People say that style moves in cycles. From skinny jeans to mullets to Northern Soul, everything waits in the wings before returning to centre stage. So, is it freemium’s time to take the spotlight?

With AI companies increasingly choosing open access over strict paywalls, we explore why freemium is back in fashion—and what this resurgence reveals about winning in today’s market.

Also in this episode: we’ll assess the new reality of Category power, and ask how do you beat a 40-year-old tech incumbent at its own game

What to look forward to:

00:35 Freemium as a route to AI category domination

09:49 The New Reality of Category Power

17:48 How do you beat a 40-year-old tech incumbent at its own game?

There is more information on how to design your category on our blog

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Paul Maher

Jonathan Simnett

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Coming back.

Um, one of the examples of this is that freemium, remember freemium is now the route to AI category domination, and it has become obvious that for freemium and product led growth to work at scale, you clearly need. Millions of users. If it's just thousands, you just have to go and sell it because the numbers don't actually work.

And as you know, if you've been paying attention, the AI era has validated that because of the rapid scaling of AI users disparate, the fact that the market appeared to lose faith in freemium for a while. You know, probably just a declining in numbers, uh, of a network effect, you know, enabling applications.

But that was before AI kicked in.

Uh, and the entire current age of ai, B2B and B2C is built on that. Uh, chat. GPT, uh, fastest was the fastest growing, uh, product ever seen in tech is the clearest proof point we've. Ever had for freemium category leadership building. Now, is it being caught? Separate conversation, but certainly it was freemium.

And the category presence that that size creates goes with it.

They're getting the, involve, the investment that they need to match it. So far, um, Gemini crossed 650 million active users or. Maus mores as they're called with, um, three plus paid tier, and there's more coming. Claude hit 30 million maus. And the, the 5 billion a r, albeit mostly enterprise and API, uh, customers and perplexity.

You know, just like how Microsoft secured the pre-cloud desktop

So you do need the big numbers. And AI didn't change those basic economics, it just changed the sample size. Freemium simply needs mega scale. To work.

AI's shown us. In reality, freemium needs 10 x to a hundred x more users than people typically expect, and it always takes longer to compound, and he is never gonna go more than a few percent conversion. But if so many of your costs are marginal, who cares?

The classic SaaS examples, a Dropbox which needed 700 million free users to get around 2.5 billion a r we previously worked with, with one of their rivals, ignites, same thing. Uh, Wix, 134 million. Users for just 1.8 billion a r and probably going down, um, Cal Calendly hit a $3 billion valuation largely on freemium, although question that valuation and Atlassian, who really are the Dons here added freemium and tripled signups.

Um, their entire empires built on free first, but you know, they like, like many others, eventually lent into the enterprise box is over 1 billion in revenue, but freemium is now just under 10% of it. Now the lesson is if you want to do freemium, you need. Big backing to build the numbers and because, you know, as a category leader that you can then start creaming off the paid for subscriptions.

It's all about the width of your funnel, and that's what gives you the choice.

Um, the enterprise revenue will consolidate and then thereafter maximizes the opportunity. You've gotta invest upfront.

Annual contract revenue value, that's a CV for, for acronym geeks, that when that changes everything. And, and of course investors love it.

Um, and AI has not invented premium. It just proved at historical scale that the premise. Basically maths was right all along. Um, it's just the numbers put into these business models were often wrong.

That's 25 million per employee. Now, on the surface, that sounds insane, but it actually tells us a lot about where tech category. Is heading and particularly about category concentration, which we discussed, I believe in episode 68.

It's not a big number for Google. It's chump change. Um, the 25 million per employee, pretty impressive. Uh, but it only looks crazy if you think that what they're buying was people. Um, like many of the aqua hires that we've seen recently, including one could argue OpenAI to Microsoft, but they weren't. What was being bought by OpenAI here was strategic control in an emerging category, healthcare, AI infrastructure.

Hot, hot, hot.

And, and that is a system that lets AI view a patient's full medical history in one place. You know, that's not a healthcare records app, that's a data layer.

And, uh, they seem to overestimate the moat that they've got. And especially in regulated industries like healthcare, you, that's easy to understand. Um, now OpenAI could have built. All of this tech themselves, uh, it would've taken years, not just technically, but to my point about, um, and, and trench players, politically and operationally, healthcare data is, um, messy, fragmented, deeply contextual, very, very private.

