Incumbents

Incumbents are the old established giants of an industry. The English word roughly means “office holder” and in business refers to: the companies that have long dominated a market. They have many customers, well-known brands, and usually a lot of money too. Typical examples are Microsoft in office software, Deutsche Bank in banking, or Volkswagen in car manufacturing. Their counterpart are the challengers: young firms that want to redivide the market. In news about artificial intelligence, the word almost always appears in this contrast.

Who defends the market and who attacks it

The term is important because it describes who has something to lose from a new technology. An incumbent already earns good money from what it offers. Every upheaval threatens that business. A challenger, by contrast, has nothing to lose and can act riskily.

This is exactly where a well-known pattern arises. Large companies often recognize a new technology early but react too slowly. They don’t want to destroy their existing business. Economists call this the innovator’s dilemma. Kodak is the standard example: the company held patents on digital cameras but earned its money from film.

On the other hand, incumbents are often underestimated. They have distribution channels, contracts, and trust. When Microsoft built AI features into Word and Excel, it instantly reached hundreds of millions of users. A start-up first has to find those users. That’s why many upheavals don’t end with the downfall of the old players, but with them buying up the newcomers.

What the established players' edge consists of

An incumbent’s advantage can usually be broken down into four points. First, the customer base: millions of people already use the product. Second, the data generated in the process, which can be used to train AI systems. Third, the money for expensive data centers. Fourth, relationships with authorities and regulators.

Then there are switching costs. This refers to the effort a customer faces when switching. A corporation that has built its entire administration around a particular piece of software won’t switch just because a competitor is slightly better. This inertia often protects the established players for years.

Attacks therefore rarely work head-on. Challengers usually start in a niche that is too small or too unprofitable for the big players. There they improve and then grow upward. A common mistake, incidentally, is to confuse incumbent with monopoly. A monopolist is the only provider. Incumbents, by contrast, do compete with one another—they’ve just all been around for a long time.

The word in stock market reports and tech coverage

You most often read “incumbents” in analyses of the AI industry. There, the question is whether OpenAI or Anthropic will become dangerous to search engines and software companies. Google is considered the classic incumbent in these texts, because it has dominated internet search for over twenty years.

The word is also common outside of tech. In banking, branch banks are called incumbents, app-based banks are called fintechs. In cars, it’s the traditional manufacturers versus Tesla and Chinese brands. In telecommunications, “incumbent” is even the official term for the former state monopolist—in Germany, that’s Telekom.

For investors, the term is a signal. Anyone who believes the established players will win buys shares in large corporations. Anyone betting on the challengers invests in start-ups or smaller companies. If a report states that an incumbent is losing market share, that’s usually bad news for its stock price.