One thing I can't square: if the cost to build an application goes to zero, we should see a proliferation of apps, especially from the AI labs.
The fact that we aren't seeing an app explosion (I think) is evidence that building applications people will pay for is significantly more complex than just prompting claude/codex/etc
I think a) the labs are releasing very fast and b) why would they implement the long tail of app features when they can effectively sell tokens to every user to write their own version of the app, which is what is currently happening?
> If token costs converge toward zero for most AI use cases...
In the real world, token costs seem to be going up, as early stage pricing at a loss gives way to pricing that generates revenue.
Compute costs might go down a little over the next five years, but there's nothing coming along in hardware that leads to huge reductions in price. NVidia says don't expect better price/performance before 2030.
The models keep getting bigger, and people put loops around them which iterate, burning tokens.
I don't expect any of the third party openrouter providers sell tokens at a loss. Agreed that increasing model size could drive token prices up however so far there's been a very strong trend in the opposite direction with smaller models becoming increasingly capable thanks to advances in theory and implementation.
There is no reason to believe the ROI runway is not long inside the tech sector either. I mean, you cannot base that on claims made by the AI sub-sector of the tech sector; of course they are going to claim nothing other than that eating their dogfood is great ROI with a short runway.
Maybe there's an argument that a lack of rising profit margins in non-tech companies is a bad sign for AI, but this article doesn't make it. Why can't we have a red-queen's race where non-tech companies are implementing AI, but it's not increasing the total profits of those sectors, just meeting rising customer demands/fighting over the share of existing profits? (Never mind that if you look at that chart, profit margins aren't static to begin with, so you can't isolate AI impact from normal fluctuation).
Now, on the first order point, I agree that non-tech companies seem to be taking longer to see results from AI, even if the argument was bad.
I work on SaaS for the logistics space, and I feel like prior to the end of 2025, almost all the discussion about AI for logistics was vaporware, starting this year, companies are actually trying to deploy agents, and we'll start finding out what the ROI is later this year or next.
> Why can't we have a red-queen's race where non-tech companies are implementing AI, but it's not increasing the total profits of those sectors, just meeting rising customer demands/fighting over the share of existing profits?
But then if this happens - all of the stock market has risen in the promise of AI. If AI eats profits instead of grows them, then the economy shrinks right? So maybe that’s worse? That there is no productivity increase?
Article is authored by a private credit firm who assigned absurd valuations to AI infra (see below as an even super recent example) - what is their intention by writing this (is it due to the AI fear narratives around software investments they also hold that drive ppl to withdraw their holdings in Apollo?)
"The first chart below shows that so far there are no signs of profit margins rising outside the tech sector. This is ultimately what we are waiting for, because the value of AI companies today rests entirely on the promise that margins in the S&P 493 will eventually climb."
This is absolutely not necessary. The bull case is that AI will bring great efficiencies. The surplus profits from those efficiencies could easily be competed away by firms who have adopted AI. Those firms who do not adopt AI will have their margis crushed.
So then your argument would be that we could see a bifurcation in the SP493 where those who adopt AI see increasing margins and those who do not have their margins crushed. What's funny is that in that scenario, the aggregate market might look zero sum.
Labor, obviously. That's where all the money in a business goes: paying pesky human employees.
If your employees can suddenly magically do more work with the same pay, that's free money (for you). You can pay fewer employees, or pay them less by threatening to replace them with the magic robot.
The magical thinking version of this is that your productivity gains magically translate into more customers and more sales for the same input cost and labor. The free money is really free because you're a magical special snowflake company and every consumer will want your brand of magic machine outputs and not the other guy's. Where does all this money come from? Do those extra customers even exist? Who cares!
Pepsi starts using AI in some magical way that allows them to increase their margins. This allows them to reduce prices while increasing profits. Price-sensitive customers switch from Coca Cola products to Pepsi products. Coca Cola loses some market share, reducing economies of scale, and reducing margins, thus reducing profits. As the cycle repeats, Pepsi moves to dominate the market, and Coca Cola is slowly squeezed down.
Well those efficiency gains have to show up somewhere. It would imply that consumers / customers of these companies are receiving cheaper or higher value services / goods.
Thats at odds with current inflation trends to say the least.
Even aside from inflation, the prospect of efficiency-borne gains meaningfully benefiting the consumer rather than fattening corporate profit margins, frankly, seems like magical thinking. I’ve seen no evidence that our current corporate culture is capable of it (for any longer than it takes to dominate some market.)
I don't understand why anyone insists that this needs more time. None of what we've seen in the past few years is new tech. It's more money and hardware thrown at the problem than ever before for diminishing returns.
The market has clearly spoken. Knowing what you're doing is much more valuable than just the doing. That still requires humans. This AI winter has already begun.
One thing I can't square: if the cost to build an application goes to zero, we should see a proliferation of apps, especially from the AI labs.
The fact that we aren't seeing an app explosion (I think) is evidence that building applications people will pay for is significantly more complex than just prompting claude/codex/etc
I think a) the labs are releasing very fast and b) why would they implement the long tail of app features when they can effectively sell tokens to every user to write their own version of the app, which is what is currently happening?