That's 40 million people. Are doing that daily.

Again, this is all about context and context over content.

And that means owning the data substrates.

You know, if you look at their lead recent moves they paid, this is where you get nice, big money, Paul. Yeah. Real money. This real proper money. Right? Proper money. Um, from memory, what about 1.1 billion for statik? Now that's, that's really about experimentation and telemetry. Um, an even bigger number, 6.5 billion for io, which is essentially hardware and infrastructure.

Um, and then this poultry 100 million for Torch, which is all about, it's all about the healthcare data.

Uh, the entire category value stack

Who owns the agent? Who owns the data history? Who owns the workflow, and who do people actually trust?

Compliance and, and continuity matter more than novelty. You can't swap vendors easily once the AI becomes embedded in clinical decision making. You know, what is that? That's vendor vna,

Placing a, planting a flag even in the ground and saying, um, we've got intentions to own the healthcare AI category End to end.

Which torch were,

You know exactly everything that's come along it seems in the last 40 years, um, seems to be. Based at, you know, better and we know better is not what you do in category, um, slide based presentations. Um, but you know, let's be real. That really doesn't matter when the incumbent is pre-installed and basically.

Yeah. Every desk in every organization, and frankly, these days, every home on earth.

So. Not tactical feature gaps, strategic structural advantages that you could create.

Took users off the massively better zoom, uh, post COVID and why people are using copilot now in preference to other AI assistant products. It's just there. But in the case of PowerPoint, it also has the DO PPTX file format that everybody has to support. But if you think about it, the biggest advantage has been built over time.

It's an invisible moat. It's what we call the mental model, especially in large corporates. The slide has become the basic unit of work, of, of structuring ideas and plans, particularly when people equate meetings with actual productive graft. Now, creating a deck seems to be the response to any challenge.

Should anyone, uh, cannibalize this advantage, um, which is of course is the, the innovator's dilemma. Uh, so they wouldn't wanna move off it necessarily themselves until they needed to. Probably the best a competitor could do, uh, is take this product to a new, probably a AI powered new level. Uh, but what they should do really is change the game, destroy the culture of slide pres presentations, which I believe is happening.

And move things on. After all, PowerPoint is simply a better version of slide carousels. Uh, Kodak, that went well. Um, overhead, projector, foils. Oh my God. Uh, remember 3M at least they're still in business making sticky tape. Quite a few other things, to be fair. Um, but decades ago, Microsoft created this new category by delivering new utility and, and.

Constraints in the business. So the way to think about that is, is to ask yourself, if they try to copy my imaginary product, what would they have to give up to do it? That now the really, really, really big pants decisions.

Um, uh, that's. That's a large thing to do. Um, ask Adobe or, or the, uh, really big banger change the actual basic premise of productivity and what a key productivity tool would comprise, uh, in or outside of the office. Um, template,

So let's let that sink in for a moment. Completely move away from creating slides as a way to communicate information in corporates and everywhere else, right? That's a paradigm shift. That means facing the proce, the, the prospect of retraining hundreds of millions of users and fundamentally changing global corporate culture.

Is that big enough?

Um, you've got to change customer expectations. I think one of my examples in this, uh, close example, could, could be Figma now, now Figma design, according to Figma. Is now the primary tool for people to create, share, and test designs for websites, mobile apps, and other digital products and experience. The thing about Figma, it was designed from the beginning to be browser-based and multiplayer.

By default. And there's sort of other examples of this, don't think Paul

It's probably still is massively the, um, incumbent couldn't follow, um, without blowing up its file format. Uh, and the business model that, that Figma was looking to usurp. And you can bet there's lots of people out there thinking about how to use AI in the same way. On Figma to change the game again. I've seen it.

Instead, use AI to help structure what you might think of as text-based narrative trumps for natural presentation. Direct to the audience.

This is about restructuring behavior. AI should only accelerate the basics, not replace them. Ground up thinking is what gets you to true differentiation.

Or presenting rather than word for reading and PowerPoint for presenting and, and some yet to be standardized. Podcast format for listening is much more suited to the formats of what is now an inherently mobile world.

PC era, uh, and an eighties way of thinking.

I'm sure we'll be talking about it 50 years from now. So if you are competing with, um, an entrenched incumbent, what have we learned here? What's, what's the one question that. That people who wanna design new categories should ask themselves,