When software was expensive - thin, horizontal, best-of-breed software stacks extracted rents across every business. Now that software is cheap - value moves to vertically integrated businesses that deliver opinionated end-to-end experiences.
Naval Ravikant argues declining software costs favor vertically integrated businesses
Nick Dobos says horizontal SaaS must accelerate development cycles.
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Industry Shift
Vertical players can mix ideas across products faster
As costs drop, integrated businesses gain the ability to borrow features and concepts horizontally at scale and pace, potentially growing into larger more capable entities while thin SaaS models lose their old rent-based advantages.
Open Question
Horizontal SaaS may need quicker development rhythms
Providers in this category could respond by chasing trends and shortening cycles rather than depending on long-term pricing power, though the exact outcomes remain open as the discussion continues without specific company metrics.
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Positive users agreed with Naval's take that cheap software boosts value for vertically integrated businesses, while negative users rejected the claim as overlooking high GenAI costs or lacking substance.
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When software is cheap, weird thing happens, vertically integrated software companies can now cross pollinate horizontal ideas at unprecedented scale & pace. I can tweet a bug fix or feature into someone else’s app Vertical businesses will become tall fat chonkers Thin horizontal software businesses will still exist but they will be focused on front running the verticals, and will cycle sales & products at meme speed, not long term rent like many SaaS do now.
When software was expensive - thin, horizontal, best-of-breed software stacks extracted rents across every business. Now that software is cheap - value moves to vertically integrated businesses that deliver opinionated end-to-end experiences.
An alternative view is that as an industry matures products move from horizontal "does everything but not all of the thing" to specialized tools that do all of a thing. Rent seeking is hardly what went on. These were real products doing things that had never been done at prices 1/100th of doing the same work without software and cheap relative to any cost of mini/mainframe software. Try writing a book without a word processor and laser printer, or M&A analysis without a spreadsheet and presentation package. SAP is expensive. I challenge anyone to simply declare a cheaper solution exists. The complexity it embodies is not a rent seeking gimmick. We know this in part because it moved whole architectures and remains by far the cheapest solution at scale. Yes you can get cheaper expense reports or inventory parts management, but that isn't what SAP is.
When software was expensive - thin, horizontal, best-of-breed software stacks extracted rents across every business. Now that software is cheap - value moves to vertically integrated businesses that deliver opinionated end-to-end experiences.
@naval “It doesn’t matter how good your engineering team is if they are not given something worthwhile to build.” ~Marty Cagan Inspired: How to Create Tech Products Customers Love book summary in 4k light and dark
@naval With AI: Software as a Service becomes Software as a Servant
Vertical integration: one company handles the full process themselves instead of outsourcing pieces to others. Simple example: A burger joint that raises cows, grows wheat for buns, makes sauce, grills, and serves you — vs buying frozen patties, buns, and condiments from 5 suppliers. They control quality and create one complete experience their way. Apple does this with chips + iOS + hardware + stores. Tesla with cars + batteries + software + direct sales. With cheap software, building these full end-to-end stacks beats mixing separate “best of breed” tools.
@naval What a weird world we are entering. We’ve been moved to the peripheral taste making stack.
The weird thing is vertically integrated software companies can now cross pollinate horizontal ideas at unprecedented scale & pace. I can tweet a bug fix or feature into someone else’s app Vertical businesses will become fat chonkers Thin horizontal software businesses will still exist but they will be focused on front running the verticals, and will cycle sales & products at meme speed, not long term rent.
When software was expensive - thin, horizontal, best-of-breed software stacks extracted rents across every business. Now that software is cheap - value moves to vertically integrated businesses that deliver opinionated end-to-end experiences.
To a 5-year-old: - Long ago, making fancy toys cost a lot. Companies sold one special toy just for houses and another just for cars. You bought many and paid lots. - The toys were great at one job but didn't always fit together. - Now toys are cheap to make. One company sells a whole box with houses, cars, and rules so everything works their perfect way. - Old software was like those expensive special toys. Businesses paid lots for programs that did only one job each. - Cheap software today lets companies build one big program that does everything together, exactly how they want from start to finish. That's where the real fun is.
@naval What do you mean by opinionated? Could you give an example? Genuinely curious
The biggest takeaway: cheap software inverts the economics. Previously, expensive dev meant thin horizontal layers (CRM here, ERP there) won by extracting rents from fragmented stacks. Now, building is trivial—so value accrues to vertically integrated players who ship opinionated, end-to-end experiences that eliminate integration tax, data silos, and user friction. The winners own the full workflow, not the pieces. AI just accelerates this flip.
@naval Damn so Steve Jobs was right after all.
@naval can u give examples of such vertically integrated businesses that you would like to invest in?
@naval This perfectly illustrates why, in the AI era, traditional, fragmented SaaS based on "rent collection" for individual small functions is slowly losing its raison d'être in favor of complete, specialized ecosystems.
@naval Most people are still running fragmented, expensive lives. Chasing the best tool, habit or system instead of building something simple and integrated that actually works end to end.
@naval As intelligence becomes abundant, the competitive advantage shifts from capability to execution.
For software companies, vertical integration means owning more layers of the digital "stack" instead of renting or partnering externally. Examples: - Building/running your own cloud servers and data centers (vs paying AWS) - Creating your own OS, tools, browsers, or AI models - Delivering a full end-to-end platform where everything (database, apps, updates, store) works seamlessly together under one company It gives better control over speed, cost, security, and features—just like a factory owner controlling raw materials to finished product, but with code and infrastructure. Microsoft (Windows + Office + Azure) and Google (Android + Search + Cloud) do this well.
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@naval So now we will have an endless number of software companies serving a very specific niche? Or are all companies going to start building their own software for their company alone?