google, app stores, or AI recommendation engines will play a bigger role in steering users to solutions.
• API Orchestration Layers – Services that connect many small apps/APIs into integrated workflows. If one app = one feature, the winners will be those that combine features into a seamless experience. We already see no-code integrators (Zapier, etc.), but future AI-powered orchestrators could dynamically choose and connect the optimal APIs for a task. The meta layer abstracts away individual apps (which are interchangeable) and delivers a composite solution.
• AI Agents – Personal AI assistants that perform tasks by calling upon various software tools behind the scenes. Instead of a user manually using 5 different apps, an AI agent could coordinate them: e.g. automatically use a travel app to book flights, a finance app to pay, a calendar app to schedule, etc. The user interacts with one intelligent agent, and that agent leverages whichever commoditized apps or APIs are needed. This positions the agent (or the platform it runs on) to capture the user’s loyalty and data. For instance, future AI copilots embedded in operating systems or browsers could render many standalone apps invisible to the end-user.

In essence, as the unit of software shifts from monolithic application to flexible AI-assembled capabilities, the value will shift to those who organize and channel the multitude of cheap apps. Investors would do well to watch for companies building these meta-layer services – they could become the new gatekeepers of the software economy.

Incumbents Fortify Their Moats; Weak Products Get Cannibalized

Not surprisingly, the big incumbents are already leveraging AI to reinforce their strongholds. Microsoft is baking AI copilots into Office, Windows, GitHub and every corner of its suite, using its massive distribution and proprietary models (via OpenAI) to ensure it stays the default productivity platform. This is a textbook move to absorb what might have been separate AI tools into the Microsoft ecosystem (e.g. why buy a standalone AI writing app when MS Office now does it?). Palantir is similarly integrating advanced AI into its data platforms to maintain its edge in complex, high-security environments. Their new AI initiatives (like the AIP and the R37 AI Lab in healthcare) aim to entrench Palantir’s software at the heart of clients’ operations – combining proprietary data, AI, and workflow integration. This makes Palantir’s offering even harder to displace. Apple, for its part, continues to tie software experiences tightly to its hardware. The company is reportedly working on on-device AI features that leverage its custom silicon (Neural Engine), which will enhance apps only available on Apple devices. By weaving AI into its operating system and hardware (e.g. privacy-preserving machine learning, personalized recommendations, etc.), Apple uses its hardware integration and brand trust moats to keep users locked into its ecosystem.

Meanwhile, many weak, single-feature products will simply be absorbed or wiped out. If an app is essentially a nice UI on top of a common function (a basic CRUD database with a pretty interface), expect it to be cannibalized by the ecosystem: either an incumbent platform will copy that feature for free, or an open-source/AI-generated version will appear. We’re already seeing this – Slack’s core chat features are now commodities copied by Microsoft Teams; countless “to-do list” and note apps compete in a race to the bottom; simple web apps are replicated by ChatGPT plugins overnight. As one commentator observed, “when everything can be copied, what you build doesn’t matter — it’s who you are that becomes irreplaceable”. The focus shifts to building a company around the product – distribution, community, brand – rather than relying on the product alone.

Bottom Line: Software has become the new commodity. The days of easy growth for undifferentiated SaaS are ending, fast. For venture investors and software execs, the mandate is clear: invest in real moats or the meta-layers that leverage commoditization. If a product lacks network effects, data advantages, technical complexity, hardware ties, lock-in, or brand – assume someone will clone it and undercut it. This is excellent news for consumers and businesses who will enjoy more innovation at lower cost. But it’s an existential threat to legacy software business models. We need to adjust strategies accordingly – double down on moats, explore aggregator plays, and be extremely cautious about backing “yet-another SaaS” without a defensible edge. The software goldmine of the past 30 years isn’t gone, but it’s moved upstream: the value will belong to those who build the pickaxes or own the gold mine, not those mining commodity bits.