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In a broad sense, companies get paid because they provide something of value to their customers, but industries vary widely in how much of that value they can capture. The big capital-intensive transportation businesses are canonical examples: railroads are part of the formation narrative for more than one modern nation-state—building a transcontinental railroad was a condition for Nova Scotia and New Brunswick joining Canada at all, railroads tied northern German states' economies inextricably to Prussia's, and while the US was a coherent nation before the transcontinental railroad, building that marked the point at which internal back-and-forth migration was a more meaningful force than an indefinite expansion of the frontier. Airlines don't unite countries, but they do unite important metro areas, and families. It's hard for secondary financial centers to thrive without frequent travel to the main one, so air travel is part of what keeps Atlanta, Charlotte, and Houston in the mix. And containerization connects places with cheap labor (or, more recently, with dense accumulated capital) to places with lots of consumption. Containerization made fortunes in East Asian manufacturing and in American retail, but the people who owned the boats in between were stuck in a business with high and rising capital requirements—cost per ton-mile is inversely correlated with containers per ship—and cyclical demand. Fundamentally, a big role of the industry was to donate gigantic ships to Walton heirs.

It actually makes some sense that expensive generally-applicable technologies that tie into existing infrastructure would struggle to price anywhere near the consumer surplus they generate. The capital-intensity means that it's hard for one company to hard launch a monopoly: in the time it takes one of them to prove out its model, competitors can place orders for the same equipment and start their own routes. If it's a transportation tool, it's going to connect existing routes—railroads for any city pair not linked by water, airlines for any pair of locations where fast transportation was at a premium (in the very early days, the big customer was the US Post Office: early passenger airlines mostly flopped (if nobody can travel that fast yet, nobody expects them to), but mail already had competition from phones. And there's a lot of complementarity between high-latency/high-throughput communication and the opposite—it was cheap to continuously transmit stock quotes in what probably struck people in the 1920s as real-time. And that would be complementary with a prospectus or annual report that might take a day or two longer. And once there's enough regular traffic from mail, the marginal cost of having a few passenger seats is lower.

But all this while, the fixed cost of a plane is getting higher, and there's basically no one trying to seize the entire market. There's a similar story for containerization, where they needed ports to cooperate at both ends, which put a natural brake on growth, which meant that there would be multiple operators (the ports weren't going to do a big capital expenditure blitz that also made them dependent on a single supplier). And railroads were costly enough that they reshaped entire economies around extracting more coal and iron and turning them into steel.¹

Shipping will probably remain a tough industry for a while; as one cruise line executive said about his industry, the nice thing about these assets is that they have propellers, so if there's a shift in demand, you can just move them around. The downside to that is that they're operating in a global market, with a long lead time for adding supply. (In practical terms, there's a shorter one for removing supply, by scrapping ships. But if shipping companies are removing capacity faster than the ships naturally wear out, they're doing it under duress—that same global market dynamic means that if you have 2% market share, 98% of the pricing benefit from your scrapping a ship accrues to your competitors. And the more of them you scrap, the lower your share gets, and the more you're redistributing. So their incentive is to hold on, which, of course, means that the bottom of the cycle can be very low indeed.) But both railroads and airlines improved, albeit after a generation or two during which they provided investors with unusually poor returns. For railroads, they got their pricing power the old-fashioned way, by inheriting it from the robber barons of the previous century. Those industrialists had carved out some routes that no one could possibly replicate given modern land values and environmental rules, and the railroad route network at least roughly approximates where bulky goods might be shipped. Once they learned how to play up their advantage, by being stricter with their schedule so they could keep costs far lower than trucking, they could divide the world into companies that weren't served by the rail network, and would thus use trucks, and the ones that were on the network, where trucks couldn't really compete (or could only compete on time-sensitive backfill, not scheduled bulk shipments). Airlines were mostly fragmented and undercapitalized, though the industry also had some sloppy financial habits. And airlines still have a tendency to try to grow their way into lower fixed costs per seat-mile before they age their way into higher labor costs per seat-mile, with the best performers being the ones where both of those factors move at less of a sprint and more of a brisk trot, and at roughly the same pace.

AI is very competitive—companies aren't necessarily aiming for this, but they act as if they're competing to see who can get their product banned for being a bigger cyber risk—which recreates this dynamic. One reason they do is that American capital markets are so dynamic—a group of researchers who defect from a big lab can get whatever it is that they do next capitalized as being worth hundreds of millions to tens of billions of dollars. And this makes it very hard for any one company to run away with the market through sheer capital accumulation, though OpenAI tried its best for a while. And AI could have been a market where one well-capitalized winner got a big enough lead that they dominated a plurality of economically-valuable reinforcement learning loops and ran away with the entire market. Sometimes, industry fragmentation is intrinsic to the economics, but in this case it's because the researchers bought into scaling laws a few years faster than the capitalists did.

In The Diff, we've written about:

• Airlines.

• Railroads.

• Shipping containers.

• And AI from the perspective of financing ($), where it gets deployed ($), and why OpenAI's financing looked so weird, and how this affected them ($).

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1  The railroads had another problem, in that they represented a leap in transportation technology well ahead of improvements in information technology. A modern airline can do some sophisticated modeling about how much demand a new direct route might induce, and how traffic flows through connecting flights. You weren't going to be doing that with an Arithmometer, though you might have some intuitions. Railroads are an interesting case because some parts of the business got much easier over time: understanding connecting traffic is useful for passenger railroads, because passengers have unique combinations of origin, destination, preferred timing, price sensitivity, and propensity for repeat purchases. Industrial products are more fungible, and if there is a case where connecting point A to point B increases traffic between points B and C—if there's a steel town that's iron-constrained and you connect it to a cheap new source of iron, for example—your customers at point B have probably told you this.