Consumer AI's tipping point
Three key drivers of innovation Five consumer AI categories on the rise Democratization of tools increases consumer autonomy Consumer earthquakes don't happen in isolation—they come in waves. And when they arrive, they feel sudden and unpredictable, reshaping industries and influencing how we connect, live, and play—seemingly overnight. But in hindsight, the rise of these consumer tech giants follows a clear pattern: a breakthrough or new distribution channel and a product experience so compelling its growth compounds on its own.
Driving the Next Wave of Consumer Innovation
We've seen this before in previous generations of consumer innovation. For example, Pinterest and Airbnb didn't succeed in a vacuum; their success was predicated on generational circumstances where technological innovation and consumer behavior collided to create billion-dollar businesses at unprecedented speed. These companies share two defining traits:
We believe we're on the brink of a new wave of consumer earthquakes, this time driven by AI-native products. Startups like Anthropic, Perplexity, and DeepL are creating experiences so magical and differentiated that they're garnering considerable organic adoption. This suggests that AI advancements could serve as both the seismic force creating new product possibilities and the distribution vector, paving the way for the next generation of consumer juggernauts.
The question now isn't whether AI can generate viral consumer moments, but whether these moments will translate into sustainable businesses with long-term defensibility. In this report, we break down the key drivers of new opportunities in consumer AI, the expanding and emerging company categories where we see the greatest potential, and the market conditions that will define the next generation of breakout consumer companies.
Cost Reduction and Market Dynamics
Foundational model costs continue to decline as OpenAI, Anthropic, Grok, and other leaders compete for market dominance. Since ChatGPT-4 was released in March of 2023, the cost of a token on the model has decreased significantly, and OpenAI's Head of API product expects this trend to continue.
B2B AI companies often have ACVs in the tens or hundreds of thousands of dollars, allowing them to spend heavily on foundation models, even when prices were higher. It's consumer companies, with their much lower-value customer interactions that stand to benefit most from further price decreases. Specifically, we predict that lower model costs will enable more consumer companies with various pricing models to become gross margin positive over time.
Advancements in Multimodal Capabilities
Recent multimodal foundation models have demonstrated significant performance improvements across key capabilities such as speech recognition and voice generation, and image and video. Companies like Fal.ai are also making it easier for developers to use multimodal models.
Building the business case for AI-enabled consumer intelligence ...
In addition to new and advancing capabilities, real-time models are significantly reducing the latency of multimodal models. This allows consumer companies to launch more services that replace manual tasks. As foundation model reasoning improves, we will likely see application-layer AI agents able to handle more complex tasks.
Real-Time and Application-Layer AI
Tools like Zep AI and Zetta give agents "long-term memory," enabling hyper-personalized user interactions and experiences based on behavior and preferences. This trend creates significant untapped opportunities in several consumer segments.
Personalization and Consumer Empowerment
AI-Enabled Consumer Services: Foundation models allow companies to build AI solutions that process data from consumers, facilitate interactions through conversational interfaces, and automate key tasks for consumers. This could revolutionize industries traditionally reliant on professionals.
Marketplaces with AI Integration: AI may route humans to services, and marketplaces could use automation to reduce friction between demand and supply. Companies like Indigo are already using AI to streamline tasks within their marketplace.
AI in Online Social Experiences: As consumers interact more with AI, we predict AI will become more prevalent in online social experiences, leading to new interactive possibilities for users.
Personalized Product Discovery: AI-enabled search experiences like those offered by companies such as Perplexity and Daydream are making product discovery more personalized and efficient through natural language and multimodal search capabilities.
Empowering the Creator Community: AI tools are prioritizing consumer autonomy, opening up opportunities for consumers to create their products in industries like fashion, interior design, and digital content creation.
As AI continues to advance, the landscape of consumer AI will evolve, creating new possibilities and reshaping industries in ways we have yet to imagine.
