The Upstream Squeeze

Foundational model companies are moving up the stack. OpenAI, Grok, and Anthropic are no longer just selling APIs; they are binding their models directly to applications, competing with the very companies they supply.

This creates a dangerous squeeze for anyone building on top of their platforms. The core problem is a simple power dynamic: the application layer company is always downstream, and therefore, always vulnerable.

The Unbeatable Advantage

Consider an AI coding assistant like Cursor. It relies on models from providers like Anthropic. The problem is that Anthropic also makes its own application, Claude Code. This gives Anthropic an unbeatable advantage.

They have perfect knowledge of how to optimize their model's performance.

They can co-develop the model and the application, using one to immediately improve the other.

They own the data flywheel, where usage of Claude Code generates proprietary data to make the model even better.

The company closest to the model can always provide the most value. They can out-innovate any downstream competitor because they control the core intelligence.

The Survival Mandate

This raises an existential question: how do application companies survive when they can't defend against their own suppliers?

The likely answer is that they must build their own models. Vertical integration may become the only defensible strategy.

This pressure is intensifying as the market moves toward autonomous agents. The next frontier isn't just a good UI; it's about creating self-improving systems that reduce human intervention. This requires an even deeper integration between the model and the application, further widening the gap between the model makers and everyone else. The squeeze is just getting started.