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Lenny's 🏦 Vault

Users Struggle with Horizontal Tools

by Brian Balfour on August 17, 2025

The rise of new distribution platforms follows a predictable four-step cycle that creates opportunities for companies who recognize and act on them early. This pattern has repeated across Facebook, Google, mobile, and other platforms - and is about to happen again with AI platforms, likely led by ChatGPT.

The Four-Step Distribution Platform Cycle

Step 0: Market Conditions Are Met

  • Consensus emerges about a new huge category (social, mobile, AI chat)
  • 5-7 major players battle for dominance with no clear winner yet
  • Fierce competition as stakes are high (markets typically end in monopolies or duopolies)

Step 1: Identifying and Building the Moat

  • A player identifies what will create defensibility and help them reach escape velocity
  • They need to gather this moat as quickly as possible
  • To accelerate moat-building, they establish a third-party platform
  • They offer a value exchange: "develop on our platform and we'll give you distribution"

Step 2: The Platform Opens

  • The platform welcomes developers, content creators, and businesses
  • They provide generous access to distribution channels and user base
  • This creates a gold rush of third parties building on the platform
  • These third parties bring more users, use cases, and engagement to the platform

Step 3: The Platform Closes

  • Once the platform achieves dominance, they begin restricting access
  • This happens through:
    • Shutting down third-party access entirely
    • Developing first-party applications that absorb the highest-value use cases
    • Suppressing organic distribution to push toward paid mechanisms
  • By this point, the platform's lead is so substantial that competitors can't catch up

Why This Matters Now

  • We're currently at an inflection point where a new distribution platform is about to emerge
  • ChatGPT is the most likely candidate based on:
    • Their identification of context and memory as the key moat
    • Superior retention and engagement metrics (including the rare "smile curve")
    • Signals they're preparing to launch a third-party platform
  • The cycles are getting shorter, giving companies less time to capitalize

How to Play the Game

  • You cannot opt out - if you don't participate, your competitors will
  • Your strategy depends on your company stage:
    • Late-stage companies can place multiple bets across platforms
    • Startups must choose one platform and go all-in with focused resources

Criteria for Choosing a Platform

  1. Prioritize retention and depth of engagement over vanity metrics like MAUs
  2. Consider user quality and monetization potential (like iOS vs. Android)
  3. Analyze the value exchange being offered
  4. Consider scale, but don't be blinded by it

Planning Your Exit Strategy

  • Immediately after entering, start planning how to exit when the platform closes
  • Build ways to own important parts of the user experience
  • Accumulate specialized data/context the platforms don't have
  • Create micro-network effects that aren't dependent on the platform

The Prisoner's Dilemma

  • Even if you're hesitant to make your data accessible through these platforms
  • Customer expectations will change as competitors adopt
  • There is no opting out of the game - you must play or be left behind
  • This is the opportunity to disrupt incumbents, similar to how Zynga grew on Facebook

The window of opportunity is likely to open within the next six months, and companies need to be prepared to pivot quickly when it does.

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