> If token costs converge toward zero for most AI use cases...
In the real world, token costs seem to be going up, as early stage pricing at a loss gives way to pricing that generates revenue.
Compute costs might go down a little over the next five years, but there's nothing coming along in hardware that leads to huge reductions in price. NVidia says don't expect better price/performance before 2030.
The models keep getting bigger, and people put loops around them which iterate, burning tokens.
Where is this cost reduction coming from?
I don't expect any of the third party openrouter providers sell tokens at a loss. Agreed that increasing model size could drive token prices up however so far there's been a very strong trend in the opposite direction with smaller models becoming increasingly capable thanks to advances in theory and implementation.
There is no reason to believe the ROI runway is not long inside the tech sector either. I mean, you cannot base that on claims made by the AI sub-sector of the tech sector; of course they are going to claim nothing other than that eating their dogfood is great ROI with a short runway.
Maybe there's an argument that a lack of rising profit margins in non-tech companies is a bad sign for AI, but this article doesn't make it. Why can't we have a red-queen's race where non-tech companies are implementing AI, but it's not increasing the total profits of those sectors, just meeting rising customer demands/fighting over the share of existing profits? (Never mind that if you look at that chart, profit margins aren't static to begin with, so you can't isolate AI impact from normal fluctuation).
Now, on the first order point, I agree that non-tech companies seem to be taking longer to see results from AI, even if the argument was bad.
I work on SaaS for the logistics space, and I feel like prior to the end of 2025, almost all the discussion about AI for logistics was vaporware, starting this year, companies are actually trying to deploy agents, and we'll start finding out what the ROI is later this year or next.
> Why can't we have a red-queen's race where non-tech companies are implementing AI, but it's not increasing the total profits of those sectors, just meeting rising customer demands/fighting over the share of existing profits?
But then if this happens - all of the stock market has risen in the promise of AI. If AI eats profits instead of grows them, then the economy shrinks right? So maybe that’s worse? That there is no productivity increase?
Article is authored by a private credit firm who assigned absurd valuations to AI infra (see below as an even super recent example) - what is their intention by writing this (is it due to the AI fear narratives around software investments they also hold that drive ppl to withdraw their holdings in Apollo?)
From last month: https://peinsights.substack.com/p/apollo-and-blackstone-clos...
The premise is flawed.
"The first chart below shows that so far there are no signs of profit margins rising outside the tech sector. This is ultimately what we are waiting for, because the value of AI companies today rests entirely on the promise that margins in the S&P 493 will eventually climb."
This is absolutely not necessary. The bull case is that AI will bring great efficiencies. The surplus profits from those efficiencies could easily be competed away by firms who have adopted AI. Those firms who do not adopt AI will have their margis crushed.
> The surplus profits from those efficiencies could easily be …
… usurped by the tech companies?
So then your argument would be that we could see a bifurcation in the SP493 where those who adopt AI see increasing margins and those who do not have their margins crushed. What's funny is that in that scenario, the aggregate market might look zero sum.
What does this look like for any given company? Which margins will you be crushed by for not adopting?
Labor, obviously. That's where all the money in a business goes: paying pesky human employees.
If your employees can suddenly magically do more work with the same pay, that's free money (for you). You can pay fewer employees, or pay them less by threatening to replace them with the magic robot.
The magical thinking version of this is that your productivity gains magically translate into more customers and more sales for the same input cost and labor. The free money is really free because you're a magical special snowflake company and every consumer will want your brand of magic machine outputs and not the other guy's. Where does all this money come from? Do those extra customers even exist? Who cares!
Hypothetical:
Pepsi starts using AI in some magical way that allows them to increase their margins. This allows them to reduce prices while increasing profits. Price-sensitive customers switch from Coca Cola products to Pepsi products. Coca Cola loses some market share, reducing economies of scale, and reducing margins, thus reducing profits. As the cycle repeats, Pepsi moves to dominate the market, and Coca Cola is slowly squeezed down.
Realistic and historically accurate:
Pepsi starts collecting the extra profits with zero price reductions.
Ah yes, magical hypotheticals
Do you have a constructive objection to the described market dynamic?
Well those efficiency gains have to show up somewhere. It would imply that consumers / customers of these companies are receiving cheaper or higher value services / goods.
Thats at odds with current inflation trends to say the least.
Even aside from inflation, the prospect of efficiency-borne gains meaningfully benefiting the consumer rather than fattening corporate profit margins, frankly, seems like magical thinking. I’ve seen no evidence that our current corporate culture is capable of it (for any longer than it takes to dominate some market.)
I don't understand why anyone insists that this needs more time. None of what we've seen in the past few years is new tech. It's more money and hardware thrown at the problem than ever before for diminishing returns.
The market has clearly spoken. Knowing what you're doing is much more valuable than just the doing. That still requires humans. This AI winter has already begun.
Ehh, it’s a late AI summer at best. You still need the economic leaves to finish falling off the trees before you can get to the true start of winter.