Did We Underestimate?

Key Concepts

• Tech Stack (AI): The layered infrastructure supporting AI development – Infrastructure, Platform, and Application layers.
• Platform as a Service (PaaS): A cloud computing model providing a platform allowing developers to build, run, and manage applications without managing the underlying infrastructure. (e.g., Palantir)
• Software as a Service (SaaS): A software distribution model where applications are hosted by a vendor and made available to customers over the internet.
• Frontier Model Players: Companies developing leading-edge, large language models (LLMs). (e.g., OpenAI, Anthropic)
• Incremental Growth: The additional growth in a specific area, measured against a baseline.
• Share Shift: A change in the proportion of growth contributed by different segments within a market.

Initial Predictions & Growth Trends (December 2024)

The analysis, based on predictions from December 2024, indicated robust growth across all three layers of the AI tech stack: the infrastructure layer, the platform layer, and the application layer. This growth was observed over the preceding four to five years (ending in 2024) and was projected to continue for the subsequent five to six years. However, the predictions highlighted significant share shifts in incremental growth among these layers.

Platform as a Service (PaaS) – The Leading Growth Sector

The platform layer, specifically Platform as a Service (PaaS), was identified as the primary beneficiary of this shift. Palantir is cited as a key example, demonstrating a remarkable 142% revenue growth rate in the last quarter (US commercial market alone). The speaker emphasizes that no other publicly traded software company is currently achieving comparable growth rates.

Frontier Model Players – Exceptional Growth in Private Markets

While Palantir’s growth is significant within the public equity markets, the analysis notes even more explosive growth occurring in the private markets. “Frontier model players” – companies like OpenAI and Anthropic – are experiencing annualized growth rates ranging from 250% to 850% over the past year and a half. This highlights the rapid advancement and investment in foundational AI models.

Software as a Service (SaaS) – Facing Disruption

Conversely, the application layer, largely comprised of Software as a Service (SaaS) providers, was predicted to be the biggest loser in terms of share of incremental growth. The initial projection of 20%+ growth for SaaS was deemed a significant overestimate. The speaker states, “Software as a Service is becoming a victim of this AI revolution.”

Underestimation of SaaS Decline & Revolution Speed

The analysis acknowledges an underestimation of the speed and magnitude of the decline in SaaS growth. The initial prediction of a share loss for SaaS was accurate, but the rate of decline was significantly underestimated. This realization underscores the accelerating pace of disruption caused by the AI revolution. The speaker states, “We underestimated ourselves. We were saying that that SAS was going to lose share. We didn't realize how much how soon and that gives you a sense of how quickly uh this revolution is happening.”

Consolidation in the SaaS Market

Despite the overall negative outlook for SaaS, the analysis anticipates consolidation within the sector. Some SaaS providers will survive by consolidating the market, suggesting mergers and acquisitions will be a common outcome.

Synthesis

The core takeaway is that the AI revolution is not simply adding to existing software markets; it is fundamentally reshaping them. While all layers of the AI tech stack are growing, the platform layer (PaaS) and the development of foundational models (Frontier Model Players) are experiencing disproportionately higher growth. SaaS, traditionally a dominant force in software, is facing significant disruption and will likely undergo substantial consolidation. The speed of this transformation has been underestimated, highlighting the dynamic and unpredictable nature of the AI landscape.