As an avid Arc user and design enjoyooor – the implications of where they’re heading with this latest announcement makes me quite uneasy.
Right now, Arc is a venture-funded browser with superior UX but no clear business model, hoping to find a non-ad based business before they run out of funding. At least that’s what it seems like from the consistent criticism of Google’s business model in their public communication.
With this feature (gorgeous video btw), Arc now has a variable cost to pay to their LLM provider of choice on every search. With API costs coming down, I’m sure they can front this for users for a long time.
But now they’ve gone from a high fixed but zero marginal cost business to a negative unit economics business. (You could argue that technically unit economics are always negative due to server infra costs, but this takes them further down that path). Maybe it’ll take years, but negative unit economics will come collecting one day: you can only defy the laws of market physics for so long.
By demonstrating enough adoption, they can likely stave off profitability for long enough to grow to a size where they can genuinely threaten Chrome. And maybe on the way, a new business model for software that owns demand (users) and can commoditize suppliers (websites) emerges.
But if it doesn’t they will inevitably need to fall back on the tried-and-true aggregator model of auctioning off their users’ attention. Maybe at first, it comes in the form of an innocuous affiliate fee they can take on commerce driven by their recommendation. But give it a few tough quarter, maybe another rate hike cycle, where cash becomes king again – it’d be hard to resist the temptation of ranking results by fee and auctioning placement…
To be clear – I don’t think that ads are fundamentally bad and user-hostile. Many a modern small business has been built on the back of ads. I also do believe that the browser company has their heart in the right place, and can likely create a much more user-aligned ad model while also delivering a next generation browser with incredible UX. I love their mission and want them to win – we all love a David and Goliath story after all. I just find the implication that they’re not gonna have the same incentives and business challenges as Chrome a bit hard to believe. Would much rather they be honest about it.